Introducing the Redback
China made post-elections noises today about "diversifying their holdings further." These rumblings aren't new, and they've already begun taking steps to protect themselves from a plunging dollar. But this rumbling, coming on the heels of a Democratic sweep, is very significant. They sense the time is right to deal. Translation: "talk to us--or we are about to stop buying bonds."
One way to look at the Iraq war is that China financed it, given that US debt issuance in the past 4 years roughly equals the expenses of the Global War On Terrorism (GWOT). China has forked over hundreds of billions of dollars, cash dollars, to Iran, Venezuela, and Africa in exchange for long-term oil contracts and development rights. If I were negotiating for China, I would put a call in to James Baker the Third to discuss full entree into Iraq's unexplored oil fields, the Nine Virgins in the western desert of Iraq. In exchange, I would be willing to buy a few more bonds while forgiving many more.
If constrained to potential oil finds alone, the risk/return ratio would be pretty high. But I would look at it this way: I could provide my own security, provide Iraqi tribes with an honest revenue stream, and help the US military out of a jam because it conquered Iraq for me. I'd be buying respect and position. And I'd be willing to forgive half a trillion dollars worth of bonds. A fair discount. It would be the deal of the century.
I'm not saying Baker could accept this deal right off. But he'd work behind the scenes to broker it, starting small and keeping things moving. I know he will do this because (as China) he has to keep me buying bonds, and to do that, he has to keep me happy. And what I want now is a foothold in Iraq. Not the whole thing, just a cut.
As I write this, many sharp businessmen are about to have lunch in Hong Kong, Shanghai, and Beijing. As they contemplate next moves over a Starbucks, they must ask themselves in wonder about the US, "How can they keep on borrowing?" Drug dealers began switching to Euros last year, and only 6% of Dick Cheney's millions are in dollar-based assets.