China Stirs a Pot of Gold 15 comments
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This week, based on indicators of improving Chinese manufacturing activity, commodity and stock markets surged in the Pacific Rim. It appears that China's recession-fighting policies are being judged successful. The 41 percent rally in Chinese stocks in 2009 from the 2008 lows dwarfs the single digit rallies in the U.S. and Europe. With Western economies still sluggish, eyes are turning eastward for solutions to the global economic riddle. As such, recent hints at the direction of Chinese monetary policy should be closely regarded.
At the recent G-20 London meetings, China called for a new international monetary order with a gold link. This was followed by the sudden disclosure that China had used part of its huge gold output to boost its own reserves by some 600 metric tons, a 75% increase in total holdings since 2003. In his first hundred days in office, President Obama's administration has injected nearly $40 billion each day into U.S. economy. Given the inflationary impact that such a torrent of new cash will spark, it is logical that the Chinese hedge their $1 trillion dollar position with a more reliable store of value.
International money continues to flood towards the Chinese economic sphere, leaving the ‘old' industrial economies of America and Europe out in the cold. The cause is quite simple: the economies of America and China are mirror images of each other. The China-centric countries are producer-dominated and America is consumer-dominated. Over time, this dichotomy is producing massive shifts in global wealth.
For a century, American Administrations have relied on the inflationary powers of paper money to finance consumer growth. The fact that the U.S. dollar is the world's reserve currency enabled this scheme to persist for longer than would have been tolerated otherwise. The Bush-Obama “stimulus and bailout” agenda is the same practice on overdrive. While driving the country further into debt, it also ensures that it will be progressively less competitive in the global economy.
China, on the other hand, is the world's largest producer and one of the top three exporters, piling up vast current account surpluses, especially in U.S. dollars. In order not to boost its currency to levels that would make its exports less competitive, China maintained its U.S. dollar surpluses in dollars, investing the bulk, almost $1 trillion, of them in U.S. Treasuries. This acted as “vendor financing” for its exports to America. The technique is similar to television commercials that promise “make no payments for 4 years”, except in this case the deal is pushing 40 years.
To combat the global recession, China spent some $700 billion on a stimulus package, primarily focused on infrastructure. As such, spending adds more value to the economy than government make-work programs, and it now appears that China's stimulus package is having positive results.
Increased economic activity in China will benefit American companies with China-sourced sales. But the majority of the American economy remains oriented toward the American consumer, and his ever-increasing ability to take on debt. This is obviously not sustainable.
The outlook for America is for hyper-stagflation, or continued economic recession accompanied by rapidly rising prices. This calls into question the continued role of the U.S dollar as the world's reserve. Surplus nations, particularly China, are voicing their growing concern. They are exploring other, less volatile arrangements. They may be considering a return to the bulwark of monetary stability: gold.
Now the world's largest gold producer, China would benefit tremendously from a shift away from the U.S. dollar and toward gold. She is clearly interested in world leadership, but would never dream of challenging the U.S. militarily. However, in the 21st Century, the weight of economics renders martial might largely irrelevant. Still, she can't afford to act irresponsibly.
There are a few considerations that should temper her ambitions. Even with the 600 metric ton increase over the past five years, China's gold holdings amount to only 1.6 percent of its total monetary reserves. Also, at 1,050 metric tons total, China's holdings are still dwarfed by the 8,132 metric tons held by the United States.
Nevertheless, the Chinese call for a new, gold-linked reserve currency, combined with the near doubling of their own gold reserves, points to a major strategic trend that can be expected to spread to other surplus nations. The biggest winners, personal or governmental, will trade their dollars for gold before there's a rush for the door.
Private investors can ride the wave created by China's strategic shift by continuing to add to their gold positions.
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On May 08 07:13 AM DONE_SONZ wrote:
> Stir away! No faith in fiats.Good article.
That's the question.
Few advocate purchase of USD bonds but on the plus side few suggest selling off what they already have. The preference lies in asset purchases. An example from an economist:
"Tan Yaling, said, "After eight months of appreciation, the dollar now needs to depreciate urgently and promptly, to cushion risks and increase the US overseas companies' competitiveness. This will definitely boost the appreciation of the yuan."
