With US Warships En Route To Islands, China Asks: “What On Earth Makes Them Think We Will Tolerate This?”
The US is in a tough spot militarily.
In Syria, Russia and Iran have taken advantage of the fact that the plan hatched by the West and its regional allies to destabilize the Assad regime took far too long to develop. The idea was to foment discord and provide covert support for the various armed militias fighting to overthrow the government. But the effort is entering its fifth year and Assad is still there. Not only that, there have been a series of unintended (well, at least we hope they’re unintended) consequences. First, one of the rebel groups the West and its allies supported morphed into an insane band of white basketball shoe-wearing, black flag-waving, sword-wielding desert bandits. Second, the fighting created a horrific refugee crisis that now threatens to destabilize the whole of Europe. Sensing a historic geopolitical opportunity, Moscow and Tehran simply stepped in and outmaneuvered Washington. Now, the US basically has to decide whether it wants to go to war with Russia, because paradropping ammo into the middle of the desert isn’t going to be a viable strategy.
Meanwhile, the US faces another superpower confrontation in the South China Sea.
When Beijing began its land reclamation efforts in the Spratlys, we’re reasonably sure the Pentagon didn’t anticipate the extent to which the effort would quickly become a giant headache for Washington.
As a reminder, it’s not so much the dredging that has Washington’s regional allies in the South Pacific upset. Island building has been done before in the area. Rather, it’s the scope of the project that has everyone unnerved as Beijing has so far constructed over 3,000 acres of new sovereign territory atop which China has built everything from cement factories, to greenhouses, to runways.
Whether or not the US really cares about this is debatable although these shipping lanes are indeed critical for world trade. But with The Philippines and others crying foul, Washington is left with little choice but to put on a brave face lest the world should get the idea that China can just redraw maritime boundaries at will and establish a Sino-Monroe Doctrine in the process.
So finally, the US decided that it would sail some warships by the islands just to see if it can do so without getting shot at.
No, really. That’s the whole plan. “Let’s see how far we can push them.”
This is of course orchestrated under the guise of a freedom of navigation operation which, in a way, makes little sense because China has never threatened global trade. Then again, it’s fairly obvious that Beijing has some military role for the new islands in mind.
In any event, China hit back on Thursday, saying the PLA would “stand up and use force” if necessary should the US make a “mistake” with the whole warship plan.
So in short, Washington is now in a staring contest with both Moscow and Beijing and both Russia and China seem to have gotten the idea that the US has lost its resolve lately and will probably blink first in both standoffs.
It’s with all of that in mind that we bring you the following rather amusing op-ed from Beijing out Saturday on Xinhua, presented below with no further comment:
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The United States’ provocative attempts to infringe on China’s South China Sea sovereignty are sabotaging regional peace and stability and militarizing the waters.
The U.S. Navy is reportedly preparing to conduct “freedom of navigation” operations, sending warships within 12 nautical miles of Chinese islands in the South China Sea. The U.S. operations may take place within days, according to reports.
Last month, in his response to China’s claim of sovereignty over the South China Sea, U.S. Secretary of Defense Ash Carter said the United States “will fly, sail and operate wherever the international law allows, as we do around the world.”
White House Spokesman Josh Earnest said on Oct. 8 that U.S. warships patrolling close to artificial islands built by China in the South China Sea “should not provoke significant reaction from the Chinese.”
Let us not forget that in October 1962, when the Soviet Union was building missile sites in Cuba — not even on U.S. soil — U.S. President Kennedy made it clear in a televised speech that the United States would not “tolerate the existence of the missile sites currently in place.”
What on earth makes the United States think China should and will tolerate it when U.S. surface ships trespass on Chinese territory in the South China Sea?
China will never tolerate any military provocation or infringement on sovereignty from the United States or any other country, just as the United States refused to 53 years ago.
China’s stand on the South China Sea disputes is firm and clear. China’s sovereignty and claims of rights over Nansha Islands and their adjacent waters in the South China Sea have been formed over the long course of history and upheld by successive Chinese governments, and have adequate and solid historical and legal basis.
Just as Article 15 of the United Nations Convention of the Law of the Sea stipulates, delimiting the territorial seas of China and other countries in the South China Sea shall be in accordance with China’s “historic title” to the region.
China has always been, in a constructive and effective manner, a firm upholder of the freedom of navigation as well as peace and stability in the South China Sea. And China has vowed to continue to do so in the future.
