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After the 'Peg': a Golden Future

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I had no sooner finished a recent commentary “China About to End Dollar-Peg”, when an inquisitive reader asked me “what's next?” While I had not intended to continue on with this topic, I decided to “take a page” out of Hollywood's book: never pass up the opportunity to make a sequel.


For those who did not read the original commentary, I stated that China would be forced to abandon the “peg” of its currency to the U.S. dollar when inflation explodes in the U.S. (likely some time this year), and had already made most/all of the moves necessary to prepare its economy for a transition away from the U.S. dollar – along with preparing the renminbi to assume the mantle of “reserve currency”.


I generally try not to get too far ahead of myself with such forecasting, as the longer the series of events which one tries to predict, the more those predictions move from the realm of “probabilities” to mere “possibilities”. Thus, while it would make good reading to postulate a detailed future, over a long time-horizon, unless one's name is Nostradamus, free will and a chaotic universe do not allow such certainty.


Nevertheless, there are some observations/deductions which I believe can be made with a reasonable degree of confidence. For those willing to learn from history, some of these “predictions” are nothing more than observations of fixed patterns which are centuries old. The most-obvious of these patterns is the “gold standard”.


Over a period of many centuries, the various tribes of humanity have been afflicted with the bankers' disease known as “fiat currencies” (paper which is deemed to be “money” purely by decree) on countless occasions, and the prescription has been the same every time: a return to a precious metals standard. For those who don't understand why this is true, I recommend reading the previous commentary – which contains a detailed discussion on what is (and what is not) “money”.


Living in a world where every economy has fiat currencies for the first time in history, it doesn't require a particularly astute mind to conclude that precious metals will again be the cure for this banker-spawned “epidemic”. It is really a very simple equation. Greedy bankers keep flooding economies with larger and larger mountains of their worthless paper until even the most gullible sheep loses confidence in this tool (paper money) which the bankers need to proceed with all their other scams to rob an economy of all its wealth.


Obviously, after losing confidence in one form of banker-paper it would be totally impossible to restore confidence by simply allowing the bankers to create another form of their worthless paper. Thus, it's not a case of societies and economies choosing to re-institute a gold standard from among a number of competing options. There are no other options. Given this basic reality, I claim no credit for “predicting” (along with others) that humanity will make the same choice with its “money” which it has always made.


When we combine the “prediction” that our economies are destined to soon return to a gold-standard, along with the equally certain prediction that China will soon abandon the “peg”, and make the renminbi the new reserve currency, the natural conclusion to reach is that we are about to move from a “fiat” U.S. dollar as reserve currency to a gold-backed renminbi. However, it can't and won't be that simple.


When the British Empire had been sucked-dry from centuries of allowing its bankers free-reign in flooding the economy with their worthless paper, and then enslaving people with debt, the “baton” was passed to the United States as the world's new dominant economy – with the U.S. dollar replacing the British “pound” as the dominant currency for international commerce.


As economic transitions go, it was relatively painless. Thus, the optimists out there may be hoping for an equally smooth transition from the dollar-based U.S. economy to China and the renminbi, as the new vehicle for growth of the global economy and international commerce. Unfortunately, there is no basis for such optimism.


When the British Empire was replaced by the American Empire as the new, dominant economy, the entire world was on a gold-standard – preventing the sort of insane accumulations of debt, and reckless money-printing which characterizes the global economy today. There has never been a scenario where the global economy has attempted a transition from fiat currencies back to a gold standard. Given that such transitions never go smoothly when even a single economy has made such a move, significant economic disruptions are a certainty.


Exacerbating this scenario is the fact that “globalization” has increased the level of global trade, making economies more inter-dependent than at any time in history (think “dominoes”). Thus, even if the coming transition is conducted with an optimal amount of care and skill, we are facing one of the most-daunting economic challenges in our history.


More specifically, once such a transition was announced, the consequences would be obvious. Given a choice between holding “fiat” U.S. dollars - “backed” by nothing but a bankrupt U.S. economy – and gold-backed renminbi, we would witness an economic stampede of Biblical proportions. Those at the front of the line would obtain nothing but a few pennies on the dollar for their greenbacks, with everyone else left with the choice of using their dollars as kindling or toilet-paper.


Thus, we can be certain on one point: we will not move directly from a world of fiat currencies and the U.S. dollar as reserve currency to a gold-backed system, with China's reniminbi as the new reserve currency. The only way that scenario could arise is if there was a complete collapse of the U.S. economy (and its currency) before China could make its move. This scenario is certainly possible, but given the extensive preparations of China's government, I'm placing my confidence in the belief that they have this situation under control.


This means that the first transition which will take place in the global monetary system would be to switch from the dollar as reserve currency to the renminbi – without immediately returning to a gold standard. Instead, my best estimate of how events will progress is that as the global economy experiences the economic shock-waves of this transition (and panic begins to rise, or existing panic rises further), that Phase II (the return to a gold standard) will be announced as soon as enough dollar-holders have been able to move to the renminbi so that the announcement of a new gold standard will lessen rather than increase those economic shock-waves.


It would be fruitless, at this point, to attempt to extrapolate further as to the course of future events, given the mounting uncertainty to which I alluded, earlier. However, I will add a few general (and hopeful) comments on what sort of “brave, new world” we may be able to create for ourselves.


The starting-point is that we in the West are likely to be pleasantly surprised at how relatively benign it will be to have China as the new “steward” of the global economy. There are two reasons for such optimism.


