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Op-Ed: Can China Beat the Fed at Its Own Game?

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China meets inflation, rate cuts by buying up natural respurces.

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Editor's Note: James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career. He can be found online at www.TheBurningPlatform.com.

We owe the rest of the world $2.7 trillion. As a result, many of these countries don't like us very much.

Now, Ben Bernanke is actively trying to drive the value of the US dollar down while decreasing interest rates paid on this government debt. As Ben prints trillions of new dollars, the value of China's, Japan's and OPEC's debt holdings goes down. The US will run a $2 trillion deficit in the next year. We need these foreign countries to buy at least $1 trillion of our new debt. We're sure they will - after all, what else can they do?

From a purely financial standpoint, it's insane for a country to make an investment in an asset paying 2.5% interest when the Federal Reserve purposely knocked the value of the dollar down 5% in a single day last week (effectively wiping out 2 years of interest income).

The Chinese aren't fools. They can clearly see that the US will try to devalue its way out of our financial mess. They're going to put their $500 billion of USD holdings to work before they become worthless. Recent examples reported by the Washington Post include:

  • On February 12, China's state-owned metals giant Chinalco signed a $19.5 billion deal with Australia's Rio Tinto (RTP) that will eventually double its stake in the world's second largest mining company.

  • On February 17 and 18, China National Petroleum signed separate agreements with Russia and Venezuela under which China would provide $25 billion and $4 billion in loans, respectively, in exchange for long-term commitments to supply oil.

  • On February 19, the China Development Bank struck a similar deal with Petrobras (PZE), the Brazilian oil company, agreeing to a loan of $10 billion in exchange for oil.

  • Iran announced that it had signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed that's believed to hold about 8% of the world's reserves of natural gas.

The Chinese have a long-term plan: They're buying up natural resources throughout the world. The walls are closing in on the US.

No positions in stocks mentioned.

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