Geopolitical Blocs, Western Inflation, and The Big Deal

We live in a world where a few mega geopolitical trading blocs exchange deficits with each other.

It’s noticeable that these blocs accept the rationality of and impose upon their subjects bipolar internal policies. Whether that is wise or not time will tell.

By bipolar I mean they either try to gain highest (reserve) currency status (to acquire resources on the cheap) or lowest currency status (improve exports without actually fixing anything in the sorry mess they call their internal economy, and so pass that mess onto the next political incumbent president/party/coalition/Central bank head/patsy).

I though it has been one of the interesting things that gold must be the counterbalance for these imbalances, when the dust finally settles. But there is always a nagging doubt. Will “they” go digital this time, and leave gold forever in the past? That’s got to be considered. Well if this was the case we would already see the beginnings of the future around us, like eg testing new currency systems, etc.

In the realm of fictional new currency trials I saw Carbon Credits crash and burn, there is a possible attempt to corner (by licensing) the control of seeds for food propagation, there was an attempt to gain control of the high seas from which a giant portion of the world’s food comes, and Bitcoin is undoubtedly of BIG interest to the powers that be and seems to be getting quite a bit of attention lately from the forces employed by same.

But none of these attempted monetizations have gotten off the ground, excepting the Euro, a relatively new currency which has now lasted a decade.

So exactly what other beginnings can we see around us?

We must look again at the geopolitical trading blocs mentioned in the opening paragraph and consider what they settle their respective trade imbalances with. Are there any changes or new developments there?

First comes the US Dollar which in its interest generating form is the T-Bond. But the US has a giant deficit, an even bigger national debt, and the economic recovery seems to be based upon statistics which might have been copied from a George Orwell novel. So if you are ... let’s say .. China, and you are selling all your stuff to  .... say ... the US. What exactly do you accept for payment? Even more T-Bonds? Not attractive! Those interest rates are rising, the US bonds are falling in value, and the dollar they are denominated in ... well the last “flight to quality” in 2008 was exposed as being a fiction created by (even more) derivatives sloshing around a banking system which is just as trustworthy as a junkies promise to look after your cash while your back is turned.

Fortunately we have prior examples of what countries can do when they are selling hard assets like eg oil, in exchange for printed assets like depreciating currency. In the 1970s the Arab countries decided that gold might be a nice thing to get in return for their oil. They did not get stuck only on the gold idea, and were happy to take dollars, sterling etc just so long as they could rise the price to match the fall in its value. All quite sensible until some Bush guy made a deal that everything should be in dollars, and any little shortfall could be made good by providing ... err .... protection.

The OPEC countries also bought rather a lot of hard assets in the west with some of that depreciating currency, quality property in the capital cities of the world.

Anyway, from that 1970s period we now have a clear idea of how it goes.

Devaluation and China’s T-Bond USD Reserves

The negative effect of a devaluation on China's export business was already seen when Japan decided to trash the Yen. Sino - Japan export trade prospects have been somewhat reduced.

China relied for the past few decades upon exports, and the west is getting a little tapped out for a while, so they will have to maintain the wealth of their middle class, or without the west’s business, they won’t have much left.

So China must hedge from western inflation currency and currency decline the following:

  • Future exports to the US and presumeably the EU, Japan and UK.
  • Foreign (USD) currency holdings which are payment for past exports to the west
  • The wealth and livelihoods of the individual Chinese citizenry who are presently making a living from western related business, and who will suffer cost of living rises due to western currency printing in the near future.

So the Chinese must reduce dollar holdings, reduce new dollars accepted in payment for anything, apply a similar policy for Euros, Sterling, Yen and another low natural resource containing country. Why low natural resource? Because the major resource producers can earn their way out of recessions without so much need for excessive money printing.

Note that these policies are required by both the peoples Bank and by the Chinese populace. 

The Big Deal

The western trading blocs do not want a world war to come from trading bloc wealth imbalances (beyond a certain point of acceptability) and so they have come to an arrangement to aid China to inflation hedge.

The terms of this deal (as I surmise it to be) required western governments to cause their banks to reduce the price of gold and thus help cause it’s dishoarding around the world, and thereby ease its purchase in the east, so China could acquire it, and prepare itself for what is coming next.

