The ongoing debacle in the US has only given fresh fodder to the peddlers of panic. Every month we receive an email full of fire and brimstone from a certain Gerald Celente:
Blaming the S&P downgrade for triggering the global sell-off/financial panic – as the majority of pundits are doing – is as bogus as blaming the onset of World War I on the assassination of Archduke Ferdinand. The downgrade was no more than the proverbial last straw that broke the nation’s financial back … future Fed schemes will, at best, provide only temporary relief and, as with its previous attempts, are doomed to fail.
If you believe Celente, and according to his website nearly everyone does, then you should a) study martial arts and b) invest your money in gold. But gold is, after all, just a yellow metal. While some in China are using gold to hedge against inflation, those abroad appear to be using China as their hedge, which is better than gold in many ways: It has a delicious cuisine, a policy of non-interference in other countries’ internal affairs, and 200 million years of history as a contiguous geographical unit, starting when the Laurasian supercontinent broke off from Pangaea.
Inspired by these advantages, foreign direct investment into China rose 19.8% year-on-year in July (it rose by an average of 18.6% for the first seven months of 2011). Sneaky hot money inflows have increased even more quickly. The State Administration of Foreign Exchange said that the volume of illegal exchanges where foreign currency was traded for renminbi rose 26% in the first half of 2011.
Is buying China safer than buying gold? The relevant organs were busy reassuring investors this week that there was nothing to worry about. (Don’t look at the stock markets, or the high-speed train system, or local government debt levels!) The Ministry of Finance said local debt is controllable, and that it will soon let local governments issue bonds so they don’t have to borrow so much from banks. Bonds are safe, right? Certainly, and according to trusty steed Dagong Global Credit Rating, they’re safer than US bonds. Like S&P, Dagong downgraded US debt to A (below its rating for China’s own government at AA+), but it gave a AAA rating to the Ministry of Railway’s recent bond issue, which means that Dagong thinks the MoR is a better bet than the central government. There’s precedent for this logic: Sarah Palin is bragging that Alaska’s debt has a higher rating than the US Treasury. Clearly, great minds think alike.