But analysts say the yuan will still maintain stable in the long term. And the stability of the strong yuan will also help speed up its transformation into a global reserve currency."
Gold should remain an asset of choice, both as insurance and investment, as long as fiat currencies are not pegged.
On May 08 09:38 AM Freya wrote:
> Military Might? Using coventional weapons against the Chinese would
> be suicidal. Even the Russians in their heyday were afraid of the
> Chinese.
> of its total monetary reserves? Are we gonna get another anouncement
> by the Chinese later this year that they now have 4620 metric tons
> of gold? Doesn't make any difference. The Chinese are on the move
> and are not at all concerned with coal plant restrictions, global
> climate change, or carbon credits. Just a selfish country growing
> their little ol' communist economy without any concern for the snail
> darter. Those dirty commie capitalists.
The announcement was intentional, their warning message to USA 'if you keep printing USD we have an alternative and we were expecting that US would do that and already started to take preventive action by hoarding our own gold'
Bailout money, zero interest etc. will definitely fire up the economy for a short time...
This is like squirting kerosene to firewood, there will be a bright violent fire but will last very short and will not heat..
How many cans of kerosene USA has left before it runs out of them..
Inflation is a short term solution and cannot be sustained, otherwise it feels excellent to live in a high inflation society, believe me I lived for 30 years in an high inflationary environment... We were able to keep it running for so long with IMF interventions .. about 15 times.. Than we hit the wall and swallowed the sour pill...
My friends there is no easy way out of this recession, if you get out of it quickly, you will get back to another recession following this one very quickly..
My Suggestion: Act smart like central banks and place %10-20 of your savings in GOLD.
On May 08 11:29 AM Mark123 wrote:
> You'll notice the Islamic Extremists dont mess with the Chinese....
This is probably due to the fact that China hasn't been playing king-maker in the Middle East for the last 80 years like the United States and other Western countries have been.
Now I know more than ever the utter power of what his few words of portent meant so long ago.
A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled "Modern Money Mechanics". This publication detailed the institutionalized practice of money creation, as utilized by the Federal Reserve and the web of global commercial banks it supports. On the opening page, the document states its objective: "The Purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system". It then proceeds to describe this 'fractional reserve process' through various banking terminology. A translation of which goes something like this: The United States Government decides it needs some money, so it calls up the Federal Reserve, and requests, say, 10 billion dollars". The fed replies, saying " sure… we'll buy 10 billion in government bonds from you." So, the government then takes some piece of paper, paints some official looking designs on them, and calls them 'Treasury Bonds'. Then, it puts a value on these Bonds to the sum of 10 billion dollars, and sends them over to the Fed. In turn, the people at the Fed draw up a bunch of impressive pieces of paper themselves, only this time calling them 'Federal Reserve Notes'…also designating a value of 10 billion dollars to the set. The Fed then takes these notes and trades them for the Bonds. Once this exchange is complete, the government then takes the 10 billion in Federal Reserve Notes and deposits it into a bank account… and upon this deposit, the paper notes officially become 'legal tender' money, adding 10 billion to the US money supply. And there it is… 10 billion in new money has been created. Of course, this example is a generalization, for, in reality, this transaction would occur electronically, with no paper used at all. In fact only 3% of the US money supply exists in physical currency. The other 97% essentially exists in computers alone. Now, Government bonds are, by design, instruments of Debt and when the Fed purchases these bonds, with money it created essentially out of thin air, the government is actually promising to pay back that money to the Fed. In other words… The money was created out of debt. This mind numbing paradox of how money, or value, can be created out of debt, or a liability, will become more clear as we further this exercise. So, the exchange has been made and now 10 billion dollars sits in a commercial bank account. Here is where it gets really interesting, for as based on the Fractional Reserve practice, that 10 billion dollar deposit instantly becomes part of the bank's Reserves, just as all deposits do. And regarding reserve requirements, as stated in Modern money mechanics: A bank must maintain legally required reserves, equal to a prescribed percentage of its deposits. It then quantifies this by stating: under current regulations, the reserve requirement against most transaction accounts is 10%." This means that with a ten billion dollar deposit, 10% or 1 billion is held as the required reserve, while the other 9 billion is considered an excessive reserve and can be used as the basis for new loans. Now, it is logical to assume that this 9 billion is literally coming out of the existing 10 billion dollars deposit. However, this is actually not the case. What really happens is that the 9 billion is simply created out of thin air, on top of the existing 10 billion dollar deposit. This is how the money supply is expanded. As stated in Modern Money Mechanics: " of course, they (the banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created.
