Gold is challenging the $1300 level for the third time this year. If it breaks upwards out of this consolidation phase convincingly, it could be an important event, signalling a dollar that will continue to weaken.
MD: Look at how silly this reads if you know what real money from a “proper” MOE process is. Referring to “real” money that sentence would read something like:
The HUL (Hour of Unskilled Labor and the unit of “all” real money) still trades for the same size hole in the ground that it did last month … and last year … and last century … and for all time.
The factors driving the dollar lower are several and disparate. The US economy is sluggish relative to the rest of the world, the rise of Asia from which America is excluded is unstoppable, geopolitics are shifting away from US global dominance, and the end is in sight for monopolistic payment for oil in US dollars.
MD: With a proper MOE process, the money cannot be driven higher or lower or anyplace else. It has nothing to do with the economy. If the traders don’t see clear to delivering on their trading promises over time and space, their money creation goes down. Otherwise, it stays the same or goes up. Either way, as far as real money is concerned, the economy is a non-issue. Real money is in perpetual free supply and is always where it needs to be when it needs to be there to immediately serve the demands of any state of the economy … i.e. what traders want to promise to do over time and space. There is “no” monetary policy, geopolitics, state dominance, commodity influence or anything else to cause it to deviate from its appointed task … that task being to keep track on all certified in-process trading promises spanning time and space.
These subjects have been covered in some detail in my recent articles, which will be referred to for further clarification where appropriate. This article summarises these trends, and explains why the consequence appear certain to drive gold, priced in dollars, much higher.
MD: And he knows his writing is non-sense … because I have annotated it for him numerous times in this very way.
The importance of gold and reasons for its suppression
The post-war Bretton Woods Agreement confirmed the US dollar to be fixed to gold at $35 per ounce. All other national currencies were linked to gold through the dollar at the central bank level. Ordinary civilians, businesses and commercial banks were not permitted to exchange their currencies for gold through central banks, so this was simply a high-level arrangement designed to maintain control of gold priced in dollars.
MD: Gold attempted to become money by edict as described here. You can’t make something money by edict and expect it to work. It is just a stand-in for real money. Look how silly this is. The gold was what gave everyone confidence in the money … even when they were explicitly told they couldn’t exchange their money for gold … the very basis for that confidence. Who’s going to believe nonsense like that?
A few years after Bretton Woods, in 1949 and when the newly-fledged IMF began to collate statistics on national gold reserves, the US Treasury was recorded owning 21,828.25 tonnes of gold, 74.5% of all central bank reserves, and 43.6% of estimated above-ground gold stocks. However, over the years the proportions changed, and by 1960, US gold reserves had declined to 15,821.9 tonnes, 47% of central bank reserves, and 24.9% of above ground stocks.
MD: With real money, none of the nonsense in the above paragraph is ever called for. There are “no reserves”. Nobody cares where the money is. Traders making new promises spanning time and space create it in the amounts and at the place they need it … they get their promises certified … and then go about delivering on them. That means doing something to reacquire money in circulation and return it … upon which it is immediately destroyed. They don’t have to go hat in hand to someone who has “proof of work in hand” before they can make their promise.
Clearly, American control of gold had weakened considerably in the two decades following Bretton Woods. This weakening continued until the failure of the London gold pool, the arrangement dating from 1961 whereby the major American and European central banks collaborated to defend the $35 peg.
MD: Again notice. With “real” money from a “proper” MOE process, you don’t have this nonsense. You have a peg … a real one … one that never changes over time and is used as the obvious unit of measure … you have the HUL … the Hour of Unskilled Labor.
It has traded for the same size hole in the ground over all time … and we have all been one at sometime in our lives (usually in high school summer jobs). we never lose a reference to its “real” value. That is made possible and maintained through its perpetual “guarantee” of zero inflation.
That guaranteed behavior is implicit in the process and real under direct observation … it is the nature of every trade … i.e. perfect perpetual balance between the supply and demand for the money itself.
