The big picture

I recommend that readers take a regular look at the Discussion Form on The Daily Reckoning. I thought that this posting was especially interesting:

Date: December 05, 2004 04:44 AM
Author: Ricardo Smith (audl1@go.com)
Subject: I'd say Washington has "won" round 1.

Chris

I don't think we are even in round one yet. This is just noise for the fans, as the present champion shadow boxes with the upcoming pretender. All know that when China reaches critical mass with a well developed and broad middle class, and a well developed and broad financial system backed by enforceable rule of law, China's internal demand will become the engine of growth that pulls the world, including the USA. Trouble is, does that happen in 10 years, 25 years, 50 years?

For now, I think China's aims are short term shots across America's bows regarding Taiwan. They want it back before the Beijing Olympics in 2008. But the Taiwanese President wants to force a vote on independence in 2006. If they vote yes, China has publically and repeatedly said they will act militarily to stop it, no matter what the cost. President Hu got all he met on his S American tour at APEC to reaffirm their "one China" credentials. Bush did so kinda, but with his fingers crossed. He has to square a U-turn with his rhetoric of his first 2 years and at the same time not be seen as jumping to China's tune. China knows that even if the US remained miitarily uninvolved, they could freeze the PBOC's (and other's) assets in US bank's and at the Fed. That more than anything else drives China's shift from the dollar, I think, into buying foreign natural resource assets and into making dollar loans to countries around the world. Between now and mid 2006, I think they will try to sclae down dollar risk.

Even so, they still have about half a trillion dollars at risk, plus those held by semi autonomous HK, ($150 billion,I think.) Longer term, this is just the start of the 21st century scramble to lock up diminishing global natural resources. In over simple terms, the US over consumes natural resources and gets a free ride via the dollar. Increasingly,that is starting to rankle non Americans. Probably made slightly worse by the way this President dissipated the global goodwill following 9/11. The present fiat-dollar reserve system is too unstable to last long term. The questions are what replaces it. Does transition happen via a soft landing (cooperation,) or a hard landing (crisis/panic,) and how long the transition. At this point, just before President Bush starts his second term, early indications are that he seems to be flirting with an "in your face", approach. Sort of "the people gave me a mandate, God gave me the first", lets do it. Certainly if he wants to go for broke, there's nothing to stop him putting through the changes he wants. Right now he could almost get away with reinstituting segregation, but I think he'll settle for gutting abortion. Time will tell if he he goes for broke, and if he does, if that's good for the dollar or not.