In 2008 the credit crisis spread around the world like a virus. We saw individuals, companies and small countries go to the wall. Will 2009 be the year when U.S. creditors refuse to expose themselves to an ever increasing risk of default in order to protect their own economies ? There are growing signs of hesitation and fear on behalf of those who would lend Uncle Sam the funds to finance yet another “stimulus” plan. No small wonder as the U.S. is flat broke and up to it's eyes in unpaid debt as it is. With inflationary fears added to the mix as trillions of dollars emerge in to the U.S. economy over 2009 and trillions already thrown in to the bottomless pit of the financial sector, China and Japan are getting nervous.

Japan's utter panic was summed up by Akio Mikuni, President of the ratings company Mikuni & Co. when he suggested that “Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession”. For good measure..”The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes drastic measures to help bail out the U.S. economy”

China's Central bank governor Zhou Xiaochuan announced that it will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta and exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations. His tongue in cheek explanation?

“The US dollar is unlikely to be stable next year and later. And the likelihood of the United States issuing more money in the near future adds to the depreciation risk in US-dollar-denominated assets and trade settlements.” Source

A previous report describing China's proposed 7 fold increase in Gold reserves is also indicative of its gradual pullback from the doomed dollar.Gold has been slowly rising as investors, previously struck rigid with fear, are now taking a breath and looking at real value. The old adage of Gold being a safe haven is coming back in to play and no amount of gold price manipulation on the exchange is going to change that. With China's announcement of its intention to build up it's reserves to 4000 Tons, we can expect other Treasury Note holders to be thinking along the same lines. This can only lead to a bullish gold market and a collapsing market for Treasuries. Treasury Note doomsayers are a growing community amongst which we can count former Bank of England policymaker, Willem Buiter, who summed up his position thus

“Even the most hard-nosed, Guantanomo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed”

And Barrons is announcing a coming Treasury Bubble Pop..

“Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating.”

Forbes is predicting China's future diversification of it's reserves as Treasury Bills become more of a liability..

“Washington's issuance of mountains of debt to bail out the U.S. economy will only make T-bills less rewarding, putting the dollar's future strength in question. Various economists are saying it will be in China's interest to diversify in the near future.”

We can discount the unexpected strengthening of the economy in 2009, but inflation has to rise once those trillions are in the playing field and the dollar will be toast. Bonds, yielding next to nothing, don't exactly present an attractive investment opportunity. The only reason Treasuries have been so attractive up to now was that they were presumed to be a safer harbor than equities, commodities or cash. No amount of “stimulus” plans can fool all the people all the time. After the initial massacre, investors are taking a moment of reflection and taking a more long term approach. We are now in an era of survival and protectionism rules the day.