China is much more prepared for dollar devaluation by now, and is racing ahead with its aim of reducing dollar exposure. It signs swap agreements with various countries so that a variety of FX reserves will replace a huge dollar reserve as time and trade move forwards.

Like the Arabs in the 1970s, China is also sending proxies to purchase western hard assets with dollars, and this is funding the US real estate boom which will at the same time help deleverage the beleaguered US financial services industry by dumping property inventory onto anyone who wants it.

The PBOC has advised Chinese people to invest in gold and similar assets for their future security, and is storing gold among its population, as well as in the PBOC vaults

In the circumstances a few charts showing the correlation between Renminbi FX value against the different western currencies, and the price price of gold in those western currencies makes an interesting study.

I provide below some charts of these so that oddities in historic trends for China vs gold vs each country it trades with can be seen and considered by readers. (The coloured barchart is the price of gold in the western currency, the black line is the Chinese Renminbi value against that western currency) .

I hope some trends are highlighted here, and where certain correlated items have diverged for a period an educated guess can be made as to which of the two or whether both components will move to close the gap.

And here is the price discount that China and its people received:

With a drop in value like that, it’s no wonder the Chinese people bought gold the way they did!

Argentus Maximus

The author posts daily commentary on the gold and silver markets in the TFMR forum: The Setup For The Big Trade. More information about the author can be found here: RhythmNPrice

101 Comments

Bongo Jim's picture

#1

First?

Darth Smoker's picture

Second Amendment to the United States Constitution

http://en.wikipedia.org/wiki/Second_Amendment_to_the_United_States_Constitution

The Second Amendment (Amendment II) to the United States Constitutionprotects the right of the people to keep and bear arms from infringement. It was adopted on December 15, 1791, along with the rest of the United States Bill of Rights. The Second Amendment was based partially on the right to keep and bear arms in English common-law and was influenced by the English Bill of Rights of 1689. This right was described by Sir William Blackstone as an auxiliary right, supporting the natural rights of self-defense, resistance to oppression, and the civic duty to act in concert in defense of the state.[1]

silver66's picture

good post

Well written and thought out. For those interested in what the Saudi's did to the fiat countries after Nixon defaulted look up the Beruit Resolution.

Silver66

Top ten

Mr. Fix's picture

5th,..."On The Path To Default"

Good afternoon,

I know I ruffled a few feathers a few weeks ago when I predicted that the government would shut down, and then was chastised further for saying that there would be no agreement on the debt ceiling, and that it would cause a collapse of the US monetary system, and yet things are proceeding forward in a very predictable manner, towards the end game that we have been waiting for. 

I see that China is calling for a new world  reserve currency, and want a system that has nothing to do with the United States.

I can see that martial law is being instituted step-by-step across the nation, and I predict that it will only escalate, never to be undone in the current system.

I see that the government is preparing for another “false flag event”, apparently involving nukes, and that the power grid is a likely target.

I see that the EBT cards are being taken away, and that this is about to escalate massively. 

I said this country will not be recognizable by the end of the month, and I stand by that. 

I would still like to be proven wrong, in no way shape or form am I enthusiastic about what is unfolding,

I've just been sitting here watching “the end of the great Keynesian experiment” along with everyone else.

Nothing whatsoever is being fixed,

our government is still doing everything in a manner that will have the worst possible outcome for the United States populace, and all the exits are still being closed, while gold and silver are still being hammered.

So in some ways,  nothing is changing, while simultaneously, everything is changing.

The revolution that our own government has been trying to incite for many months now is finally picking up steam, people are starting to notice.

It's all about to come to a head.

argentus maximus's picture

When I look at the charts, I

When I look at the charts, I wonder what will be price of gold in yen be when central bank suppression of gold-yen comes to an end.

If you cut the vertical rise off the CNY-JPY and paste it onto the Gold-JPY chart there is a rise in yen-gold of 90,000 that has not yet formed!

Gent's picture

Pass It Along

IT IS A PRIVILEGE TO SERVE IN WASHINGTON, NOT A RETIREMENT PENSION!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 

Winds of Change 

Warren Buffet is asking each addressee to forward this email to a minimum of twenty people on their address list; in turn ask each of those to do likewise. At least 20 if you can. It has to stop somewhere. 

In three days, most people in The United States of America will have this message. 

This is one idea that really should be passed around 

*Congressional Reform Act of 2013 
 

1. No Tenure / No Pension. 

A Congressman/woman collects a salary while in office and receives no pay when they're out of office.

