Life in the world of gold bullion is full of mysteries. Each mystery is like a straw in the wind, which individually means little, but tempting us to speculate there’s a greater meaning behind it all. Yes, there is a far greater game in play, taking Kipling’s aphorism to a higher level.
One of those straws is Russia’s continuing accumulation of gold reserves. Financial pundits tell us that this is to avoid being beholden to the US dollar, and undoubtedly there is truth in it. But why gold? Here, the pundits are silent. There is an answer, and that is Russia understands in principal the virtues of sound money relative to possession of another country’s paper promises. Hence, they sell dollars and buy gold.
But Russia is now going a step further. Izvestia reported the Russian Finance Ministry is considering abolition of VAT on private purchases of gold bullion.[i] We read that this could generate private Russian annual demand of between fifty and a hundred tonnes. More importantly, it paves the way for gold to circulate in Russia as money.
We should put ourselves in Russia’s shoes to find out why this may be important. Russia is the largest exporter of energy, including gas, pushing Saudi Arabia into second place. This means she is also the largest acquirer of fiat currency for energy. That’s fine if you like fiat currencies, but if you suspect them, then you either turn them into physical assets, such as infrastructure and military hardware, or gold. Russia does both.
Then there is China. China has started announcing monthly additions to her gold reserves. China is up to her neck in dollars, and the relatively minor monthly additions to her reserves really make little difference. However, the link between the gold exchanges in Moscow and Shanghai strongly suggest Russia and China are coordinating gold dealing activities.
In any event, China now dominates physical bullion markets. Deliveries (withdrawals) from the Shanghai Gold Exchange’s vaults into public hands are running at roughly two-thirds of the world’s annual mine supply. At 426 tonnes in 2017, China is the largest gold mining nation by far, and the state owns all China’s refining capacity, even taking in doré from abroad. No gold leaves this version of Hotel California.
The frequently-expressed reasoning for their gold policies is Russia and China are locked in a financial war with their largest debtor. This is not the underlying reason these nations have chosen gold as an expression of their dislike of America’s weaponization of her monetary policies. They know the difference between unbacked fiat currencies and sound money, which has been chosen by people ever since they began to use a separate commodity to intermediate in transactions.
However, it is true the Americans have weaponised the dollar, bringing an urgency to China’s and Russia’s deployment of gold. US dollars have been the world’s reserve currency for the last forty-eight years, and America, which pays for everything in costless, newly-issued dollars, now says it wants a better trade deal. It obviously assumes the dollar’s supremacy is unchallengeable and in their need for dollars China and other exporters to America will be forced to comply.
Let’s pick this apart. The US Government pays for everything in a currency which it issues at will. New dollars only gain value once they are in circulation, but the cost of production is zero, stealing their circulatory value from previously existing currency. However, the US Government is unable to balance its books without recycling some of these duff dollars into its own IOUs (Treasury stock). Because they are required to be repatriated to balance the US Treasury’s books, the US Treasury borrows them back from foreigners who might otherwise question the dollars true value. So, foreigners get a Treasury IOU eventually paid out in a currency IOU. It really is pig on pork.
So far, the foreigners have been successfully conned, though questions are beginning to be asked.
Logic suggests that the US Government getting something for nothing is as good as it gets. But President Trump thinks this is unfair, not on the Chinese and other foreigners swapping goods for ultimately worthless paper, but on America herself! He holds out for an even better deal. He demands the Chinese and others stop supplying real stuff to his people in return for his costless, dubious paper. In other words, speaking on behalf of the American People, he is now dissuading the Chinese from giving Americans something for what amounts to nothing.
Those on Planet Asia could be forgiven for looking at things rather differently. After Mao’s death and a brief period of accepting the dollar scam on the basis that demand for dollars would always ensure they could be exchanged for value, the Chinese have for a long time smelled a rat. This is why in 1983 they appointed the Peoples Bank to be in charge of liquidating dollars for gold and silver. They have gently played along with the dollar scam ever since, not wanting to be the party that exposes it for what it is.
Now it is Trump himself who has blown the whistle on the dollar. China and Russia have undoubtedly got the message from this new art of the deal. But at the heart of it is a deep, wider malaise in the fiat currency world. Understand that, and we get to the true reason why Russia and China are wary about accumulating the West’s fiat currencies. Until now, they have run with the hare and hunted with the hounds. China in particular uses fiat renminbi to drive expansion. But then if she didn’t, today’s world order would have probably collapsed in the wake of the Lehman crisis as the flaws and weaknesses of fiat currencies would have been exposed.