China’s construction of civilian and public facilities on the Nansha Islands and reefs, which fall within the scope of China’s sovereignty, serves not only China but also coastal nations in the South China Sea.
For instance, two lighthouses recently built on reefs in the region have helped guide passing vessels from around the world and significantly improved navigation safety.
Contrary to U.S. claims, it will be the United States, as an outsider, that further provokes tensions in the South China Sea by sending soldiers and warships to Chinese territory in the name of “freedom of navigation.”
This is not the first move by the United States to undermine the regional peace and stability that China has worked so hard for.
Over the past several years, the United States has held frequent large-scale drills with its allies in the South China Sea, flexing their military muscles.
According to the website of the U.S. Department of Defense, the country has deployed thousands of civilian and military officials, as well as a huge number of weapons, to the Pacific region.
To destabilize the region and contain China, the United States has deliberately involved non-party nations, such as Japan, in the South China Sea issue and stirred disputes between China and other parties, including the Philippines.
By no means will China let the provocateurs make waves in waters that should be characterized by peace, friendship and cooperation.
Last year, the bilateral trade volume between China and members of the Association of Southeast Asian Nations (ASEAN) exceeded 480 billion U.S. dollars.
Concerned nations have no alternative but to jointly deal with disputes in the South China Sea that pose a threat to the development and prosperity of parties in the region.
On Sept. 18, in response to remarks made by the commander of U.S. forces in the Pacific on patrolling the South China Sea, a Chinese foreign ministry spokesman said China, like the United States, upholds freedom of navigation in the waters.
However, the spokesman stressed, China opposes any country’s challenge, in the name of freedom of navigation, to China’s sovereignty and security in the South China Sea.
During a visit to Europe in March 2014, Chinese president Xi Jinping stressed that his country will “never stir up any trouble, but will resolutely safeguard its legitimate rights” when it comes to sovereignty and territorial integrity.
Even though enhancing mutual trust and managing disputes through high-level visits and talks still remains the first option for China, the country will, without any doubt, adopt countermeasures against the United States if it doesn’t stop military provocations that infringe upon China.
The growing problems in the Chinese banking system could spill over into a wider financial crisis, one of the most respected analysts of China’s lenders has warned.
Charlene Chu, a former senior analyst at Fitch in Beijing and now the head of Asian research at Autonomous Research, said the rapid expansion of foreign-currency borrowing meant a crisis in China’s financial system was becoming a bigger risk for international banks.
“One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding. As that changes, it obviously increases their vulnerability to swings in foreign investor appetite,” said Ms Chu in an interview with The Telegraph
India on Sunday successfully test-fired its 5,000-km range ballistic missile Agni V, which is capable of delivering nuclear warheads up to one tonne and hit targets even in China’s northernmost corners.
The second test of India’s first intercontinental-range ballistic missile (ICBM) in two years marks the beginning of the production and induction phase of the missile. The missile is expected to be test-fired three or four more times before it is inducted into the Army by 2016.
For this particular test, sources said, the flight range was kept a little less than the ideal range of 5,000 km and the missile flew the entire path. “According to preliminary reports, the launch was a success and the missile hit its pre-determined target inside the Bay of Bengal, achieving all mission objectives. However, a detailed study and analysis of all the data are on,” said a source at the Interim Test Range.
Powered by three-stage solid rocket motors, the missile had a “flawless and spectacular” launch in auto mode and followed its entire trajectory in textbook manner, dropping three motors at predefined stages, said a spokesperson of the Defence Research and Development Organisation (DRDO).
The ships located in mid-range and at the target point tracked the missile and witnessed the final event, when it reached its destination with expected precision.
The 17.5 metre-long missile’s maiden launch took place in April 2012, when it took off from the same island, catapulting India into a select group of four nations with ICBM capability.
While Pakistan’s most advanced missile Shaheen-2 is a two-stage rocket capable of travelling 1,200 km, China’s three-stage missile can go up to a distance of 10,000 km bringing entire India to China’s reach.
China is suspected to have two long-range missiles—Dong Feng-31 and DF-31A, both three stage rockets—with a reported range of 10,000 km and 7,000 km respectively. The DF 31A is suspected to have been carrying a multiple independently targetable reentry vehicle (MIRV) that releases multiple weapons.
The DRDO is also developing its own MIRV.