2. Congress (past, present & future) participates in Social Security.

All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system and Congress participates with the American people. It may not be used for any other purpose.

3. Congress can purchase their own retirement plan, just as all Americans do.

4. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.

5. Congress loses their current health care system and participates in the same health care system as the American people.

6. Congress must equally abide by all laws they impose on the American people.

7. All contracts with past and present Congressmen/women are void effective 12/31/13. The American people did not make this contract with Congressmen/women.

Congressmen/women made all these contracts for themselves. Serving in Congress is an honor not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.

If each person contacts a minimum of twenty people then it will only take three days for most people (in the U.S. ) to receive the message. Don't you think it's time?

THIS IS HOW YOU FIX CONGRESS!

If you agree with the above, pass it on. If not, just delete.

 

¤'s picture

AM

Outstanding...thanks. yes

I'd like to get my hands on about 30-50,000 yuan and sit on it..

If the USD becomes weaker and the yuan becomes stronger then having some yuan makes sense.

Before Germany went into hyperinflation mode the German mark was approx. 6 marks to the dollar. Just like yuan is today.

Several years later it took billions of marks to buy 1 USD. I

Just imagine if some smart Germans bought lots of dollars at 6-1 before things went crazy. They would've weathered the hyperinflation better then most.

I'm not saying a hyperinflation is going happen here and you should consider buying yuan just in case. It makes sense though to invest about $5,000 USD to procure approx. 30,000 RMB

The writing is on the wall. As the yuan becomes part of (or becomes soley) the next reserve currency that the spread between USD/RMB is going to tighten and possibly trade at par OR even reverse roles where the USD is weaker then the RMB.

The US Govt for years has been hypocritically labeling China as a currency manipulator by keeping their yuan weak. At some point soon they'll get their wish and the yuan will strengthen as the dollar weakens.

I hope to be positioned with at least $5,000USD worth of RMB at some point. The thought of how much it might turn into eventually is intriguing and it makes sense to stick up on some undervalued RMB at this point.

Once the RMB currency swaps gain traction is when an alternative to a weakening USD becomes apparent and preferable by many. 

The German hyperinflation story has some elements to it that we should be aware of in order to take advantage of a currency crisis that will be marked by a dramatic transition and ascendency of the yuan within the next decade. It's already underway.

Stackin' yuan makes sense to me.

http://www.bocusa.com/portal/Info?id=827&lang=1&

HappyNow's picture

Just Checkin'

I'm seeing all these video clips about the closure of national sites and they are posted up as if Obama is to blame.

He did campaign on the health care changes, and did win, right?

Now he's trying to follow through and deliver what he promised, right?

And it takes two to tangle, Republicans are as much holding up the process as he is, right?

It's more fun to make fun of the prez I know and besides his name works well with things like Barrycades.

I'm not seeing much pro-Democrat material here on the site. 

So I'm just checkin'.

fraxinus's picture

Re-cycling trade surpluses is good, incompetence is bad

Yes, sustaining the massive Chinese trade surplus requires China to re-cycle the surplus back to the consuming countries, to finance continued purchasing. That isn't an issue. What is an issue, is that the same Western decision-makers who clearly can't run a popsicle stand, have opted to rebuild their purchasing power by handing over their gold reserves to the Chinese, at the price of popsicles. And of course, it's beyond the intellect of most popsicle vendors to understand, that the gold purchaser publicly intends to displace both the US dollar and the euro as reserve currencies. frown

Mr. Fix's picture

Dearest “Happy Now”

You're looking for "Pro Democrat" material on this site?

I don't think there are any residence in Turdville that are that delusional.

Your observation that it “takes two to tango”, is quite correct, it has become quite apparent that neither side of the aisle has any allegiance whatsoever to the American public.

At least one side is honest in their contempt for us, while the other side pretends to be on our side, while stabbing us in the back at every opportunity.

Some people here might be fooled by the backstabbing half, but you will not find any people who appreciate Obama's contempt for America.

argentus maximus's picture

Gold priced in Renminbi 

Gold priced in Renminbi  (CNY)

That is probably the most bearish gold chart there is.

Anyone got Gold/Ruble or Gold/Tugrik?

Mr. Fix's picture

JP Morgan, dumping treasuries: What do they know?

