"I would recommend you panic" *

The world is going crazy. Americans are printing dollars Treasury papers (and keep getting into deep debt) to sustain whatever is left of their once top lifestyle. Chinese are buying them in order not to let the dollar fail (at least for now). Chinese are pushing whatever they can of this money mountain out acquiring whatever they can in terms of influence, assets, commodities (and rights to them). This mountain overall keeps on growing. In terms of mechanism we are really dealing with the world money circulation system being turned into a global mega version of Lehmans.

At one point, in the same way as commercial banks refused to roll over Lehmans debt in September 2008, China will refuse to roll over US debt. And the whole system will collapse. This will leave China with still a massive real wealth of assets and possibly notionally even bigger mountain of the US T-papers worth as much as Lehmans shares, ie nothing. I think China already accounted this notional loss as clearly this is the way to finish off the US financially and acquire real wealth globally (influence, assets, commodities and rights to them). This is a war in all but name. The US is defenceless unless it uses real weapons. Quite scary.

The US, for political reasons, cannot stop this process itself. The question is what will happen in the US (or how is the US going to react) if China stops this process or it is simply stopped as such a mechanism cannot run to infinity. (If anything the computer power is limited and ultimately such process is bound to collapse for strictly technical reasons, e.g. lack of sufficient memory or processing power for financial transactions.)

This is crazy: on one side financial institutions' executives caught the national budgets by their throats. The queue of countries waiting to be 'rescued' is long (and includes the UK). Today Portugal seems to have got into a 'rescue' mode (following Greece and Ireland). On the other side China got by the throat the US financial system which is an ultimate foundation of the global financial system.

What will happen when China does not buy another tranche of the US T-papers (because it will refuse or... the financial computer system will collapse)? How is the US going to react? I think, the sheer scale of money involved and the past history teaches us that it will be a very sad, if not dramatic, end.

It is clear that the politicians do not understand the scale of what is going on and that it is getting worse. Thus far every 'significant' government decision (like the recent public spending cuts in the UK) for the last 2 years has always been heralded the beginning of the recovery. And as expected, it always got worse. The reason is that the fundamental cause behind this crisis, too great money multiplier, is not getting any smaller. This crisis is NOT a debt crisis. Debt is only a manifestation of the real cause of this crisis: too high money multiplier, that looks on the outside like a debt crisis. It is like pneumonia of an AIDS sufferer. Indeed it is pneumonia but the AIDS is an underlying problem. Why politicians, the mainstream media and pundits still do not get it seems rather impossible to tell.

^* - a quote from Hugh Hendry interview