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!