One of those straws is Russia’s continuing accumulation of gold reserves. Financial pundits tell us that this is to avoid being beholden to the US dollar, and undoubtedly there is truth in it. But why gold? Here, the pundits are silent. There is an answer, and that is Russia understands in principal the virtues of sound money relative to possession of another country’s paper promises. Hence, they sell dollars and buy gold.
But Russia is now going a step further. Izvestia reported the Russian Finance Ministry is considering abolition of VAT on private purchases of gold bullion.[i] We read that this could generate private Russian annual demand of between fifty and a hundred tonnes. More importantly, it paves the way for gold to circulate in Russia as money.
We should put ourselves in Russia’s shoes to find out why this may be important. Russia is the largest exporter of energy, including gas, pushing Saudi Arabia into second place. This means she is also the largest acquirer of fiat currency for energy. That’s fine if you like fiat currencies, but if you suspect them, then you either turn them into physical assets, such as infrastructure and military hardware, or gold. Russia does both.
Then there is China. China has started announcing monthly additions to her gold reserves. China is up to her neck in dollars, and the relatively minor monthly additions to her reserves really make little difference. However, the link between the gold exchanges in Moscow and Shanghai strongly suggest Russia and China are coordinating gold dealing activities.
In any event, China now dominates physical bullion markets. Deliveries (withdrawals) from the Shanghai Gold Exchange’s vaults into public hands are running at roughly two-thirds of the world’s annual mine supply. At 426 tonnes in 2017, China is the largest gold mining nation by far, and the state owns all China’s refining capacity, even taking in doré from abroad. No gold leaves this version of Hotel California.
The frequently-expressed reasoning for their gold policies is Russia and China are locked in a financial war with their largest debtor. This is not the underlying reason these nations have chosen gold as an expression of their dislike of America’s weaponization of her monetary policies. They know the difference between unbacked fiat currencies and sound money, which has been chosen by people ever since they began to use a separate commodity to intermediate in transactions.
However, it is true the Americans have weaponised the dollar, bringing an urgency to China’s and Russia’s deployment of gold. US dollars have been the world’s reserve currency for the last forty-eight years, and America, which pays for everything in costless, newly-issued dollars, now says it wants a better trade deal. It obviously assumes the dollar’s supremacy is unchallengeable and in their need for dollars China and other exporters to America will be forced to comply.
Let’s pick this apart. The US Government pays for everything in a currency which it issues at will. New dollars only gain value once they are in circulation, but the cost of production is zero, stealing their circulatory value from previously existing currency. However, the US Government is unable to balance its books without recycling some of these duff dollars into its own IOUs (Treasury stock). Because they are required to be repatriated to balance the US Treasury’s books, the US Treasury borrows them back from foreigners who might otherwise question the dollars true value. So, foreigners get a Treasury IOU eventually paid out in a currency IOU. It really is pig on pork.
So far, the foreigners have been successfully conned, though questions are beginning to be asked.
Logic suggests that the US Government getting something for nothing is as good as it gets. But President Trump thinks this is unfair, not on the Chinese and other foreigners swapping goods for ultimately worthless paper, but on America herself! He holds out for an even better deal. He demands the Chinese and others stop supplying real stuff to his people in return for his costless, dubious paper. In other words, speaking on behalf of the American People, he is now dissuading the Chinese from giving Americans something for what amounts to nothing.
Those on Planet Asia could be forgiven for looking at things rather differently. After Mao’s death and a brief period of accepting the dollar scam on the basis that demand for dollars would always ensure they could be exchanged for value, the Chinese have for a long time smelled a rat. This is why in 1983 they appointed the Peoples Bank to be in charge of liquidating dollars for gold and silver. They have gently played along with the dollar scam ever since, not wanting to be the party that exposes it for what it is.
Now it is Trump himself who has blown the whistle on the dollar. China and Russia have undoubtedly got the message from this new art of the deal. But at the heart of it is a deep, wider malaise in the fiat currency world. Understand that, and we get to the true reason why Russia and China are wary about accumulating the West’s fiat currencies. Until now, they have run with the hare and hunted with the hounds. China in particular uses fiat renminbi to drive expansion. But then if she didn’t, today’s world order would have probably collapsed in the wake of the Lehman crisis as the flaws and weaknesses of fiat currencies would have been exposed.