Agni V’s second successful test paves the way for initiation of productionisation and eventually, canisterisation. The missile, in its operational form, is designed to be stored and launched from the canister, enhancing its storage, operational readiness, transportability, response time and shelf life.
China’s foreign minister on Sunday welcomed the deal between the United States and Russia to eliminate Syria’s chemical weapons, which headed off the prospect of US strikes against Bashar al-Assad’s regime. “The Chinese side welcomes the general agreement…
UN Security Council envoys from Britain, China, France, Russia and the United States held talks Wednesday on the Syrian chemical weapons crisis, but no agreement was reached. “They discussed elements that could go into a resolution” on Syria, said one…
The news media has been running wild lately over reports that the U.S. is “going to war” with Syria. The flurry began with Secretary of State John Kerry’s bold comments on Monday and Secretary of Defense Chuck Hagel’s subsequent comments that the U.S. was “ready to go” should President Barack Obama order military action. By “ready to go,” the administration is talking about providing air support to the Syrian rebels much as it did for the Libyan rebellion to oust Muammar Gaddafi two years earlier.
I still have my skepticism, though. If the U.S. were going to attack Syria in any way that would alter the balance of power in the Syrian civil war, it would not be telegraphing such strikes. But Obama’s red line on chemical weapons has trapped the administration; it does not want to militarily intervene, but it cannot sit idly by after having been so explicit about what would trigger military action (or the bluff of it anyway). What the administration is really trying to accomplish is convincing a war-weary American public that this will not be a protracted affair while giving Washington time to try to secure a broad coalition of support at the United Nations, NATO and/or with the Arab League.
But while isolationists (or non-interventionists) are panicking over a possible course of action that doesn’t involve boots on the ground, what I find ironic is that the U.S., along with several other actors across the globe, have already had a covert presence within Syria for the last two years – supplying everything from intelligence to weapons to both sides of the conflict. I think it’s important to remind everyone exactly which external actors are involved in this civil war as well as what their stake is in the conflict. This is not just a battle among Syrians. This is a battle between Saudi Arabia and Iran, Iran and the U.S., Turkey and Iran, Russia and the U.S., and others with each player pursuing very different interests.
Saudi Arabia and Iran are locked in a centuries-old ideological conflict, where fighters today are drawing their motivation from seventh century battles. Saudi support for the Syrian opposition is motivated by a decades-long desire to break the alliance between Syria and the Islamic Republic of Iran, Saudi Arabia’s chief rival for dominance in the Persian Gulf and the wider Middle East.
Saudi reaction to the Arab Spring has been two-fold: Containing the unrest before it reaches Saudi territory, and ensuring that Iran does not benefit from any changes to the regional balance of power. In this context, the outbreak of the Syrian uprising in the spring of 2011 came as a golden opportunity for the Saudis to strike at Iran’s key Arab ally. While Saudi Arabia lacks the military capacity to intervene directly, it has been using its oil wealth to arm Syrian rebels and, in the event that Assad falls, ensure his regime is replaced by a Sunni-friendly government.
Turkey has been looking for a regional opportunity to showcase itself as a model and leader for the Islamic world for the last decade. The ironic part is prior to the current uprising, Turkey looked at Syria as a cornerstone in its plans to become a political, economic and “moral” leader in the Middle East. Now Turkey has committed itself, in cooperation with Saudi Arabia and other Arab League actors, to bring about regime change in Damascus. It has allowed the Syrian opposition to set up headquarters in Istanbul, and it is arming and training the Sunni rebels.
In fact, Turkey has embraced an exclusively Sunni cause in Syria. Ankara is not only embroiled in a confrontation with the Alawite Syrian regime but is also in conflict with the Shi’ite regime in Iraq over Kurdish territories. In addition, the historic, geopolitical rivalry between Turkey and Iran, the patron of Syria, has resumed after a brief interlude during which Turkey appeared to be “drifting eastward,” siding for a while with Iran and against its Western partners over the Iranian nuclear issue. This rivalry now is being played out in Syria and Iraq.
Iran has few allies in the Arab world and its most important one is Syria. Their relationship dates back to the years after the 1979 Islamic revolution in Iran. They needed to come together to fight their common rival, Saddam Hussein of Iraq. They also allied in order to check Israeli advances into Lebanon. Syria has consistently provided Iran with an element of strategic depth. It gives Iran access to the Mediterranean and a supply line to Iran’s Shia Muslim supporters in southern Lebanon – Hezbollah – next to the border with Israel.