Gold has never gotten close to delivering that sub-minimal attribute of real money. In fact, it claims to be money via the opposite path … that it is “rare”.
The Americans had abused the gold discipline by financing foreign ventures, notably the Korean and Vietnam wars, not out of taxation, but by printing dollars for export, and it began to put pressure on the dollar. The London gold pool effectively spread the cost of maintaining the dollar peg among the Europeans. Unsurprisingly, France withdrew from the gold pool in June 1967, and the pool collapsed. By the end of that year, the US Treasury was down to 10,721.6 tonnes, 30% of total central bank gold reserves, and 15% of above-ground stocks.
MD: “Abused the gold discipline”. Now that is rich!!! And remember, the co-option of trader’s invention of money by the money changers now has “all” taxation going to paying tribute (interest) to those money changers. Governments are sustained totally by counterfeiting. It’s not “Americans” who abused the money … it’s the governments … which are demonstrably everything that is “non-American” in values and behavior.
And again notice, all the machinations he describes are of no interest to a “proper” MOE process at all … not at all!
Inevitably the decline continued, and by the time of the Nixon shock (August 1971 – the abandonment of the gold exchange commitment) it was clear the US Government had lost control of the market. She had only 9,069.7 tonnes left, representing 28.3% of central bank gold, and 11.9% of above ground stocks. Monetary policy switched from the fixed parity arrangements centred on gold through the medium of the dollar, to a propaganda effort aimed at removing gold from the monetary system altogether, replacing it with an unbacked dollar as the international reserve standard.
MD: “The Nixon Shock”. The French called them on their obvious bluff and lie. You don’t have money by edict. The most efficient and fair process allowed to be instituted will always prevail … and there can be any number of instances of it. Their operation is totally transparent. There is no concept of the “backing” of the money. The fact that “all” defaults are immediately recovered by interest collections of like amount is what guarantees perpetual zero inflation of the money … it’s what gives the money its integrity. There is no “standard” … international or otherwise (other than the obvious use of the HUL as an unvarying unit of measure). There are no “reserves” … international or otherwise.
The result was the purchasing power of the dollar and the other major currencies measured in gold has all but collapsed, as shown in the chart below.
MD: Duh … the only right value for inflation is zero. Real money from a “proper” MOE process guarantees it perpetually.
Between 1969 and today, the dollar’s purchasing power relative to gold declined by 97.3% (the blue line). By banning gold from having any monetary role, the US removed price stability from the dollar.
MD: Ramping up of government counterfeiting (and then lying about the obvious inflation that results) is what removes value from the dollar. Instability comes from the fits and starts of their counterfeiting. If they did it predictably, we would still have the 4% leak … but we could compensate for it with regular 4% price and wage increases. But with “real” money, none of those degrees of freedom even exist. It’s a much kinder and gentler environment for traders (like you and me).
More recently, since the great financial crisis the quantity of fiat money in the global currency system has expanded dramatically relative to the long-term average growth rate of money and bank credit. This is illustrated in our second chart, which records the growth in the total amount of fiat dollars in the US banking system.
MD: Note the presentation of the “fiat” qualifier for money. Knowing what “real” money is … i.e. a promise … you know that it is fiat. But they say it as a slur. Their alternative, gold, is obviously deflationary and strangles trade … but it’s not fiat. It’s not money at all. It represents a trade completed. How stupid they are!
MD: Draw that curve for “real” money and it’s a perfectly straight horizontal line … a HUL is always a HUL and always trades for the same size hole in the ground. This is the pot calling the kettle black.
The fiat money quantity is the sum of true money supply and commercial bank reserves held at the central bank (the Fed). It is the measure of all deposits, including those of the commercial banks. Monetary inflation has expanded dramatically since the great financial crisis, illustrated by its acceleration above the long-term trend. The consequences for the dollar’s purchasing power in time will be to accelerate the dollar’s decline even more.
