Notes From Underground: U.S. Secretary of Defense cautions against opening the Gates to hell

U.S. Secretary of Defense Robert Gates chimed in today on the China/Taiwan issue. He warned that it was important for cooler heads to prevail in this most recent diplomatic blowup between the U.S. and China. The Defense Secretary became alarmed as the Chinese military talked of suspending joint military cooperation. Gates is worried that if communications were to breakdown, there could be some small misunderstanding that could inadvertently grow into a larger problem. With many ships representing both navies patrolling the seas, the possibility of an incident increases as communication breaks down. We well remember the first year of Bush administration when there was an aircraft incident involving a Chinese and American aircraft. There was a great deal of bombastic language but cooler heads calmed the incident. It is good to see Gates urging caution. Hopefully the Congress and others will also calm down before the calls for protectionist retaliation escalate.

In a Financial Times article by Michiyo Nakamoto, it is reported that the Japanese Fianacial Services Minister, Shizuka Kamei, Monday suggested that the Japan Post Bank diversify its holdings away from JGB’s. The minister warns that the postal savings bank is far too dependent on the Japanese government and should move to buy U.S. Treasuries and more corporate debt.

For those who don’t know, the Postal savings account is the largest source of savings in Japan and probably the world. These funds have historically been collected door to door in Japan by the mail service and deposited in very safe accounts. The Postal Bank presently owns 24% of all outstanding JGB’s according to the article and we are surprised the number is not higher. We have to ask why this is being brought to the fore at this crucial juncture, as the issuance of Japanese debt has become a very serious issue.

What is this minister thinking? Does he wish to undermine the government’s ability to issue debt at a low rate? Is there something bigger here in that this idea is another way for the Japanese Government to create downward pressure on the YEN? Our attention is definitely captured and we await some type of counter statement from a Japanese official.

More on the European debt problem. The Maastricht Accord calls for a limit on the deficit incurred by any EU member to be not more than 3% of GDP and for national debt to be no greater than 60% of GDP. This is known as the Growth and Stability Pact. We know about Greece’s failure to meet the criterion and the growing concerns about the other PIIGS.

A Reuters Monday reported that the French deficit this year is projected to be 8.5% and the national debt to be 80% of GDP, rising to 90% in 2011.The problem for France is that Sarkozy wants to expand a government stimulus effort while Prime Minister Francois Fillon discusses cutting back public spending as a way to rein in the deficit. Just another reminder of the seriousness of Europe’s ongoing budget problems. If nobody abides by the rules, we guess they don’t really exist.

Just released: The Aussie Central Bank (RBA) left rates unchanged. The Aussie broke hard on the announcement and is searching for support. Look at the crosses and determine if support levels hold as that will mean that risk on will be back in vogue. If the AUSSIE fails to hold support, the question of risk on will have to be examined.

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