Losing this support would be a major blow to Iran. So Iran has supported the Assad government (uninterrupted during the transition of Presidents Mahmoud Ahmadinejad to Hasan Rouhani) with weapons in the current conflict, and Iranians are fighting on Assad’s side.
Israel had maintained a complex and not always transparent relationship with the Syrian government. In spite of formal hostilities, the two shared common interests in Lebanon. Israel did not want to manage Lebanon after Israeli failures in the 1980s, but it still wanted Lebanon – and particularly Hezbollah – managed. Syria wanted to control Lebanon for political and economic reasons and did not want Israel interfering there. An implicit accommodation was thus achieved.
Israel continued to view the Alawite regime in Syria as preferable to a radical Sunni regime (sort of a “go with the devil you know” strategy). In the context of the U.S. presence in Iraq, the threat to Israel came from radical Sunni Islamists; Israel’s interests lay with whoever opposed them. Today, with the U.S. out of Iraq and Iran a dominant influence there, the Israelis face a more complex choice. If the regime of President Bashar al-Assad survives (with or without Assad himself), Iran will maintain its sphere of influence from the Mediterranean to western Afghanistan. Accordingly, Israel has shifted its thinking from supporting the Assad regime to wanting it to depart so that a Sunni government hostile to Iran, but not dominated by radical Islamists, could hopefully emerge.
Russia is looking for another noisy Middle Eastern maelstrom to bog the U.S. down while it continues to reassert its presence and influence – with little Western interference – in the former Soviet Union. Moscow also has long-standing strategic and financial interests in Syria.
Syria hosts a Russian naval base on the Mediterranean, and contracts for Russian weapons sales to Syria – those signed and those under discussion – total $5 billion. The fall of Gaddafi has also contributed to Putin’s support of Assad. The Kremlin lost about $4 billion worth of weapons contracts when the Libyan regime fell, and it wants to avoid a repeat in Syria. Beyond weaponry, Russian companies have invested $20 billion in Syria since 2009. If Assad loses power, these contracts would be forfeited. Summing up Russia’s interests in supporting yet another regime hostile to Western interests, to quote a line from The Godfather, “It’s nothing personal. It’s just business.”
While China seems more than happy to let Russia and Iran take on the role as Assad’s main supporters, it is nonetheless far from neutral. Much like Russia, China’s interests in the Syrian conflict are purely practical. Kadri Jamil, Syrian deputy prime minister for the economy, boasted that China has joined Iran and Russia in delivering $500 million a month in oil and credit to Syria. The majority of Syria’s oil is in the largely rebel-held north and northeast of the country and the network of pipelines connecting the wells to the population centers are vulnerable to rebel attack. As a result, Syrian oil production has fallen by as much as 95% during the ongoing conflict, and the importance of Chinese aid should not be underestimated. Chinese financial and material support supplements Russian and Iranian aid and has allowed the Assad war machine to remain militarily effective.
Assad’s survival is also tied up in a Chinese geostrategic consideration of the energy-rich Middle East, whereby supporting Assad is seen as an effective block on Western power in the region. Moreover, the Chinese government is nervous of creating a precedent for intervention on human-rights grounds due to its own insecurities at home.
Europe had an obvious interest in Libya: It’s the North African country’s No. 1 oil consumer. European leaders were also vilifying Gaddafi for decades while simultaneously putting up with him, even as he provided sanctuary for countless terrorist organizations from the northern Irish IRA to the Palestinian PLO. By 2011, British Prime Minister David Cameron and French President Nicolas Sarkozy were the two leaders strongly pushing the most to initiate a NATO campaign to oust Gaddafi, with U.S. President Obama and Italian Prime Minister Silvio Berlusconi reluctantly following behind.
Cameron and France’s new President Francois Hollande both seemed ready to “punish Assad” over the alleged gas attacks the regime has been employing as of late, but now seem to be wavering or scaling back a bit in the wake of new UN reports claiming the chemical weapons may have been used by the rebels. German Chancellor Angela Merkel certainly won’t risk taking any action just weeks away from nationwide elections – precisely why she didn’t want to risk unpopularity during the Libyan intervention two years ago as well.
