While we in the United States have been blathering about guns, China has been buying up gold like hotcakes for the past year now. Do they know something we don’t?
Susan Stark
Guest Blogger: Meanwhile, Back in China . . .
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While we in the United States have been blathering about guns, China has been buying up gold like hotcakes for the past year now. Do they know something we don’t?
Susan Stark
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13 Comments.
They know what we know. The American Dollar is the world’s reserve currency because it is the world’s reserve currency.
Tautological finance.
This “because we say so” basis for the dollar’s value can only last as long as the US can stave off catastrophic failure, and with Washington hell bent on imperial overreach, that seems likely to come sooner rather than later. All the major powers outside the US have been very nervous about being tied to a drowning giant for the last ten years or so; ever since Bush launched the War on Goldstein they have all been frantically revising their estimates of how much longer the American era of global affairs will last.
Their situation is tricky because the USA is their bank. If they pull out too much or too fast, whatever dollars they still hold become worthless, so they are stuck in a tricky game trying to ride out American decline. Buying gold sounds to me like a very good strategy for them because it creates a stable buffer at the bottom of their coffers while quietly converting dollars into something else.
Our position is much simpler: we are fucked. Washington’s only option is to maintain the dollar’s value for as long as they can in the hope that there are a few more years to be teased out of our golden age.
To Wat Tyler
I generally agree with your message but below are some links showing that several of the world’s countries, who are tired of being bullied buy a dying behemoth, have worked out their own non-US-dollar-based exchanges.
http://www.debka.com/article/21673/
http://www.bloomberg.com/news/2012-01-07/iran-russia-replace-dollar-with-rial-ruble-in-trade-fars-says.html
http://blogs.rediff.com/mkbhadrakumar/2012/01/19/china-tiptoes-into-petrodollar-recycling/
http://www.bbc.co.uk/news/business-18639212
http://www.bloomberg.com/news/2011-12-29/china-japan-currency-deal-points-way-to-a-new-world-monetary-order-view.html
@Wat
The Chinese aren’t interested in the dollar falling merely for the reason that a major portion of their economy is fueled by the American consumer. By them buying gold, they are hedging against the loss of the American consumer. They can always find other buyers for their mounds of plastic junk. And, since after the Collapse, the average American won’t be able to afford anything except Chinese generic goods, the Chinese will win again.
But try telling that to Washington and Wall Street, who think they are out-competing the Chinese by creating snuff-porn out of Middle-Eastern and and Central Asian peasants. And try telling that to the media, who chase after school-shootings and wonder if Tweedledum or Tweedledummer will win the election this year.
Susan,
As Voltaire said, “All fiat currencies eventually return to their intrinsic value: zero.”
The idea of the Chinese Middle Class has always struck me as unlikely. A Middle Class requires infrastructure and Democracy. China can trot out all the high-speed maglevs they want, I don’t think that China’s going to have anything even remotely like the American Middle Class. When their economy finishes superheating (a couple more years), it will start to implode. I hope at that point that America will rediscover how to build a coffee maker and a toaster. Yes, the box store will collapse as the Era of $9 Toasters ends, and people will end up having to use the same $50 toaster for six or seven years, but that does seem to be the only way to find a way to put all the unemployed to work again.
@Alex
The Chinese Middle Class lacks the space to compete with ours in terms of collecting junk. Their population density makes it like the Middle Class of New York City. Lots of money to take trips and go to the theater, but not a two car garage.
Update: the Chinese are also stockpiling rice, dried milk, and industrial metals. The shit do be goin’ down, right?
No I think Wat Tyler has the right of it. American money in the end is backed only by two things, petroleum and the threat of violence from the worlds most expensive army(/navy/airforce/ect…). Really it is only backed by one thing because the petroleum backing comes from petroleum being traded only in dollars, and this is only done because of the threat of violence. For instance the two most recent countries that tried to trade oil in other currencies (because they will get more value for their oil if they trade in say, the Euro) were Iraq and Libya – do those countries sound familiar to you?
Its not that the Chinese are interested in the dollar falling, you are right that would seriously hurt their economy. They don’t want it to fall, but they are worried about it falling and are sick of the unfair leverage it has being the international reserve currency.
The entire world wants off of the Dollar as the reserve currency for precisely the “tied to a drowning giant” reason that Wat Tyler pointed out (as well as the unfair leverage it gives the dollar). But the entire world doesn’t want to be bombed and invaded by the US either. China’s solution is to very slowly and subtly trade their dollar holdings (including dollar debt and whatnot) for things that are a bit more stable and disconnected from the sinking giant. They have been buying resources, companies, infrastructure, and commodities like gold for precisely this reason.
The scariest potential sign about that, is if it shows that China knows something we don’t, then what they know is likely either: A) the world at large is working to shed the dollar as their reserve currency and China wants to be ahead of the subduction zone that will befall late leavers of the dollar, or B) China is expecting a major military showdown with the US in the not to distant future possibly in conjunction with a number of other countries looking to jump ship on the petro-dollar to increase their gains and survive the eventual collapse. Most likely it is A) followed by B). Scary times.