MD: The money quantity is the sum of “all in-process trades”. And it is always exactly what it needs to be. Supply of real money is perpetually in balance with demand for real money. What could be simpler. What could be more appropriate? That’s what it is right now in spite of the improper MOE process the Fed runs. Government counterfeiting is also a trading promise … which is DOA (Default on Arrival … they never deliver … they just roll their trading promises over). That would be ok if it was met by equal interest collections. But it is not. Those interest collections (taxes) go straight to the money changers. Thus, “all” governments are sustained by inflation. So are all finance practitioners. With “real” money, Their cherished (1+i)^n formula (the time value of money) runs a constant 1.000 perpetually. They have no reason to exist.
The monetary expansion of the dollar has been echoed in the other major currencies, with negative consequences for global price inflation in the coming years. Meanwhile, gold’s inflation, at roughly 3,200 tonnes annually, is about 1.9% of above-ground stocks. The different rates of increase between above-ground gold stocks and the fiat money quantities of unbacked state-issued currencies is what ultimately drives the price of gold measured in those unbacked currencies. It is easy to see why a higher gold price, reaffirming gold’s role as sound money at a time of excessive fiat currency inflation, is viewed by the major monetary authorities as a potential threat to their currencies’ credibility.
MD: Notice they say “price” inflation. “Prices” have to do with the supply and demand of the object in question. Inflation has to do with supply/demand of the money itself … witch is properly and perpetually zero. They just don’t get it! And look at all this effort to keep track of gold … and calling it backing. Remember, there’s just one ounce per person on Earth (and I have well over my fair share). That’s just $2,000 per person. It’s lost in the noise of trading and saving levels. That’s the “backing” they’re in love with. You can’t make this stuff up!
There can be little doubt that without the propaganda war against gold led by the US monetary authorities, without the expansion of unbacked paper gold constituting artificial gold supply in the futures and forwards markets, and without the secret interventions of the US’s Exchange Stabilisation Fund, the gold price would be considerably higher, expressed in dollars.i
MD: With a “proper” MOE process competing with what we have now … and with “would-be-stand-ins” like gold, this article couldn’t exist. Gold would be priced in HULs and that would only change with the supply and demand for gold … the supply and demand for HULs being in guaranteed perpetual perfect balance. Thus the HULs required to buy gold would be related to miners, electronics manufacturers, dentists, and jewelers. GoldMoney.com would be out of business. So, who do you think needs to keep driving the propaganda? Follow the “fake” money. Imagine “real” money.
However, gold remains centre-stage as a global hedge against the decline in purchasing power of fiat currencies. Besides rescuing the financial system from collapse nine years ago, the expansion of bank credit is inherently cyclical.ii The credit-cycle for China’s yuan appears to be moving into a new expansionary phase, reflected in a rising trend for nominal GDP. This will be put into context later in this article, but it is noticeable that on the back of China’s GDP growth, Japan, the EU and the UK are also enjoying export-led revivals.
MD: Actually, my six months of canned food and my free and clear land and improvements are a far better hedge than gold. Look at the Weimar debacle. Gold played no role at all. They did a reset. Everyone got screwed to various degrees. And they started over. It took about 3 years to ramp up and explode … it was reset in about 6 months and started all over again. But look at all the hand waving … “… new expansionary phase …”
The US does not share these benefits, partly because China and Russia, the founders of the Shanghai Cooperation Organisation (SCO), are deliberately freezing America and her money out, and partly because of America’s own tendency towards trade isolationism.iii It is therefore less certain that America is close to moving from the recovery stage of the dollar’s credit cycle into expansion. In the absence of other factors, the difference in interest rate outlooks this implies should be reflected in a declining dollar exchange rate against the other major currencies, a trend that has been under way since last January.
