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on top of
James Rickards' Currency Wars
Is It Time to Invest in Europe?
(1:01:30) "...We've reached a point, The Profound Point in
Economic History: Where the truth is unpalatable to the political class.
And that truth is that the scale and the magnitude of the problem is larger than their ability to respond. And it terrifies them." -- Hugh Hendry, May Day 2012
h/t Lauren Lyster/Capital Account → Simone Foxman/Business Insider
America has, in fact, run trade deficits large enough t0 wipe out its gold hoard under the old rules of the game. Still, the idea of the gold standard was not to deplete nations of gold, but rather to force them to get their financial house in order long before the gold disappeared. In the absence of a gold standard and the real—time adjustments it causes, the American people seem unaware of how badly U.S. finances have actually deteriorated.
While this example may seem extreme, it is exactly how most of the world monetary system worked until forty years ago. In 1950, the United States had official gold reserves of over 20,000 metric tons. Due to persistent large trade deficits, at the time with Europe and japan rather than China, U.S. gold reserves had dropped to just over 9,000 metric tons when Nixon closed the gold window in 1971. That drop of 11,000 metric tons in the twenty—one years from 1950 to 1971 went mostly to a small number of export powerhouses.
p. 108
No one knows better than the Chinese Communist Party leadership what would happen if those jobs were not available. The study of Chinese history is the study of periodic collapse. In particular, the 140-year period from 1839 to 1979 was one of almost constant turmoil. It began with the Opium Wars (1839-1860) and continued through the Taiping Rebellion (1850-1864), the Boxer Rebellion (1899-1901), the fall of the Qing Dynasty in 1912, the warlord and gangster period of the 1920s, civil war between nationalists and communists in the early 1930s, Japanese invasion and World War II (1931-1945), the communist takeover in 1949, the Great Leap Forward (1958-1961), the Cultural Revolution (1966-1976), and finally the death of Mao and the downfall of the Gang of Four in 1976. These events were not just noteworthy points in a chronological history but involved continuing episodes of external war, civil war, widespread famine, mass rape, terror, mass refugee migrations, corruption, assassination, confiscation, political executions and the absence of any effective political center or rule of law. By the late 1970s, Chinese culture and civilization were politically, morally and physically exhausted, and the people, along with the Communist Party, wanted nothing more than stability and economic growth. Liberal democracy and civil rights could wait.
This is why the Tiananmen Square demonstrations in 1989 were as troubling to the Chinese leaders as their violent suppression was shocking to the West. From their perspective, Tiananmen seemed to put China on the edge of chaos again after just ten years of growth and stability. The Chinese Communist Party leadership understood that the nineteenth—century Taiping Rebellion had begun with a single disappointed student and soon embroiled the southern half of the empire in a civil war resulting in twenty million deaths. Chinese history is proof that a social network does not require the Internet but spreads just as powerfully by word of mouth and by what the Chinese call dazibao, or big-character posters. The Chinese leaders also understood that the Tiananmen protests were fueled not just by prodemocracy sentiments but by student and worker resentment at higher food prices and slower job growth as China’s policy makers hastened to tamp down the economy to fight the inflation that had begun to take off in the late 1980s.
p. 110-111
In fact, Germany had no attractive alternatives. The costs of a euro collapse far outweighed the costs of regional bailouts. Germany actually [benefited] from the European sovereign debt crisis. The continued existence of the euro gave Germany a dominant position inside Europe while a somewhat weaker euro internationally enabled it to gain market share in the rest of the world. The sweet spot for Germany was a euro that was weak enough to help exports to the United States and China but not so weak as to collapse. Germany was successful in Ending that sweet spot during 2010 despite the sturm und drang surrounding the euro itself. With the self—interests of the United States, China and Germany all pointing in the same direction, there would be no doubt for now about the survival of the euro. That the banks were flush with rotten assets, that the periphery nations were running nonsustainable FIscal policies and that the people of Greece, Ireland, Portugal and Spain were facing austerity in order to keep the assembly lines moving in Seattle and Shanghai were all matters that could wait for another day. For now, the center held.
p. 119
In a globalized world, however, exchange rates act like a water-slide to move the effect of interest rates around quickly. Quantitative easing could be used by the Fed not just to ease financial conditions in the United States but also in China. It was the perfect currency war weapon and the Fed knew it. Quantitative easing worked because of the yuan-dollar peg maintained by the People’s Bank of China. As the Fed printed more money in its QE programs, much of that money found its way to China in the form of trade surpluses or hot money inflows looking for higher profits than were available in the United States. Once the dollars got to China, they were soaked up by the central bank in exchange for newly printed yuan. The more money the Fed printed, the more money China had to print to maintain the peg. China’s policy of pegging the yuan to the dollar was based on the mistaken belief and misplaced hope that the Fed would not abuse its money printing privileges. Now the Fed was printing with a vengeance.
p. 135
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