What they do when they make loans is to accept promissory notes (loan contracts) in exchange for credits (money) to the borrower's transaction accounts."
In other words, the 9 billion can be created out of nothing, simply because there is a demand for such a loan, and there is a 10 billion dollars deposit to satisfy the reserve requirements. Now, let's assume that somebody walks into this bank and borrows the available 9 billion dollars. They will then most likely take that money and deposit it into their own bank account. The process then repeats, for that deposit becomes part of the banks reserves, 10% is isolated and in turn 90% of the 9 billion or 8.1 billion is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion…to 6.5 billion..
to 5.9 billion etc. This deposit-money creation-loan cycle can technically go on to infinity… the average mathematical result is that about 90 billion dollars can be created on top of the original 10 billion. In other words, for every deposit that ever occurs in the banking system, about 9 times that amount can be created out of thin air. So that we understand how money is created by this fractional reserve banking system, a logical, yet elusive question might come to mind:
What is actually giving this newly created money value? The answer: The money that already exists. The new money essentially steals value from the existing money supply… for the total pool of money is being increased, irrespective to demand for goods and services, and, as supply and demand finds equilibrium- prices rise, diminishing the purchasing power of each individual dollar. This is generally referred to as 'inflation' and inflation is essentially a hidden tax on the public.
(Ron Paul) : "…what is the advice that you generally get, and that is inflate the currency. They don`t say debase the currency, they don`t say devalue the currency, they don`t say cheat the people with savings, they say lower the interest rates. The real deception is when we distort the value of money, when we create money out of thin air, we have no savings yet there`s so called capitol…so my question boils down to this-how in the world can we expect to solve the problems of inflation--that is the increase in the supply of money-- with more inflation? " Of course, it can't. The Fractional Reserve System of monetary expansion is inherently inflationary. For the act of expanding the money supply without there being a proportional expand of good and services in the economy, will always debase a currency.. In fact a quick glance at the historical values of the US dollars Vs the money supply, Reflects this point definitively, for the inverse relationship is obvious. In fact, One dollar in 1913 required 21.60 cents in 2007, to match value…that is a 96% devaluation since the Federal reserve has come into existence. Now, if this realty of inherent and perpetual inflation seems absurd and economically self-defeating… hold that thought, for absurdity is an understatement in regard to how our financial
system really operates. For in our financial system money is debt and debt is money. Here is a chart of the US money supply from 1950 to 2006. Here is a chart of the US national debt for the same period. How interesting it is that the trends are nearly identical… for the more money there is, the more debt there is… the more debt there is, the more money there is. To put it a different way, every single dollar in your wallet is owed to somebody by somebody; for remember, the only way the money can come into existence is from loans. Therefore, if everyone in the country were able to pay off all debts, including the government, there would not be one dollar in
circulation. (If there were no debts in our money system, there wouldn`t be any money"
-Marriner Eccles-Governor of the Federal Reserve September 30th, 1941 -House Committee Hearing on Banking and Currency )
In fact, the last time in American history the national debt was completely paid off was in 1835, after President Andrew Jackson shutdown the Central Bank that preceded the Federal Reserve. In fact Jackson's entire political platform essentially revolved around his commitment to shut down the Central Bank, stating at one point: " the bold efforts the present bank has made to control the government are but premonitions of the fate that awaits the American people should they be deluded into a perpetuation of this institution or the establishment of another like it." Unfortunately his message was short lived, and the international bankers succeeded to install another central bank in 1913…The Federal Reserve. And as long as this institution exists, perpetual debt is guaranteed.