To put it bluntly, the U.S.’s strategic interest is to avoid becoming drawn further into another age-old sectarian vendetta that saps the U.S.’s ability to maintain its balance in the world. Still, as frequently happens, many in the U.S. and Europe are appalled at the horrors of the civil war, some of whom have called on the U.S. to “do something.” The U.S. has been reluctant to heed these calls. While Washington has no love for the Assad regime, it does not have a direct interest in the outcome, since all possible outcomes are bad from its perspective. Moreover, the people who are most emphatic that something be done to stop the killings will be the first to condemn the U.S. when its starts killing people to stop the killings (surprise).
The Obama administration therefore adopted an extremely cautious strategy. It said that the U.S. would not get directly involved in Syria unless the Assad regime used chemical weapons. When Obama proclaimed his red line on Syria and chemical weapons, he assumed the issue would not come up. Unless Obama can get overwhelming, indisputable proof that Assad did not – and that isn’t going to happen – Obama will either have to act on the red line principle or be shown that he was bluffing. But there is no political support in the U.S. for intervention. That’s the hand the president has to play, so it’s hard to see how he avoids military action and retains credibility. It is also hard to see how he takes military action without a political revolt against him if it goes wrong, and it could.
But as you can see, we’re not the only ones involved in this global game of chess within Syria.
As Jerome Corsi warned earlier today, “this is one of the most serious moments that we’ve ever faced in world history.”
Events are happening quickly and as it stands, the United States, Britain and other western allies are preparing a missile strike on Syria.
Russia has been the most critical opponent of the possibility of mid east military action, but now China has also stepped in.
Russia and China have stepped up their warnings against military intervention in Syria, with Moscow saying any such action would have “catastrophic consequences” for the region.
And moments ago the Interfax new agency announced that China and Russia have left the negotiating table in response to a proposal for Britain’s David Cameron on pending intervention in Syria.
UN-SECURITY/COUNCIL-RUSSIA-CHINA DUBAI. Aug 28 (Interfax)
Russian and Chinese representatives have left the UN Security Council session that discussed the draft resolution on Syria proposed by Great Britain.
We could be days away from the start of a conflict the likes of which the world has never seen before.
The United States and Britain are pushing forward with plans to execute a “brief and limited” strike on Syrian targets, but all signs suggest it will turn into much more than that. In January of 2012 the United States positioned 100,000 soldiers off the coast of Iran, and just last weekend it was reported that hundreds of US soldiers and intelligence assets had moved into Syria ahead of the attack.
In response, Syria has warned it will immediately target Israel with Russian supplied advanced weaponry. Syria’s closest ally in the region, Iran, has echoed the threat and warned that it, too, will turn its military capabilities on Israel.
This is a game changer. Any response by Israel against Arab nations would turn the entire middle east against the U.S. led coalition.
According to a report from the LA Times, that’s exactly what Israel intends to do.
“We are not part of the civil war in Syria, but if we identify any attempt whatsoever to harm us, we will respond with great force,” Netanyahu said after huddling for a second consecutive day with key Cabinet members to discuss the possible ramifications of a U.S. strike against Syria.
Armies are mobilizing, and that includes Russian troops, who are reportedly now being deployed in Syria to help Assad defend against “rebel forces,” which adds additional strength to the 160,000 Russian troops mobilized in the region earlier this summer. Furthermore, the Russian Navy deployed nearly its entire Pacific fleet to the Mediterranean in May.
Moreover, after a meeting with Saudi Arabia in which the Saudi head of intelligence directly threatened Vladimir Putin with terrorist attacks during the coming winter Olympic games in Russia if they didn’t let the U.S. move forward with their plans in Syria, President Putin has reportedly responded with the threat of a massive counter-strike against the Saudi Arabian monarchy.
This isn’t an exercise.
The writing is on the wall.
The militaries of the most powerful nations on Earth are preparing to engage.
If President Obama initiates a missile strike on Syria, however limited in scope, it could set the whole world ablaze.
TruthOnPot.com – Acupuncture has been around for thousands of years and so has medical marijuana. But the two haven’t been connected until now, thanks to a group of outside-the-box thinkers at a university in China.
Their findings, published online by the National Institutes of Health, show how electroacupuncture – an electrified version of traditional acupuncture used to treat pain – works by increasing activity of natural painkillers in the body called cannabinoids.
Explaining the thought process behind their study, the authors point to existing knowledge on cannabinoids – a group of molecules found in both cannabis and all vertebrate animals (including humans) – and their ability to fight pain by acting on specific receptors of the body:
“Previous studies show that cannabinoid CB1 receptors are related to pain relief.”