MD: A proper MOE process cannot be frozen out by anybody or anything. It is as good as a money process can be. Competitors can only copy it. They can only compete through greater and greater efficiency and fairness. There is no such thing as an “interest rate”, let alone an “interest rate outlook”.
Despite the massive expansion of fiat money over the last nine years, it is possible for governments to stabilise the future purchasing power for their currencies. It will require their fiat currencies to be tied convincingly to the characteristics of gold. It depends on the government concerned accepting that gold is superior money to its own currency, owning sufficient physical gold reserves to convince the markets, and the gold price being at a level where the arrangement sticks. There is no doubt that China, Russia, as well as the other SCO member states and their populations regard gold as a superior money to fiat currencies, partly because their fiat currencies do not have well-established records of objective exchange value.
MD: Right. You’re counterfeiting hand over fist and inflating the money … and you’re going to harness that by “convincingly tying your counterfeiting to characteristics of gold”. Amazing! And “owning sufficient physical gold reserves”? Like more than your 1oz fair share? What’s with these idiots!
In the US, Japan, the UK and through much of Europe, the populations have experienced a longer, generally more stable objective exchange value for their currencies. Under pressure from their governments to use only state-issued currency, they have lost the habit of regarding gold as money. The monetary authorities of these countries, with a few exceptions, also do not regard gold as having any monetary role at all, beyond paying lip-service to a vague concept it has value as an asset which is no one else’s liability.
MD: Lost the “habit” of “regarding gold as money”. I don’t know about you but I have never regarded gold as money. It hasn’t been money in my 70+ year lifetime … anywhere. Nor in my father’s 80+ year lifetime. And I saw it proved not to be money (in concept) when in 1964. Then I traded a quarter … with 90% silver … for a gallon of gasoline. And then the next year in 1965 when they made quarters with 0% silver … I did the same thing … one 0% silver quarter traded for a gallon of gasoline. Now come on! What does that tell you about the role that precious metals obviously plays in the eyes of traders like you and me? Zero … right? Right! With a “proper” MOE process, there are no “monetary authorities” … in this country or anywhere else … ever.
Therefore, understanding the role of gold and the protection it can offer fiat currencies is split into two geographic camps: the governments of Asia which are actively accumulating, or would like to accumulate additional reserves of monetary gold, and the governments of North America and Western Europe which see the gold price as irrelevant from the monetary point of view.
MD: I understand the nature and role of “real” money. I understand it is created and destroyed only by traders. I understand that gold plays no role whatever. How about “you” get some understanding of the obvious!
Gold reserves and gold secrets
We shall now briefly comment on the positions of the main monetary authorities on the global gold stage, their current gold policies, and how they are likely to change. These are the US, China, and the member nations of the SCO.
MD: Tips his hand right away. With a “proper” MOE process, there are “no” monetary authorities … on the global gold stage or anywhere else. There are no “policies”. There is just the process that all trading promises creating real money are certified and transparent; that deliveries on those promises are perpetually and openly monitored; that defaults are detected and mitigated by interest collections of like amount … transparently; and that no money exists before a trading promise is certified, nor after the trading promise is delivered and the money destroyed, for any trading promise … period!
The US monetary authorities were behind the push to remove gold from the monetary system, when they terminated the Bretton Woods Agreement in 1971. They are somewhat schizophrenic on the issue, the US Treasury claiming it still owns 8,133 tonnes of gold, reflected in the Fed’s balance sheet at the last official price of $42.22 per ounce. Interestingly, when the previous Fed Chairman, Ben Bernanke, was questioned on the subject by Senator Ron Paul in 2011, it was clear he did not regard it as money, only a legacy asset. If this is true, the Fed should substitute the reference to gold in its balance sheet with an unsecured loan to the US Treasury, which if Ben Bernanke is right, has a greater monetary credential than gold. It would also end the embarrassing calls to audit the Fed.
