2012-06-14, Issue 589
The news in May that China can bypass Wall Street when buying United States government debt in what is the Treasury’s first direct relationship with a foreign government was reported by Reuters and carried by very few of the mainstream press. This announcement came at a moment when the depth of the Eurozone crisis was dominating the headlines and creating panic in international markets. Though this arrangement has been in place for about one year, it was only in last month that Reuters revealed in its report that for the first time ever the US Treasury system granted China direct computer link to its auction system. http://goo.gl/rbNCS
I can remember the days when the International Monetary Fund (IMF) sent representatives to sit in the central banks of Third World countries to monitor the operations of their treasuries. In those days of US financial and military dominance, these IMF monitors dictated to states and governments about management of their economies and used the IMF lending power to dictate whether resources were transferred to a country or not. Now it has been revealed that the United States government has given the Peoples Bank of China a direct computer link to the US Treasury. It is the equivalent of a Chinese officer monitoring the ebb and flow of US indebtedness and making decisions about buying and selling of US Treasury Bills without going through the Primary Dealers of US debt on Wall Street. This means that unlike other governments in the world, the Peoples Bank of China will not have to place orders for US debt through the Wall Street banks appointed by the feds as “primary dealers” to bid on Treasury auctions.
In our commentary this week we will reflect on this major international development in the world of high finance in relation to three aspects of the international system. First, what is the meaning of this arrangement for the stability of the international system in this period of depression? Second, what are the short term impacts on the relationship between the United States and the People’s Republic of China? And third, the importance of this arrangement for world peace?
In the conclusion we will note that while this arrangement for the short term is seeking to stabilize the international financial system, it is at the same time laying the foundations for the evolution of the international system towards a new financial architecture.