JP Morgan dumps all short-term US treasuries as default approaches next week with no deal on the debt ceiling

Posted on 12 October 2013 with 1 comment from readers

The US Government shutdown continues and we are only five days from national bankruptcy when the debt celing is reached. Fund managers at Fidelity and JP Morgan have taken the prudent view and have dumped all their short-term US treasuries just in case of the first default in the history of the union.

Not wishing to panic markets the bank said: ‘Although JPMorgan Investment Management continues to believe that the probability of a US government default is low, it has taken certain precautionary measures with respect to the money markets.’

Armageddon plan

Selling out is certainly a way to protect against the Armageddon scenario. But then if it is bordering on the impossible to imagine why take this precaution? Does somebody at the largest US investment bank have an inside track and not like what they are hearing?

The surging yield on one-month treasuries shows how the fear factor is growing in Washington DC:

 

http://www.arabianmoney.net/us-stocks/2013/10/12/jp-morgan-dumps-all-short-term-us-treasuries-as-default-a

Edit:

for some reason, I can't get that link to work, so to read the rest of the story, go here:

http://www.stevequayle.com/

Scroll down to the story, and click on it.

At least it will get you there.

Robski's picture

Doug Casey on KEREPORT

Thought I'd share, from KEREPORT

http://www.kereport.com/2013/10/12/casey-research-2013-summit/

Hour 1:

Hour 2:

I really enjoyed segments 7&8, Doug Casey is always a fun listen, but the real gem for me is Louis James.

¤'s picture

Mr Fix

I don't think you seriously ruffled anyone's feathers. 

It was more of the constant Chicken Little/sky is falling thing that some people (myself included) pointed out and commented on. 

Some of the prognostications of dramatic dire consequences (herd thinning, govt executions, nukes etc.) are amusing/entertaining on some level to myself where they otherwise might be deadly serious need-to-know predictions by yourself that some find valuable on here.

It seems like almost every negative recent event is perceived to be some type of  plot or clue to something bigger and more nefarious. That's not something I can take seriously enough that I'd shed serious feathers over.

I'll leave that to Chicken Little. wink

Mr. Fix's picture

And now a message from the White House.....

View image on Twitter

DPH:

Noted.

DeaconBenjamin's picture

Preparations for inflation

Just imagine if some smart Germans bought lots of dollars at 6-1 before things went crazy. They would've weathered the hyperinflation better then most. Many did shift to dollars, Swiss Francs, and British Pounds. Others thought it unpatriotic.

Another approach was that taken by a German pastor who (during more prosperous times) disdainfully dumped the copper coins put into the collection into a tub. During the hyperinflation, he was able to live off of the "worthless" coins that now had value, because they were copper.

Mr. Fix's picture

5 more days (as of yesterday)

World Bank head Jim Yong Kim warns US is ‘five days away from a very dangerous moment’ because of the government’s borrowing crisis

  • World Bank chief Jim Yong Kim warned on Saturday that the United States was headed toward peril as politicians failed again to resolve the shutdown standoff 
  • The US and world economies face higher interest rates, falling confidence and slower growth if the US Congress does not raise the $16.7 trillion borrowing cap, Kim said

Read more: http://www.dailymail.co.uk/news/article-2457514/World-Bank-head-Jim-Yong-Kim-warns-US-5-days-away-dangerous-moment.html#ixzz2hdPYi24o 
Follow us: @MailOnline on Twitter | DailyMail on Facebook

http://www.dailymail.co.uk/news/article-2457514/World-Bank-head-Jim-Yong-Kim-warns-US-5-days-away-dangerous-moment.html

¤'s picture

The Pig Speaketh

Mr. Fix's picture

Re, "The Pig Speaketh"

This sky  won't be made of "air".

Chicken Little Fix.wink

fraxinus's picture

@Mr. Fix re Jim Yong Kim

My command of Korean thinking is a little shaky, but my free-form translation of Jim Yong Kim's meaning is: "Abandon your reasoning, put aside your principles, let democracy collect dust on the shelf; just trust us and obey us, and everything will be fine."

Occasnltrvlr's picture

A Little "Fiat Porn"

Mr. Fix's picture

@ fraxinus

That quote sounds exactly like the line of thinking that is coming from our White House.

Bollocks's picture

Hey Mr Fix

"I said this country will not be recognizable by the end of the month, and I stand by that."