But the researchers also say they weren’t the first to discover that acupuncture could cause an increase in the body’s cannabinoids:
“According to the latest reports in the American journal of Nature Neuroscience, acupuncture has been found to cause the human body to release some natural painkillers.”
The acupuncture points used in the study correspond with human acupoints.
They were, however, the first to explain why. Using rat models of arthritis pain, the researchers found that repeated treatment with electroacupuncture resulted in an increase in cannabinoid receptors in a part of the brain called the striatum.
That’s where it gets complicated, because the striatum is also full of dopamine cells. Previous studies show that marijuana can increase dopamine as well and the current study seemed to confirm this. The researchers found that electroacupuncture also led to an increase in dopamine receptors, but whether dopamine played a part in pain relief was not clear.
Overall, the rats appeared to be in less pain after receiving acupuncture – a treatment that the authors say is endorsed by the World Health Organization (WHO) for over 40 disorders. And if cannabinoids are the reason why acupuncture works for pain, then perhaps it’s time the WHO endorsed marijuana as well.
The study was conducted by researchers at Shanghai Jiao Tong University and funded by grants from the National Basic Research Program of China, National Natural Science Foundation of China , Shanghai Leading Academic Discipline Project, Shanghai Municipal Natural Science Foundation, and Shanghai Famous TCM academic research project.
Do you want to know the primary reason why rapidly rising interest rates could take down the entire global financial system? Most people might think that it would be because the U.S. government would have to pay much more interest on the national debt. And yes, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has actually been much higher in the past), the federal government would be paying out about a trillion dollars a year just in interest on the national debt. But that isn’t it. Nor does the primary reason have to do with the fact that rapidly rising interest rates would impose massive losses on bond investors. At this point, it is being projected that if U.S. bond yields rise by an average of 3 percentage points, it will cause investors to lose a trillion dollars. Yes, that is a 1 with 12 zeroes after it ($1,000,000,000,000). But that is not the number one danger posed by rapidly rising interest rates either. Rather, the number one reason why rapidly rising interest rates could cause the entire global financial system to crash is because there are more than 441 TRILLION dollars worth of interest rate derivatives sitting out there. This number comes directly from the Bank for International Settlements – the central bank of central banks. In other words, more than $441,000,000,000,000 has been bet on the movement of interest rates. Normally these bets do not cause a major problem because rates tend to move very slowly and the system stays balanced. But now rates are starting to skyrocket, and the sophisticated financial models used by derivatives traders do not account for this kind of movement.
So what does all of this mean?
It means that the global financial system is potentially heading for massive amounts of trouble if interest rates continue to soar.
Today, the yield on 10 year U.S. Treasury bonds rocketed up to 2.66% before settling back to 2.55%. The chart posted below shows how dramatically the yield on 10 year U.S. Treasuries has moved in recent days…
Right now, the yield on 10 year U.S. Treasuries is about 30 percent above its 50 day moving average. That is the most that it has been above its 50 day moving average in 50 years.
Like I mentioned above, we are moving into uncharted territory and this data doesn’t really fit into the models used by derivatives traders.
The yield on 5 year U.S. Treasuries has been moving even more dramatically…
Last week, the yield on 5 year U.S. Treasuries rose by an astounding 37 percent. That was the largest increase in 50 years.
Once again, this is uncharted territory.
If rates continue to shoot up, there are going to be some financial institutions out there that are going to start losing absolutely massive amounts of money on interest rate derivative contracts.
So exactly what is an interest rate derivative?
The following is how Investopedia defines interest rate derivatives…
A financial instrument based on an underlying financial security whose value is affected by changes in interest rates. Interest-rate derivatives are hedges used by institutional investors such as banks to combat the changes in market interest rates. Individual investors are more likely to use interest-rate derivatives as a speculative tool – they hope to profit from their guesses about which direction market interest rates will move.
They can be very complicated, but I prefer to think of them in very simple terms. Just imagine walking into a casino and placing a bet that the yield on 10 year U.S. Treasuries will hit 2.75% in July. If it does reach that level, you win. If it doesn’t, you lose. That is a very simplistic example, but I think that it is a helpful one. At the heart of it, the 441 TRILLION dollar derivatives market is just a bunch of people making bets about which way interest rates will go.
