Monday, July 22, 2013

China's Yuan Moves

Througha Russian reporter, the Chinese float out the idea that they will move to back the yuan with gold. The Russian reporter mentions the havoc that this will play on the yuan, and then mentions positive effects it could have for Russia. China and Russia both want to knock America the hyperpower down, as the Russians just had a conference for the G-20 about reinventing Bretton Woods. China and Russia are performing a great tag team workover of the US as they are the only two other nations close to true sovereignty. Will the Chinese eventually back the yuan with gold? Yes. Will they benefit? Yes. If reporters did investigating, they'd see a pattern.

We live in the age of the petrodollar. The petrodollar helped the US after Nixon closed the gold window. Volcker eventually fixed things by forcing a recession on us. Oil is priced and traded in dollars, and that is key to the dollar system. The Chinese signing $270 billion deals with Russia for oil is a way around the petrodollar. China now buys its oil from Russia, Iran, Angola, Sudan and Venezuela in yuan (weird, those countries are all declared bad). Those imports total just over 5 mil barrels per day of oil. China has also been busy on currency swaps to have the yuan in other nations' banks' hands. The ECB, the Aussies, the Brits, the Brazilians, and the Swiss of Asia (Singapore) is acting as a clearing house for yuan (note: all articles not in US papers). Those are a lot of big nations to interact with, and it lays groundwork for a safe move away from the dollar system.

An interesting thing about our global monetary crises of the '80s and '90s were that they happened on the periphery. Flare ups happened in Brazil, Mexico, Argentina, Asia, but never in the US. The 2008 financial crisis was the first directly in the heart of the dollar zone. The possibility of a crisis in the center of the zone makes everyone on the edge far more nervous. China is setting up an alternative to the dollar zone first with these bilateral arrangements. The second step is with gold. Skim this article on China's gold reserves and behaviors. They last reported reserves of 1054 tonnes in 2009 (that number could be an understatement as well). They buy all domestic production (400+ tonnes) and then import hundreds more. What do you think the announcement number will be next time? A clue is that their total reserves are over $3 trillion yet US securities only make up 54% of that now. A multipolar currency system with gold the main anchor and ultimate comparison would be a huge draw for countries fearful of dollar instability. It would also be a draw for key cogs in the dollar system that currently export oil to China (Saudi Arabia/Nigeria).

Gold has no counterparty risk. Gold in your hand is true wealth. If a dollar alternative system that had a gold backed yuan as the player were unveiled, what pull would that have on other investors: institutions, accredited investors and even smaller fry? Wall Street has technical expertise, but how bad is their brand for casino antics? If China and Russia align and stand tough, they face the Anglo-American banks swimming in all of that debt in charge of hollowed out, post-industrial economies. The Chinese and Russians also must look at media spectacles like the Trayvon fiasco or the week long immigrant uprisings in Europe and laugh. They can be patient. They can assemble a different system. If the west can resist an entirely new system, Russia and China will have immense leverage at the future conferences on the 'restructuring of the global monetary system". Now is not the time, but the time draws closer.


PRCD said...

The thing is, if all your assets are in real estate or securities, do you care what happens to the dollar? Securities, gold and real estate can be exchanged for any currency.

This really affects people who live large on government cheese. Government cheese is given out because of the global dollar system - the Fed selling bonds and people holding our currency. Am I missing something?

Son of Brock Landers said...

when everything is priced n the dollar, when the dollar has a crisis it is like a black hole. Stock ownership is limited. The govt cheese and paycheck to paycheck crowds are huge now.

I do think land is a great counter-dollar collapse investment. Reading up on the Latin American hyperinflations it seemed that the wealthy or at least upper 25% would purchase land as a store of wealth and as better streams of income due to the ability to raise rent.

PRCD said...

what do you mean, "Stock ownership is limited?" Does it mean, "Few people own stocks?"

I think land is a store of wealth but you can always be run off it. It can't be your only store of wealth. I also suspect Latin Americans didn't have much access to financial markets to diversify their assets.

Son of Brock Landers said...

The top 10% own 80% of stocks.

Anonymous said...

I can't believe any major government will establish a truly metals backed currency, as in I can really turn my paper into X grams of gold in my hand. Seigniorage is practically the raison d'etre of modern governments.

Heck, the Chinese invented government paper money. For some period of centuries they just periodically recalled all the hyper-inflated notes and started fresh with new ones.