China, cont.

"Geithner Says China Has Faith in U.S."
--headline, The New York Times (6/3/09)

[Editor's Note: Sorry, I'm on a China kick -- just one more in that vein. And yes, it does bear on real estate. In fact, whether China keeps buying U.S. debt -- and therefore whether mortgage rates stay low -- is probably the single biggest variable affecting U.S. housing prices right now.]

Just two thoughts on the above headline:

One. Wouldn't it be more reassuring if it read, "China says China Has Faith in U.S."??

Two. Actions speak louder than words.

Some of the most flattering things you'll ever hear about a publicly-traded company are analysts and major stockholders praising it as they seek cover to dump their shares (or recommend same). Or buy credit derivatives that appreciate as company shares tank, which is effectively the same thing.

You'd think that the Securities and Exchange Commission ("SEC) would police that (and a lot of other things), but there's plenty of evidence that they don't.

"Over a Barrel"

So here's what you're left with: don't listen to what Chinese leaders say, watch what they do.

Of late, they've been pushing to have their own currency, the renminbi, included in a basket of world currencies to serve as a meta "reserve currency." That's significant because it would supplant the U.S. dollar as the de facto world reserve currency.

Why does that matter?

A key difference between, say, Albania, and the U.S., is that the latter's debts are denominated in its own currency. If the U.S. debt becomes unmanageably large -- one of the big concerns at the moment -- it always has the option of printing more money. For now, at least.

One last quote regarding China, which already owns a trillion-plus in U.S. debt: 'if you owe your bank $1,000, they've got you over a barrel; if you owe them a couple trillion, you've got them over a barrel.'

Unfortunately, there's a crucial difference between dumping what you already have -- and buying more.