MD: Knowing they have taken the wrong fork in the road, we’ll now just scan forward to see if they ever bring themselves back. Don’t hold your breath. If we see a glaring misconception … in the midst of this total misconception, I’ll call it to your attention.
The resistance to leaving go of gold rather proves that gold is still money. However, the monetary policies of the Fed since the great financial crisis are predicated in the belief that gold is not money. This dichotomy is also shared with the Bank of England, the Bank of Japan, and the European Central Bank.
They all say that the world has moved on from the days when gold was part of the monetary system, so they are ill-prepared to discard the Keynesian beliefs upon which their current monetary policy is based. Their advanced, welfare-state economies are simply too far down the road of the state theory of money to turn back. However, this exposes their currencies, and particularly the US dollar as the world’s reserve currency, to a substantial loss of purchasing power as the rapid monetary expansion of the last nine years works its way through to consumer prices. The election of President Trump promising to make America great again is turning out to be a failure. The removal only last week of Steve Bannon, his chief strategist, clears the way for the pre-Trump establishment to reassert itself. Gone is Bannon’s talk of a financial war against China and Russia, and doubtless, with a trio of the Generals Kelly, Mattis and McMaster now in control of the White House, it will be back to military options.
General Kelly, who was appointed to bring some order into the White House is doing this by removing dissenters from the mainstream. This was why Bannon had to go, and why President Trump himself will have to knuckle under and become as anodyne as President Obama. The mainstream is back and little has changed.
MD: Bannon had to be let go because Kelly knows gold is money? Wow!
Meanwhile, the US economy muddles along without clear signs of improving consumer demand. It seems increased trade tariffs against China remain on the agenda, in which case they will amount to a self-harming tax on American consumers. Furthermore, global economic growth and progress is being driven primarily by China, from which America is excluded. And as the interest rate differentials start to widen between a stagnating US economy and an expanding Asia that also benefits Japan, the EU and the UK, the dollar is likely to weaken considerably in the foreign exchanges, as well as in terms of the commodities a dollar will buy.
MD: Remember … tariffs are just a way for the governments instituted by the money changers to deliver tribute to those money changers. They steal it directly from the traders.
Some forecasters believe that the US economy is stalling and deflation beckons. This is a mistake. The conditions replicate an inflationary outlook, whereby prices start rising at an accelerating rate, driven by a falling purchasing power for the dollar. The dollar is likely to lose more purchasing power through the effects of the last nine years’ monetary expansion working through to consumer prices. Additionally, foreign nations and commodity suppliers doing business in Asia are likely to be sellers of dollars for other currencies as the world moves towards an Asia-centric global economy. For deflation to take hold, there must be a shortage of dollars, not the substantial excesses in existence today.
In partnership with Russia, China is ringmaster for all Asia. The Chinese economy is run with a beneficial mercantilist approach. The primary political objective is to plan an economic future for the benefit of its people. Instead of democratic responsibility, the leadership commands the economy strategically in the universal interest of its citizens, crushing all individual dissent.
MD: How is Chinese money created? Same bogus way the Fed does it, right? Through government counterfeiting, right? Institute a competitive “proper” MOE process and you put the Chinese manipulators on the ropes too … immediately
The Chinese state, having embraced important concepts of free markets, operates rather like the East India Company of old. Through a series of five-year plans, hundreds of millions of workers are being moved from less productive employment, redirected and retrained to more productive, higher technology and service occupations. The whole economy is in a planned transition. Low-skill jobs are being mechanised. Already, China is expanding into the rest of Asia, promising to move whole communities and countries out of relative poverty. The trans-shipment of goods across the Eurasian continent is expanding rapidly. The Chinese have also taken economic control over much of sub-Saharan Africa to secure the natural resources for the Grand Plan.iv
Most of this expansion is financed through bank credit, issued through the large state-owned banks. Unlike economic policy in the West’s welfare states, which is aimed at preserving legacy businesses, the positive redeployment of capital resources limits the build-up of malinvestments in China. Furthermore, the expansion of nominal GDP, which is the direct consequence of the expansion of bank credit, is accompanied by genuine economic progress, which is decreasingly the case in the West.v
MD: Financed through “bank credit”? That’s an open myth. Banks have no credit to give. They’re just the score keepers for the money changers. They are their retailers. Just store fronts. They are empty suits.