And normally the betting stays very balanced and our financial system is not threatened. The people that run this betting use models that are far more sophisticated than anything that Las Vegas uses. But all models are based on human assumptions, and wild swings in interest rates could break their models and potentially start causing financial losses on a scale that our financial system has never seen before.
We are potentially talking about a financial collapse far worse than anything that we saw back in 2008.
Remember, the U.S. national debt is just now approaching 17 trillion dollars. So when you are talking about 441 trillion dollars you are talking about an amount of money that is almost unimaginable.
Meanwhile, China appears to be on the verge of another financial crisis as well. The following is from a recent article by Graham Summers…
China is on the verge of a “Lehman” moment as its shadow banking system implodes. China had pumped roughly $1.6 trillion in new credit (that’s 21% of GDP) into its economy in the last two quarters… and China GDP growth is in fact slowing.
This is what a credit bubble bursting looks like: the pumping becomes more and more frantic with less and less returns.
And Chinese stocks just experienced their largest decline since 2009. The second largest economy on earth is starting to have significant financial problems at the same time that our markets are starting to crumble.
And don’t forget about Europe. European stocks have had a very, very rough month so far…
The narrow EuroStoxx 50 index is now at its lowest in over seven months (-5.4% year-to-date and -12.5% from its highs in May) and the broader EuroStoxx 600 is also flailing lower. The European bank stocks pushed down to their lowest in almost 10 months and are now in bear market territory – down 22.5% from their highs. Spain and Italy are now testing their lowest level in 9 months.
So are the central banks of the world going to swoop in and rescue the financial markets from the brink of disaster?
At this point it does not appear likely.
As I have written about previously, the Bank for International Settlements is the central bank for central banks, and it has a tremendous amount of influence over central bank policy all over the planet.
The other day, the general manager of the Bank for International Settlements, Jaime Caruana, gave a speech entitled “Making the most of borrowed time”. In that speech, he made it clear that the era of extraordinary central bank intervention was coming to an end. The following is one short excerpt from that speech…
“Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road. And it is a call for recognizing that returning to stability and prosperity is a shared responsibility. Monetary policy has done its part. Recovery now calls for a different policy mix – with more emphasis on strengthening economic flexibility and dynamism and stabilizing public finances.”
Monetary policy has done its part?
That sounds pretty firm.
And if you read the entire speech, you will see that Caruana makes it clear that he believes that it is time for the financial markets to stand on their own.
But will they be able to?
As I wrote about yesterday, the U.S. financial system is a massive Ponzi scheme that is on the verge of imploding. Unprecedented intervention by the Federal Reserve has helped to prop it up for the last couple of years, and there is a lot of fear in the financial world about what is going to happen once that unprecedented intervention is gone.
So what happens next?
Well, nobody knows for sure, but one thing seems certain. The last half of 2013 is shaping up to be very, very interesting.
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How the Chinese currency is replacing the U.S. Dollar in global oil markets
History is being written in the East. As the U.S. stays distracted with stone age warriors in Central Asia and the Middle East, the last platform of the American economic foundation, the U.S. Dollar’s currency reserve status, is being underminded by their trade partners in Asia. Both Australia and Japan are set to start direct-trading in Chinese currency and they are not the only ones. There are almost 20 countries whom have currency swaps in place with China all in order to side-step the U.S. Dollar in global trade. At the China Money Report, we have written extensively on the “Rise of the Renminbi”. What is new and largely unreported and what we will cover in this article is the “Rise of the Petroyuan,” as China is now converting its oil imports into Chinese Yuan as opposed to U.S. Dollars. This will be a new challenge and possibly the fatal blow to the U.S. Dollar as the dominant global reserve currency.
With their industrial base all but gone, the housing market bubble popped, and the Federal Resereve funding the majority of the government debt with printed currency, the American economy can ill-afford a new challenge to its currency’s reserve status. It is this very reserve status which has led to America being able to consume more than it produces for decades upon decades as foriegn countries were willing to trade consumer products for paper IOU’s. The Dollar’s reserve status came about naturally after WW2 as the U.S. was the world’s larget trading nation, exporter, and creditor. Today, China occuppies all of these slots.
China will soon occupy a new slot: That of the world’s largest oil importer. OPEC has confirmed on April 4th of this year that they expect China to surpass the United States as the world’s largest oil importer in 2014. This shift in global oil flows is being driven by the twin pillars of a booming Chinese economy and America’s newfound booming domestic oil and gas supply. This shift in the oil trade carries with it massive geopolitical implications that will reshape the world as we know it.