So far, China and Russia have resisted the temptation to act precipitously. Their economies are dependent on Western cooperation. Russia exports energy to the West, and China runs a trade surplus in goods and services. To dispense with Western trade, they need an Asia-wide self-contained market. They are building it, with China’s silk road projects and by consolidating the membership of the Shanghai Cooperation Organisation. But not all the groundwork has been done, certainly not enough to “go commando”.
The transfer from a dollar-centric world to gold-backed roubles and renminbi will continue to be at a pace determined by the monetary mistakes of America. That is why the next economic downturn is so important to geopolitical outcomes. And it won’t be just a rerun of Lehman, characterised by a sudden crisis, money-printing, and heaving a sigh of relief when the banking system doesn’t collapse.
The starting-gun for the next credit crisis has already been fired. A reversal of expanding cross-border trade is in full swing. The sales of dollars by foreigners has begun. There is little doubt there is a recession ahead, the only question is of its likely depth. The massive build-up of unsustainable global debt since the Lehman crisis tells us to expect the liquidation to be substantial. The coincidental combination of the peak of the credit cycle and trade protectionism warns us of something far worse than an ordinary recession: a possible rerun of 1929-32, only this time with unsound currency instead of currencies freely convertible into gold.
It is the sheer scale of the problem which is likely to prove the undoing of fiat currencies. A deep recession will do catastrophic damage to government finances, which can only be covered by massive monetary expansion. At the same time, monetary policy is designed to ensure the general price level does not fall. This occurs when a credit crisis wipes out demand, and prices in sound money fall significantly. We know this because in 1929-32 measured in gold-backed dollars prices did just that.
It may take a few months before the purchasing power of fiat currencies begins a renewed decline. The recent strength in energy and commodity prices is worrying in this context, but it is probably too early to call it the start of a definite trend of falling purchasing powers for the dollar and other currencies, measured against the commodity complex.
Trouble is likely to start with either the dollar or the euro. In a deepening recession, the euro will struggle with escalating problems in the PIGS[ii], Brexit, US trade protectionism and systemic risks in the Eurozone’s banking system. The Eurozone could easily disintegrate. A falling dollar, over-owned in the context of declining international trade, is also a racing certainty. A race to the bottom for both currencies is becoming the increasingly obvious outcome of a slump in world trade.
The transfer from a dollar-centric world to gold-backed roubles and renminbi will continue to be at a pace determined by the monetary mistakes of America. That is why the next economic downturn is so important to geopolitical outcomes. And it won’t be just a rerun of Lehman, characterised by a sudden crisis, money-printing, and heaving a sigh of relief when the banking system doesn’t collapse.
The starting-gun for the next credit crisis has already been fired. A reversal of expanding cross-border trade is in full swing. The sales of dollars by foreigners has begun. There is little doubt there is a recession ahead, the only question is of its likely depth. The massive build-up of unsustainable global debt since the Lehman crisis tells us to expect the liquidation to be substantial. The coincidental combination of the peak of the credit cycle and trade protectionism warns us of something far worse than an ordinary recession: a possible rerun of 1929-32, only this time with unsound currency instead of currencies freely convertible into gold.
It is the sheer scale of the problem which is likely to prove the undoing of fiat currencies. A deep recession will do catastrophic damage to government finances, which can only be covered by massive monetary expansion. At the same time, monetary policy is designed to ensure the general price level does not fall. This occurs when a credit crisis wipes out demand, and prices in sound money fall significantly. We know this because in 1929-32 measured in gold-backed dollars prices did just that.
It may take a few months before the purchasing power of fiat currencies begins a renewed decline. The recent strength in energy and commodity prices is worrying in this context, but it is probably too early to call it the start of a definite trend of falling purchasing powers for the dollar and other currencies, measured against the commodity complex.
Trouble is likely to start with either the dollar or the euro. In a deepening recession, the euro will struggle with escalating problems in the PIGS[ii], Brexit, US trade protectionism and systemic risks in the Eurozone’s banking system. The Eurozone could easily disintegrate. A falling dollar, over-owned in the context of declining international trade, is also a racing certainty. A race to the bottom for both currencies is becoming the increasingly obvious outcome of a slump in world trade.
All that’s needed is a trigger. China has cornered the bullion market. Russia is selling dollars for gold and appears to be paving the way for gold to circulate domestically. A deep recession, perhaps replicating the 1930s depression, is becoming more likely by the day. Massive monetary inflation will be required to prop up Western governments. Foreigners own too many dollars for these developing conditions. The world’s impending economic failure is entirely down to the continual debasement of fiat currencies, a practice that will be brought to a head by the ending of the current credit cycle.
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