Consequently, China’s credit bubble is arguably less dangerous than those in the US, EU, UK, and even in Japan. However, credit bubble there is, and it is part of a global credit cycle that afflicts all fiat currencies. Undoubtedly, the Chinese authorities are aware of this danger, evidenced by their repeated actions to contain credit-fuelled speculation before it gets out of hand. [Crypto-currency enthusiasts, beware!]vi
So far, China has pursued a policy of managing the yuan’s exchange rate against the US dollar, and consequently records $3.08tr in foreign reserves, the vast bulk of it in dollars. At some point, China will need to abandon foreign exchange support of the dollar, because the dollar’s purchasing power measured in commodities is likely to continue its decline. This policy is making the raw materials China needs more expensive priced in yuan.
It is therefore becoming more sensible for China to dispose of her dollars and encourage the yuan to rise against it on the foreign exchanges. Admittedly, this will damage the profits of exporters to dollar-denominated markets, but should have the beneficial effect of redirecting capital and labour resources from these legacy businesses towards the new activities favoured by the five-year plan. Now that the process of refocusing the economy from manufacturing and exporting cheap goods towards a technology and service driven economy is well underway, China must be getting closer to ditching the dollar as the yuan’s reference currency. It is near the time for China to stop supporting the one currency she wants to do away with.
MD: With a “proper” MOE process, “all real” money, regardless of who certifies it exchanges at a constant rate with all other “real” money. And if they all adopt the HUL as the obvious unit of measure, that exchange rate between all moneys is 1.000. Supply and demand for goods themselves is what determines their price … everywhere … all the time. You change nothing by exchanging 1 dollar for 1 yuan for 1 HUL and back to one dollar.
All the indications from China’s gold policy are that the end-plan is to tie the yuan to gold. In 1983, China introduced regulations appointing the Peoples Bank with the role of acquiring gold on behalf of the state. Analysis of contemporary prices, Western central bank sales and leasing into a prolonged bear market, shows China could accumulate significant quantities of gold bullion. In the 1980s, China had capital inflows she wished to neutralise, followed by the trade surpluses that began to accumulate in the 1990s. Adding to her programme of acquisition of gold from abroad, China beefed up her gold mining capacity and her gold refining state monopoly. Today, she is the largest mine producer by far, and takes in gold doré from other countries to refine and keep.
MD: Tie the yuan to gold. That 1oz per person? Going to strap them down with that are you?
By 2002, she had accumulated enough bullion by then permit her own citizens to buy gold, and even advertised on television and other media to encourage them to do so. Deliveries into private ownership through the Shanghai Gold Exchange (controlled by the Peoples Bank) has totalled over 15,000 tonnes after 2002, though some of that will have been recycled as scrap. I have speculated that by 2002, the Chinese state could easily have accumulated over 20,000 tonnes before the Shanghai Gold Exchange was established, rather than the paltry figure of 1,843 tonnes in declared reserves today. Whatever the true figure, the Peoples Bank has purposefully been acquiring gold for thirty-four years, and by 2002 had built a strong and satisfactory position, clearing the way over the last fifteen years for her people to do the same.vii
MD: Permitted them to buy gold. Did any buy more than their 1oz share? That means some others couldn’t buy their 1oz share, right? Stupid is as stupid thinks.
China now has an iron grip on the physical gold market. The launch of the Hong Kong owned LME’s new gold contract is the latest move, building on China’s policy of using the Hong Kong and London connection for the development of her interests in international capital markets. The contract has been a success from day one. While the American banks push the price round on the Comex futures market, the real control over the market is now in Chinese hands.
