China sell US bonds Bernanke buy back US bonds without blinky eye China take US dollars from Bernanke and buy lotsa stuff Everything get very expensive cause China bidding up price US sheeple rant and rave in impotent rage
"SPECIAL REPORT-China flexed its muscles using U.S. Treasuries" "FANNIE AND FREDDIE, GUARANTEED OR NO" http://www.reuters.com/article/2011/02/17/wiki-china-treasury-idUSN1610751620110217
This is a lucid and brilliant synopsis: This is a slow burn retribution for China unilaterally deciding in 1994 to de-value their currency by 50% in one day, which is what ignited the entire cheap labor for crappy goods manufacturing arbitrage we are now engaged in.
The same argument can be made for all floating currencies. History Repeats Under Bretton Woods the dollar was made the reserve currency backed by gold at $35 per ounce. The dollar was "as good as gold" with the most purchasing power and was the only currency backed by gold. Just like our present war situation, the vietnam war and the refusal of the administration of U.S. President Lyndon B. Johnson to pay for it resulted in an increased dollar outflow to pay for the military expenditures and rampant inflation, which led to the deterioration of the U.S. balance of trade position. By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit. The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits. In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the Nixon Shock. The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25% devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the major currencies were floatingâin other words, exchange rates were no longer the principal method used by governments to administer monetary policy. On December 17 and 18, 1971, the Group of Ten, meeting in the Smithsonian Institution in Washington, created the Smithsonian Agreement, which devalued the dollar to $38/ounce, with 2.25% trading bands, and attempted to balance the world financial system using SDRs alone. It was criticized at the time, and was by design a "temporary" agreement. It failed to impose discipline on the U.S. government, and with no other credibility mechanism in place, the pressure against the dollar in gold continued. This resulted in gold becoming a floating asset, and in 1971 it reached $44.20/ounce, in 1972 $70.30/ounce and still climbing. By 1972, currencies began abandoning even this devalued peg against the dollar, though it took a decade for all of the industrialized nations to do so. In February 1973 the Bretton Woods currency exchange markets closed, after a last-gasp devaluation of the dollar to $44/ounce, and reopened in March in a floating currency regime. On September 24â25, 2009 US President Obama hosted the G20 in Pittsburgh. A realignment of currency exchange rates was proposed. This meeting's policy outcome could be known as the Pittsburgh Agreement of 2009, where deficit nations may devalue their currencies and surplus nations may revalue theirs upward. On Jan 27, 2011 in his opening address to the World Economic Forum in Davos, President Sarkozy repeated his call for a new Bretton Woods. Leaders agreed to allow $250 Billion of SDRs to be created by the IMF, to be distributed to all IMF members according to each countries voting rights. In the aftermath of the summit, Gordon Brown declared "the Washington Consensus is over".