JANET YELLEN GOES TO CHINA / MACLEODFINANCE

Janet Yellen goes to China

Frequent visits to China can only mean one thing: the US Treasury is making repeated visits to America’s bank manager.

MACLEODFINANCE

This is Yellen’s second trip to China in nine months, following a recent visit by her officials. 

According to the US Treasury’s press release and subsequent briefings, this is about unfair trade practices, particularly China’s subsidy of production and how manufacturing overcapacity might lead to losses of American jobs. 

And then there’s the obligatory stuff, such as cooperation on tackling illicit finance, drug trafficking, and fraud. 

And (please suppress your mirth) there’s financial stability, climate change, and debt distress in emerging nations.

But this is not what it is really about.

Chinese officials are expected not to notice the American pot calling the Chinese kettle black. 

In the interests of diplomacy, we must hope that they don’t laugh out loud during the meetings (leave it to after the meeting and Yellen has departed). 

Apart from telling Chinese officials how they should behave, the US Government is subsidising US production (“investments the Biden administration is making in American production”) and is worried that the Chinese are subsidising their production as well. 

Consumer interests which can be expected to benefit from this competition in subsidies doesn’t come into it. 

Instead, there is an inept administration (America’s) trying to rig the market with a more shrewd one (China).

That’s bad enough, but this is between two sworn enemies. 

In the field of military conflict talks to save lives or to unite against a third enemy are common enough. 

But economic cooperation between enemies to rig markets between them is novel. 

And as for cooperation on debt distress in emerging nations, that takes the biscuit.

The US has bullied nations into debt on pain of regime change — that is well documented and even publicly admitted by luminaries such as John Bolton and Victoria Nuland. 

Instead of bribing politicians, China builds their infrastructure and goes into business partnerships. 

China recognises that emerging nations prefer its approach to American colonialism and are desperate to escape from US dominance and its hated dollar.

But behind US Treasury bluster, the most important point is glossed over. 

As supplicant, Yellen is actually going to see the bank to persuade it to lend more money. 

The two largest holders of US Treasury debt are China and Japan. 

Japan is selling hers in a desperate attempt to support the yen. 

China has no need to sell hers, other than politics and her assessment of risk.

To an extent, China controls both these issues. 

So long as the US is belligerent over her Pacific interests, it makes no sense for China to buy US Treasuries. 

In fact, she could reasonably threaten to liquidate her position to bring the US to heel. 

But the assessment of risk is also one Chinese officials will make.

The US Government is in a debt trap which threatens to destabilise the US economy and the dollar, which is the true weathervane of US financial risk. 

China wants to do away with dollars but is in the position of a bank manager asked by a customer who is probably going bust to extend its overdraft facilities. 

Does you simply draw a line and accept the losses, or does you lend a lower amount at a higher interest rate in compensation for the risk? 

If the latter you want to have some control over how the business is run.

We must hope that all that stuff about cooperating in avoiding overproduction and bailing out poor African states is just cover for this intensely more serious matter. 

If it is not, then things are considerably worse than they might appear. 

But even if it is just political cover for the real issue, and if Yellen and her officials are going cap in hand to the Chinese, it means that China is the true controller of US interest rates and bond yields because they will set the price. 

Forget the Fed’s FOMC: they play no material part in it.

Though we might not yet realise it, Pax Americana is already dead, replaced by mercatura orientalis.