Notes From Underground: Russia is the bear in the China shop

Former Treasury Secretary Hank Paulson’s book, “On the Brink: Inside the Race to Stop the Collapse of the Global Financial System”, attempts to explain why he should be praised and not buried.The question is whether it his book should be classified as fact or fiction.

We won’t be reading it, but we found the leaked excerpts that shed light on the Russians’ attempt to manufacture chaos through a selloff of Fannie Mae and Freddie Mac bonds more than interesting. The plan included persuading the Chinese to join but they declined. By the end of 2008, it appears that the Russians had sold off their GSE bonds and freed up dollars to rebalance their reserves.

Our readers know that we watch the Russians with eyes wide open for they have a proclivity to foment discord when they believe it works to their advantage. This tale from the perils of Paulson sets the board for some intriguing market movements with the events that happened over the weekend.

China is very upset with the Obama administration for announcing a $6.5 billion arms deal with Taiwan. This is not a new deal but part of what the Bush administration had initiated back in 2001. It should also be noted that this is not offensive weaponry but rather Blackhawk helicopters and Patriot Missiles. The Chinese have flexed their financial muscles, saying that they will review their purchasing of commercial aircraft and other large high level capital goods.

Boeing is nervous as are other high tech manufacturers. Interestingly, Europe announced this weekend, at the behest of Spain, that the EU was contemplating lifting their China arms embargo. We do not fault the Obama administration for honoring a previous U.S. commitment, but we warn that the trains are set in motion and they must be stopped before we are launched into an all-out trade war. An export-hungry Europe may try to benefit at the expense of Boeing losing orders. The U.S. must not respond by announcing restrictions on Chinese imports or vent its frustration at Europe. The world economy is much too fragile to embark upon playing tit-for-tat games when it comes to world trade. Let us hope that cooler heads find a way to prevail before the trains are too close to the battle lines.

A final note: We look at an article from today’s London Telegraph. Lord Turner, chairman of the Financial Services Authority (FSA) of Britain, signaled that there needs to be a heavy regulatory framework for foreign exchange carry trades. He believes carry trades serve no useful social purpose. This daft Englishman has imperialist written all over him. The carry trade is probably the most important element in the global financial system, for it tends to do the work of central banks. The U.K.’s better position is due to the fact that the carry trade was responsible for depreciating the POUND while the EURO was rallying, giving the British a trade advantage relative to its European trading partners.The recession in Britain would have been far more severe had the POUND not depreciated so severely as it was used in the carry trade game. Lord Turner’s idiocy is a main reason why there will be no global financial regulation and in this we should rejoice.

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4 Responses to “Notes From Underground: Russia is the bear in the China shop”

  1. GaudiaRay Says:

    Mish Shedlock made the point, I believe, that selling arms to Taiwan, when there is a reasonable risk that Taiwan may fold into China in the not too distant future, is handing over those defensive arms to China, along with operating procedures and detailed plans for their repair, and thus reverse engineering.

    Tracking always in the background is a Chinese population and government who believe that their country has been done a fundamental wrong by the West, for hundreds of years. China’s symbol is “center of the world”. Thus they believe their country is the Center of the World, and that they have an unspoken desire to seek revenge.

    This is not a new thought of mine. In 1991, I hired mainland Chinese who were in the USA as graduate students, three very bright individuals. They shared this insight among others.

    The US cannot remain the idiot savant and believe that luck will “save” their nation state from the Chinese profound need for achievement of superiority over all other countries.

    Not bound by Judeo-Christian ethical values, China is totally free to pursue its interpretation of what will serve it as a nation-state and its populace.

    I am as you said “eyes wide open” regarding this reality. I believe that the economic consequences of this Chinese national weltanshaung will be ceaseless during our lifetimes.

  2. GaudiaRay Says:

    One added refinement, I said, above, “Thus they believe their country is the Center of the World, and that they have an unspoken desire to seek revenge.”

    I wish to rephrase this as, “Thus they believe their country is the Center of the World, and that they have an unspoken desire to expiate this believed sense of suppression and cultural disrespect and humiliation.”

    To me, this is an enormous and permanent “heads up”.

    Do you have a view regarding what I state here?

  3. yra Says:

    there is a great deal to chew on.The supposition of China as the middle kingdom always puts it in an interesting light.If we go back 250 years and measure china’s GDP relative to the rest of the world we see that china can move quickly to promote growth and if they get to be 28% of global gdp she would only be where she was long ago.When you get in the realm of a nation’s psyche,it is interesting to consider but I believe that things are never the same but the results can be—it is how they get there.China will always fascinate as it is a huge ,populous state with a long history and now undoing the previous disastorous 50 years.The same accusations would made about the Japanese when they were the most dynamic nation but things certainly look different now.The important thing will be how china reacts when they hit serious bumps on the road of developement

  4. Grady Harper Says:


    With all due respect,
    I hear many commentaries of this nature about China and, while I may be wrong, it always seems a bit silly to me.

    Doesn’t the American attitude also seem to be one of thinking we’re the center of the world? Many barely pay any attention to anything that happens outside our borders, few learn a second language, etc. We always portray ourselves as ‘#1’ and the white knight that saves the world in our movies. And the double standard we apply to ourselves vs others is a clear indication that we consider ourselves to be ‘exceptional’ (e.g. our ‘collateral damage’ is their ‘terrorism’).

    And as for the Judeo-Christian ethical values, who’s got two wars going in Asia? Who was shooting Palestinians like fish in a barrel on the eve of Obama’s assumption of office? And am I supposed to believe that the same elite that is now robbing the domestic US population blind hasn’t been doing the same to the rest of the world for decades and more? Starting with gunboat diplomacy opening Japan, then the Spanish American war and the Philippines, and the pace just picked up from there.

    If you are right, and they are going to be a less friendly world power than the US has been, then heaven help us all.


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