Loan Modification

Didn't these people learn anything from the mortgage crisis? For bankers the best collateral in the world is U.S. Treasury debt. That is likely to change soon, but if we deal with the facts of today, the Chinese are holding what bankers perceive is the most liquid and highest-quality collateral. Do you think that this characteristic of U.S. debt has escaped the notice of the Chinese?

I would bet that the Chinese have been busy using their Treasury debt as collateral against FIXED-interest-rate loans. They will have used this money to buy real assets. We know they have bought at least 454 tonnes of gold. They are importing 70 percent more copper than they consume. They are filling up a strategic petroleum reserve. They have been going around the world making deals for raw materials and acquisitions of small-enough companies that they fly under the radar.

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The notion that the Chinese have accumulated this massive U.S. debt portfolio and only now are wondering what to do about it is so naive it doesn't warrant serious consideration. I have dealt with Chinese in business and they are the sharpest knives in the drawer. My guess is that China has already diversified most of its dollar holdings.