You said that in April. surprise

¤'s picture

I hate saying it...

...but I've been saying it for awhile.

China expanding their PM futures markets (and PM ETF trading) is going to allow them to monkey around with the metals market like London and NY does. I don't think some imminent PM price explosion is around the corner due to China. Not yet at least.

Why would China allow the price of gold to rocket while they're busy still accumulating as much of it as possible for the foreseeable future? It won't rise significantly until they really want it to.

Until the time comes where China wants to make waves they'll just stroke and skim that vast untapped eager Asian PM market for all it's worth while keeping gold/silver just where they want and need it to be.

_leo27_35383449.jpg (652×405)

achmachat's picture

re: fiat porn

When I was working in Beijing, I used to get my salary in CASH (quite common there).
Big fat envelope with a few stacks of hundred 100 RMB notes fresh from the printing press.
Walking home on that day always felt a bit "weird".

Mr. Fix's picture

@ Bollocks

What's your point?    

You know the gold and silver markets that we watch?

Well, they most certainly are unrecognizable now, And have been so since April.

They are the most noticeable example of lawlessness and legalized theft that we have,

and very, very few are even paying attention to them.

A lot of people are paying attention to what is unfolding today, and since our government has been backed into a corner, there is absolutely no doubt, everybody's going to see the next step.

tyberious's picture

Good stuff from MA

http://armstrongeconomics.com/2013/10/13/solution/

Solution

SOLUTION Text

The shaky global economy already is besieged by other threats, including the sudden drop in exports from China for September. We are headed into this debt vortex from which rational minds simply cannot prevail. We are plagued by old politicians too entrenched in the system to see that the road they are on leads to total destruction no different from communism. If the government claims it owns everything and pays you $25,000 a year to live or they tax and fine everything leaving you with only $25,000 at the end of the day, what is the difference? That is like saying we are a free society but you have to request permission to protest or even travel. Our so-called democracies are merely corrupt republics and we have ZERO say in anything material.

Ultimately, to answer the many questions I get about how to reform the political system, let me say this. Switzerland is an example of probably the best political system ever devised – that of the Republic of Genoa in northern Italy. The leaders hold that position for one year only. The top rich families of Genoa were the ruling class. However, each family had its turn for one year only. Genoa was run not in a some mythical contest between the rich and the poor, but as a corporation in competition with Venice and Florence. When the competitive focus is external rather than internal class competition, then the whole benefits from the competition against other states. The short duration of a Doge (leader) ensured that he would pass no law that was Draconian for he would soon suffer that same fate. Likewise, laws were fair because next year he would be subjected to retaliation.

The Swiss system submits individual issues to a public vote only if it is constitutional. That should be expanded to tax power etc. Today, everything should be submitted to a public vote. You log on to your computer and vote. Those who do not have one, go to the local library. If this is the case, the number of laws will diminish. After all, man has written billions of laws trying to improve upon the Ten Commandments by manipulating society while they are at it.

USIntAs%Total

If we shorten the term of office, eliminate second terms, then the people in office will really be the people and not career politicians losing touch with reality. TAXES are no longer necessary at the federal level. Print what we need to cover the cost of government. Those who think that will be inflationary are unfamiliar with the facts. Virtually 70% of the national debts is accumulative interest payments that do nothing by subsidize banking and eliminates capital that would otherwise be lent to the private sector expanding the economy and truly lifting the VELOCITY of money..

If the $17 trillion in debt was invested in the private sector, can you imagine the amount of jobs that would be created? Eliminate the payroll tax and the cost of labor will drop sharply bringing jobs back home. Taxes are necessary for state and local government that cannot print money. There also, we must privatize government as much as possible because ONLY a private company will meet its obligations. Pensions are unfunded in the public sector because they assumed they would always be able to raise taxes. They are morons for they never looking at the math behind such a model. The City of Detroit collapsed because 50% of current taxes went to pensions driving taxes higher to sustain the operating costs of the government.

These are just a few of the issues we will have to deal with in the years ahead. The system can be reformed. We must eliminate the old guard who refuse to see the light because they are the very problem. This is part of the political reform process that will begin after 2016.

argentus maximus's picture

I edited the blog article to

I edited the blog article to include the Gold-CNY chart. It's instructive to see the amount by which the gold price fell in Yuan - back to 2009 levels.

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