First of all, China has not demonstrated any imperial ambitions. While China's leadership could become intoxicated/corrupted by its new power and stature in the world, we must keep in mind that this is arguably humanity's most mature tribe/society. Unlike any other major domain on Earth, China has existed roughly in its current form for thousands of years.


Among the lessons which this society has had an abundance of time to learn is how difficult it is to exert dominion over large numbers of people. Indeed, with one out of every five people already living within China's borders, it would be no surprise if China's totalitarian regime adopts the realistic viewpoint that merely keeping its own population relatively content is enough of a challenge – without been seduced by the ultimately counter-productive progression of building, maintaining, and then losing an “empire”.


Thus, I am optimistic that “China's century” may represent the first time in history when we could actually observe a discernible decrease in war. Adding to my optimism in this respect is the more cynical observation that (as the U.S. has demonstrated) anyone foolish enough to attempt to conduct large wars with a petroleum-fueled war machine is simply committing economic suicide.


My second reason for looking forward with hope to China assuming global, economic leadership is that (for once) we will have the global economy being guided by an entity capable of long-term thinking and planning. Unlike Western democracies, in general, and the U.S. government in particular, China's government doesn't make all its decisions solely based upon whether it would be politically popular in the next election cycle (which, in the U.S. is never more than two years away).


Indeed, the U.S. political system has become so hopelessly dysfunctional that the next election “starts” as soon as the last ballot is counted from the last election. It should not be necessary to point out how utterly idiotic it is to allow the global economy to be guided by a government in permanent election-mode – where no real planning beyond a two-year time horizon is ever contemplated.


The switch to a global economy being led by a stable, mature, forward-looking government would seem to be a scenario which must represent an improvement over the status quo: a global economy “hijacked” by the small group of banker-oligarchs, who long ago bought-off both “book-ends” in the U.S.'s two-party dictatorship. The fact that this transition will (eventually) be accompanied by a return to a gold standard is the “icing on the cake”.


From a selfish viewpoint, there may be yet another dividend for me, personally: the opportunity to move away from writing about all the reasons why “things” (from an economic standpoint) will get worse-and-worse, and begin to offer people genuine reasons for hope. However, now I am getting ahead of myself. We have several crises ahead of us, with most of our current leadership focused on lying to us about those problems, or simply pretending they don't exist.


For now, all we should be focused upon is how to rid our world of the U.S. dollars which Western bankers are using to attempt to enslave us all. The oligarchs will not surrender their dreams of ultimate wealth and power easily. In a scenario which no one could have predicted even a decade ago, we hope and wait for the government of China to “rescue” us – from ourselves.

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Jeff Nielson
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written by Jeff Nielson, December 01, 2010
Mathnerd, I've read similar essays myself - often from people who tend to write from a broader perspective, and are not necessarily "experts" in currencies.

I find all such work USEFUL (even if we don't agree with it) in that the absolute worst mistake being made by talking-heads and even most of the so-called "experts" is to continue to base their analysis on comparing current events with other (recent) periods of times.

I originally looked at these events as "another Great Depression", but I'm now well beyond that. Economic historians, who view events from the broadest perspective of all, have speculated that the current episode my be more like the once-in-three-hundred-years mega-catastrophes which seems to inflict upon itself.
mathnerd
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written by mathnerd, December 01, 2010
It'll be interesting to see how this all plays out.

Another commentator (I don't remember who) predicted that the RMB would replace the USD as the reserve currency, but that it would be much different for the world.

This commentator posited that we're at the end of a (political) Christian superempire that was Portugal and its currency, England/ UK and the pound, and now the US and the dollar. He noted that the transition from the pound to the USD (and the transition from Portugal's currency to the pound a couple centuries before) was relatively uneventful (I don't know anything about the transition to the British pound becoming the reserve currency though). He thought this was because the countries involved either were Christian or had a Christian heritage. And, since China certainly is not a Christian country, the transition to using China's currency would be much more chaotic.

I don't agree with his opinion. My worldview (I'm a Christian) often has more in common with that people of other religions or philosophies than with a Christian who doesn't actually understand the religion.

Just thought I'd throw it out there.
Jeff Nielson
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written by Jeff Nielson, June 19, 2010
Yes, Derek. There weren't too many predicting China was about to end the "peg", so I'm pleased to get this vindication.
navderek
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written by Derek, June 19, 2010
And so it begins...

http://www.reuters.com/article/idUSTRE65I11B20100620
GINGER60
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written by GINGER60, January 22, 2010
Ah, the problems, certainly the U>S> gov't is not going to advertise, and the U.S. media sheep are right in lock step. But maybe if there were a stampede, it might be an awfully good thing for those of us holding
most of our wealth in gold silver and G and S stocks.
Jeff Nielson
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written by Jeff Nielson, January 22, 2010
Hi Ginger.

The transition has already started. I don't think anyone has MEASURED precisely how large an amount of U.S. dollars have ALREADY been replaced by renminbi. It's clearly in the $10's of billions, and quite possibly in the $100's of billions - when the actions of OTHER nations (like the oil producers) are factored-in.

So, getting back to your question, if you listen carefully, most Chinese officials now refer to the dollar as "a" reserve currency, not "the" reserve currency.

Clearly, the LESS cognizant that markets and investors are of the changes which are ALREADY taking place, the faster and more smoothly this transition can be conducted.

It's when the "sheep" and the "experts" finally figure out what is taking place, and the frantic stampede out of the dollar BEGINS that this process becomes more complicated and urgent.
GINGER60
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written by GINGER60, January 22, 2010
very astute article, just WHEN?

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