US Financial Cliff Worries Over? What’s Next?

By: Forexter

US Financial Cliff Worries Over? What’s Next?

Good day everyone, with the bullish Dow Jones for past 2 days, it seems like the US Fiscal Cliff has come to an end. Or is it not?

The Congress has eventually came up with a mutual understanding, both parties had compromised for “a better United States”, is that so?

This fiscal cliff issue does looks too dramatic and it looks like part of the political game, which clearly shows that the Republicans who represent the interests of the rich prefer spending cuts; Democrats prefer to raise taxes, especially towards the rich. One thing is for sure, no matter how many internal contradictions that the congress is facing, they would actually not let the economy fall to the bottom of the cliff. Over the years, such a compromise to the dispute is always occurred in the nick of time, such as the 2010 and 2011 year-end financial agreement which had their motion tabled and passed on 17 and 23 December of the current year respectively. In conclusion, I do feel that the “dramas” made by these two political parties are just taking this opportunity to show their political stance to the American public, for the sake of the future General Elections.

By now, everyone will be paying too much attention on this political “game”, but they’ve ignored the economic fundamentals of this financial cliff which is US Dollars being the status as an international currency, according to the past, the US Government should have optioned for quantitative easing. But in this Fiscal cliff the US Government reacted in an unusual way, instead of supplying more dollars into the market, they’ve optioned something else… Why?

First and foremost, the current Dollar system wouldn’t collapse, the accusation of US will be heading towards bankruptcy is baseless. So, is U.S having financial problems? This is obvious. Ever since the Government has passed the authority of the mint to the Feds, the U.S government’s financial status weren’t “healthy” as they’ve been in deficit budget which yields more than $1 Billion Dollars for the fourth consecutive year! Throughout all these years, with several Presidents leading the country, the only time when the US government has fiscal surplus would be during President Clinton’s era. In 2009, the government deficit reached a historical high of $1.41 trillion; compared to 1.1 trillion in 2012!

Fiscal deficit has never been a problem that politicians and the White House need to be worried about, why would they need to worry about money? The reason is very simple, the way to resolve the problem is to settle their old debt with a new loan.  This is how the U.S government increases their income, and who is the one willing to assist U.S? They are the biggest U.S Treasury bond holders – China & Japan.

The United States has been borrowing money as a form of generating income; the main reason due to U.S Dollar is the international trading currency, which resulted that most countries includes China & Japan own a large number of reserves in U.S. dollars. Ironically, U.S. dollars are not to be used for domestic consumption in China or Japan. In other words, apart from being able to use U.S Dollars for direct investment into U.S, this would just be a stack of papers. What do we mean by direct investment into United States? It would be either to purchase government bonds, or direct investment into the real economy, and this would be equivalent to have been directly or indirectly lending monies to the United States in order for them to sustain their own economy.

Let us have a clearer picture towards this “awkward phenomenon” - China would be handling their monies to United States in exchange of fine stacks of printed papers (dollars), and in return China would replaced their stacks of fine printed papers (dollars) into another stack of paper (U.S Treasury Bonds), and the United States shall re-use these stacks of fine paper (dollars) to buy more of Chinese’s exports. As a result, by executing Quantitative Easing (print more Dollars), the United States has the ability to plunder the resources of foreign countries.

It is saddening, but why China, Japan or other countries would still lent monies to United States? Do they have an option to say no? Imagine, should they’ve stopped lending monies to U.S, then we’ll have the United States to set various trade barriers to prohibit the importation of the country’s products, which means their products would not be able to enter the United States. China, for example, there are large numbers of export-dependent companies, organizations and several of these enterprises would suffer significant hit which may resulted a vast impact towards the entire industry chain. That is why, these countries would option to lend United States a “helping hand” in exchange for a barrier-less trades which may stimulate or drive further developments for the industry chain.

This phenomenon has started way back during the times where the United States is involved in World War 1 & 2, which resulted of a skyrocketed nation’s debt.  “Quantitative Easing” policy has been executed since then for the sake of an evasion towards their debt, and also for the hope of vast development. The drawback of this “holy” policy is by printing more notes, the value will depreciate accordingly. For those countries who holds significant U.S. Dollars reserves will feel the pressure as what they are holding a currency which has depreciating value, it is possible that one day the stack of fine papers (Dollars) will turn into a stack of worthless papers. Bound by these pressures, many countries has started to sell their U.S Dollars and in order to curb this problem, the United States has started this drama called “Fiscal Financial Cliff” to ease the tension among its’ debtors.

It is to be informed that with the results or decision for this “Fiscal Financial Cliff” would temporary ease off the worries and doubts regarding the financial situation of the United States, but bear in mind, there would be more problems to be resolved by them in years to come. But at the very least, with the congress making announcement which somehow “satisfies” the entire world, it is possible that the United States is trying to revert the message to the world that “they would like to break away from this awkward phenomenon, and U.S. Dollars or the United States is still a worthy investment.”

Does this sound like good news to you? Think again, the whole “act” has just started, sooner or later the fiscal cliff would arise again, and we will have to re-enact to the whole drama again and this time the United States will make it clear that: “With U.S Dollar being the international currency for trade, the rise and fall of every countries in the world are greatly bonded by this special relationship between the United States and them.”

The history of the evolution of the global economy has proven once again that the statement stated by former Secretary of State Mr. Henry Kissinger – “who controls the currency will control the world.” Is indeed true.

But does that mean that the world economy will not be able to extricate themselves under the control of the United States and U.S. weapons? Apparently it is not. The starting point of the U.S. dollar being the single dominant currency started during World War 2. But with the rise of Euro, the internationalization of the Chinese Yuan (RMB), and the strengthening Asian currencies, the U.S Dollars as a strategic “global domination” weapon for U.S. has no longer exists.

After the rule of U.S Dollar being the world's dominant currency for the international monetary system for 100 years, the U.S. dollar, based on the external compression due to the recession factors and global economic competition, it is inevitably that United States may suffer from full-blown recession. Based on the financial crisis which began in 2008, some experts claimed that the collapse of the dollar system cycle will last 30 years. The present practice of the United States would just postpone the after effects from the 2008 crisis, but the history shall repeat itself. This “awkward phenomenon” may be abolished from time to come.

Disclaimer: The information and analysis mentioned above are solely based on Invest ACE’s personal technical analysis with the aid of professional training, decades of experience and meticulous foresight; Invest ACE shall NOT be held liable for any losses (financially or otherwise) incurred by any parties relying on aforementioned analysis without prior professional consultation. Should you wish to find out more on how to invest wisely, do not hesitate to contact Invest ACE via investace126@gmail.com.