The rest of the world holds $16.9 trillion in dollar financial assets, and China owns a large, although indeterminate, portion of these assets.

With Nancy Pelosi, Chris Dodd, Barney Frank, and Harry Reed having taken over monetary policy from a weak, inexperienced President Obama and with the Democrat-controlled Congress freely enacting highly inflationary spending programs — holders of dollars across the globe are getting worried, and rightly so.

Forget Geithner and Bernanke — the game is now being controlled by the House of Representives while Obama is at fake “town-hall” meetings, whipping up carefully-selected crowds for photo-ops.

The Democrats are moving so rapidly to push their inflationary agenda that it may be too late to save the country when the mid-term elections come around in 2010.

There is a logical way for non-residents to protect dollar assets

As long as the Bank of China holds dollar financial assets, the US Treasury will be able to keep on selling them bonds to finance the federal deficit — unless spending causes the fiscal deficit to exceed the amounts accumulated over the years by the trade deficit.

There is one way, however, that China and other foreign dollar holders can get out of the “dollar-trap” and save themselves from the ravages of US inflation. That is to buy inflation-protected, non-financial assets from US residents, such as income-producing, US commercial real estate.

The total market value of US equity REITs was $176.2 billion in 2008 and represents ownership in tens of thousands of premier office buildings, shopping centers, hospitals, malls, apartment complexes, industrial facilities, and medical complexes across the country. This includes buildings rented by the FBI and the Department of Homeland Security and most major US corporations.

The total market value of US equity REITs is only about 1% of total dollar financial assets of residents of other countries.

REITs can easily be acquired online, with the click of a mouse. If one wanted to buy US real estate assets secretly, all that is necessary is to set up a thousand or so dummy corporations in offshore financial centers, and then set up a similar number of closed corporations throughout the US, and then buy control in tiny pieces, unobserved by Federal regulators. After all, if the SEC couldn’t even catch Bernard Madoff, despite repeated warnings, how could they stop a determined effort of a foreign government to acquire control of a major portion of the US commercial real estate market?

Economic and strategic advantages

The potential benefits of holding real assets as opposed to cash or other financial assets in times of inflation are obvious. However, national security issues may also be involved.

Why waste time trying to crack into computer files for corporate or government espionage, when you can easily put a janitor in a target building to plant surveillance devices and break directly into computers and other files at night?

A foreign intelligence service that secretly owns and manages a building where the US government or a manufacturer of classified technical equipment has offices would have a significant tactical advantage. Remember the case of the bugged US embassy building in Moscow during the cold war.

Economic warfare at its best

If China were determined not only protect the value of its dollar holdings, but also to wage economic warfare that will dramatically weaken the United States and remove the US dollar from its pedestal as the world’s reserve currency, a massive move into US non-financial assets would be the way to go.

Not only could advantages for espionage be exploited, as suggested, but with the extra money left over after buying up major commercial real estate, China could secretly acquire control of defensive contractors and effectively take over key players in the US economy.

This tactic would offer three advantages:

1. Value accumulated over the years by selling goods to the US could be preserved by conversion from monetary into real assets.
2. Real assets could be acquired that present an advantage in gathering intelligence or even controlling part of the US economy.
3. Once monetary assets are converted into real assets, there would be less money to buy US Treasury Bonds, forcing the US government to inflate the currency. A rapidly inflated dollar would no longer be suitable as the world’s reserve currency. The US role as leader of the free world would be finished.

So, even though individuals may make it through the inflation that the Obama regime is ginning up, the United States may not fare as well.

Now, this is not a prediction, only a possibility.

I do hope someone in the US Congress or some other corridor of American power reads this and will understand that inflation combined with the natural wishes of holders of dollar financial assets to protect themselves in the only way possible, can have extremely serious consequences for the position of the US in the world.

I can assure you that someone in Beijing is reading this blog.

This entry was posted on Monday, March 30th, 2009 at 12:10 pm and is filed under Capital Flow Analysis, Treasuries, Open Market, Equities, Foreign Investors, Government Officials, War. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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