China’s Increasing Oil Imports
The demand side of oil from China has already reshaped geopolitics and global supply chains. Between 2002 and 2010, China’s annual imports of crude increased from 70m tonnes to more than 270 million tonnes. Saudi Arabia’s largest customer for oil is no longer the U.S. but the Peoples Republic of China. In the year 2012, China’s net oil imports were still 1 million barrels per day lower than in the United States, but in some months, China was very close and even surpassed the U.S. in net oil imports. In December 2012 for instance, China imported 6 million barrels a day compared to only 5.98 million barrels in the U.S. From 2010-2015 alone, oil imports in China are expected to grow over 40%. China’s oil demand growth is expected to represent 64% of all new demand for oil in 2012-2013.
The upside potential of oil imports into China are still not understood by most analysts and the potential on how large they could become is incredible. Car sales in China are already almost twice the levels in the U.S. and sales are up 20% for the first two months of 2013. Keep in mind that 90% of car sales are paid cash-up-front and most large cities have prohibitive taxes and quotas against new car sales. Despite these regulations, sales are still up 20% so far in 2013. All of these new cars and trucks will of course require more oil that China will need to import. General Motors already sells more vehicles in China than they do the United States and their sales are growing double-digits.
China’s increasing dependence on imported oil has threatened the country’s energy security and it is of major concern to the government. China’s oil dependence is expected to reach 59.4 percent in 2013. Be assured, China is building a blue-water navy and developing the global relationships, which will be required to protect this supply of crude they require today and the ever increasing amount they will need in the future. Indeed, the country of China may be forced into becoming the reluctant miltary superpower to guarantee that they have access to global oil markets.
Americans Turning Off Oil Imports
In comparison to China, the US reliance on foreign energy imports has declined considerably, and many are predicting that the US could be energy self-sufficient by 2030 thanks to its surging domestic production of shale gas and oil. The US is now expected to be a gas exporter by 2020 instead of the previously projected 2022. Domestic oil supplies as well as Canadian supplies will make North America energy independent. This is good news for the U.S. and this new found wealth could be used for a new platform for a revitalized American economy if they can substianlly restructure the tax and legal system which has driven production out of the country.
Trading Oil for Yuan
Recent reports from Reuters, have confirmed that China is now trading their own domestic currency, the Yuan, for oil. Both Russia, and Iran are now using Yuan for oil sales to China. Venezuela is sure to follow. With Russia and Iran accepting Yuan for oil that means there are now almost 1 million barrels per day being exchanged for Yuan instead of USD. Angola can be expected to move oil sales into Chinese Yuan if they haven’t already. Over half of their oil sales are now to China. For Venezuela, the political relationship with the U.S. is well known as fear of the U.S. military might be the only thing stopping them from shifting oil sales into Yuan now. Sudan is another country, highly dependent on China politically and will most likely convert their oil sales into Chinese Yuan.
If Russia, Iran, Angola, Sudan, and Venezuela all convert just their oil sales to China into the Chinese Yuan the world will see over 5 million barrels per day traded not in U.S. dollars but in Chinese Yuan. Good night Petro Dollar…Hello Petro Yuan.
Geopolitical Shift and Rise of the Petro Yuan
Does China, as the world’s largest importer of oil then take charge of global sea lanes to ensure the trade in oil? This has been a priority of the U.S. military for the last 50 years. The Pentagon is spending $1.58 trillion annually on hardware for trucks, planes, ships, and guns. In 2013, their cost increase alone was $74 billion. The cost increases this year alone, of $74 billion, is more than Russia’s entire military budget. Can America justify a defense budget of this size to protect sea lines for Saudi crude going to China?
What about the so called “King Dollar”? For decades you could trade oil for dollars. This relationship has gone a long way towards making the U.S. dollar the world’s reserve currency. What happens when the U.S. no longer needs to buy imported oil. As time goes on, the oils futures markets will no doubt shift more to Dubai and Dalian, than West Texas and Brent Crude. In decades past, America’s thirst for energy imports resulted in all oil contracts being denominated in U.S. Dollars, the so-called Petro Dollar. The Petro Dollar is now headed for extinction to make way for the Petro Yuan.
We are all witnessing the birth pangs of a new global reserve currency and the “Rise of the Petro Yuan”.