@someone
Right-wingers fear a military invasion by China, but it is more likely we will be dumb enough to invade them first.
In regards to the petrodollar: forcing people to buy and sell petroleum in dollars is a completely wasteful and precarious way to maintain our currency’s value. The way to maintain value for a currency is to have it backed by a commodity. Wingers prefer the gold standard, but it doesn’t necessarily have to be gold. My preference is to have currency backed by *joules*, or units of energy, if such a thing is possible.
Please slow down on filling your drool buckets – the Chinese have trillions and trillions of dollars – this alone makes them want to make sure of the value of the dollar, but it also makes them want to diversify a bit and get something more than a fiat currency – hence the buying of gold. Invading China? 2 car garages?…..maybe a little vodka with those diet cokes?
I agree entirely. I don’t think China is going to start a war, I think they are preparing for a war that they are fairly certain (and unfortunately likely correct) that the US is going to start with them when the foundations of the petro dollar start collapsing and countries like China start pulling out of it, if only to save themselves from the petro dollar’s colapse.
I also agree the petro dollar is stupid. It might not be stupid if it were only backed by the petroleum that was produced in the US (though that would currently be insufficient to support it the way it needs support to have the power and value it currently does but that is another story.) I would prefer the dollar to be backed by US economic prowess which would, in many respects, encourage, the powers that be to actually do important and good things in the US. For instance an economic backed dollar would sort of force the hands of the powers that be to do something about unemployment, because they know that even the laziest most incompetent potential worker who wishes to work still adds value to the total economic prowess of an economy when given work to do. Thus putting as many people to work and educating and modernizing and improving the country as much as possible would add to the power of the currency they control, allowing their boundless greed to tempt them to at least do more good things for the people, if only to improve their own standing.
“people will end up having to use the same $50 toaster for six or seven years”
Assuming it’s built so that it will actually last that long that would be better in so many ways…
Before WWII, the only accepted currency was gold. 24K gold. Just like Rand wanted. Nations always watered their currencies (seigniorage), and forced residents to accept their watered currencies, but in International Trade, only gold was accepted: the creditor worried that the debtor’s nation would water down the currency, and the debtor worried that the creditor would strengthen their currency. So international contracts were denominated in gold.
When the US stock bubble burst in ’29, the US government didn’t have enough gold to pay it’s sovereign debts, so it confiscated all the gold in the US. It was illegal for US citizens or residents to hold gold, but the US government guaranteed all US sovereign debt in gold, so a US dollar was worth exactly 1/35 oz of 24K gold to anyone who wasn’t a US citizen or resident. So, after WWII, the US dollar was used as gold for all international trade, since there were no viable alternatives, and international trade was growing far beyond the ability of metallic gold to keep up.
Then, in 1971, Nixon defaulted on all US international sovereign debt. People had been so used to the dollar being exactly the same as gold, that all international debts (including US sovereign debt) was denominated in dollars, with the underlying gold understood. The world more-or-less survived.
Since ’71, the US dollar has been the world’s Key Currency, the only currency accepted for International Trade (except for intra-block quasi international trade), a currency completely controlled by a single, often erratic nation. A currency that has remained the key currency since ’71 because …
a) the power of the US military, strong enough to completely destroy about 40% of the world with no serious damage done to the US (only the nuclear powers are off the list);
b) the complete absence of any alternative.
c) both of the above
d) neither of the above
Needless to say, other nations have been, to various degrees, unhappy about this. The Brits can no longer insist on sterling as the medium of exchange within the British Empire, since that Empire no longer exists. No other single nation has the power to impose its own currency as a key currency. Europe tried to create an international key currency, one not under the control of any single nation, but that doesn’t seem to be working very well. So the dollar remains. A currency entire under the control of a crazy cabal, and no one can see any alternative.
As Tobin wrote many years ago (I have to paraphrase since I don’t have the source before me) Look at the French peasants. The French peasants have always kept gold, since they know that gold is the only safe store of value. But they remain peasants, which seems to be the flaw in that argument.
Update that to: Look at the Chinese peasants…
All currencies serve the same purpose: a method of simplification for the exchange of goods and services (chickens don’t fit into a wallet as easily as some fifties, so people exchange money rather than poultry to get things done).
The problem with the “only gold has value” meme so beloved by the Preppers is that, no, gold has no value either, just like fiat currency. I can’t eat gold, breathe it, smoke it, drink it, or burn it for warmth. It’s a hunk of metal. Paper money? At least I can burn it and use it to wipe my ass.
The Chinese are acquiring gold for the non-End of the World reasons. It’s a good hedge against inflation, it’s desirable as an industrial metal, it’s universally accepted. Why keep dollars, which have a small chance of becoming worthless, when gold has a much lower chance of doing so?
Rest assured, the Chinese aren’t just stockpiling gold.
@Alex,
Every substance has value, and gold is no exception. I think that throughout history, people liked gold for it’s shiny brillance, but it does have modern industrial applications.
And you’re right, the Chinese are stockpiling other things, like food and base metals.