MD: “Iron grip on gold market”. Well, dentists and jewelers and electronics manufactures … you know where you need to go to acquire your feed stock. And you traders creating money to effect trades over time and space … fear not … you’re not affected in the least. Just institute your “proper” MOE process and let those idiots do as they please … as long as they leave you alone.
China and her citizens are still accumulating gold. Basically, gold that goes into China does not come out. This contrasts with the US and the EU, where people are strongly discouraged from regarding gold as money or a store of value. For geopolitical purposes, it matters not who is right, but who has the power to be right. By ending the yuan’s exchange relationship with the dollar and transferring it to gold, global monetary hegemony would be transferred from America to China and her sphere of influence in one big step.
The Shanghai Cooperation Organisation
The SCO is driven by China in partnership with Russia. As well as a population of 3.3bn, it is the principal trade partner of Japan, the Koreas, and all the South-east Asian nations, adding a further 830 million people into the SCO’s sphere of influence. Dependents on the SCO for their exports of raw materials takes in nearly all sub-Saharan Africa, adding another billion. Europe, Australia and New Zealand are also drawn into the SCO’s circle of trade influence, a further 700 million. That totals over 5.8bn, leaving nations with a population total of about a billion either neutral or siding with America. Yet, it is the US dollar that settles the bulk of world trade.
There are strong indications that gold will be part of the settlement medium for the SCO’s future trade. Not only is China driving the SCO in partnership with Russia, which appears to be gold-friendly as well, but central bank demand for physical gold has mostly been from SCO member states and affiliates.
MD: Again … ground your thinking as you read all this nonsense. There is only 1oz per person on Earth … and everyone reading this has more than their 1oz fair share.
India, which lacks enough gold at the state level to support her membership, is using increasingly desperate measures to acquire gold from her own citizens. India’s economic renaissance, since the socialist Ghandi dynasty was ousted, has been on the back of Keynesian policies, so there is likely to be a strong intellectual resistance to gold in the monetary elite. Furthermore, senior appointees to the Reserve Bank have traditionally been on the advice of the Bank of England, which is anti-gold, and at the same time conscious that Indian gold demand on top of that of China is undermining control over the London bullion market. India’s gold policy as a member of the SCO is somewhat confused,
MD: “Membership” in what? The community of idiots? As Groucho Marks once said, “I wouldn’t be a member of any club that would have me as a member.”
The imbalances between gold ownership of the various SCO member states rule out a new super-currency, so it is likely to be the yuan that is predominantly used for Eurasian trade settlement, with other members pursuing a currency board approach for their own currencies.
MD: With a “proper” MOE process (i.e. real money) there are no imbalances … anywhere … any time. They really tip their hand when they make these idiotic statements.
Control over the oil market
The most significant post-war financial agreement achieved by America was with Saudi Arabia, whereby the Saudis agreed to only accept dollars in payment for oil in return for American protection. The agreement was adopted by all OPEC members, in return for the ability to fix oil prices as they pleased. This put the American banks firmly in control of the expansion of global credit, as well as the recycling of the currency surpluses arising from sales of oil to oil consuming nations, particularly benefiting the friends of America. That one decision, negotiated by Nixon and Kissinger, set up the dollar as the world’s reserve and trade currency after the end of the Bretton Woods agreement, and remains so to this day.
MD: A proper MOE process employs no agreement. It is just a transparent process traders (like you and me) use to effect our trades over time and space. If we don’t want to use it we don’t have to. The agreement is implicit in our use and the perpetual transparent view of its operation.
Today, Saudi Arabia is no longer the stable theocracy it was, and at current oil prices is running into financial difficulties. It plans to sell a five per cent stake in the national oil monopoly, Aramco, to raise $200bn to plug the gap in state finances. It can only do this by way of a public listing and offering if it can verify its stated oil reserves, which may prove difficult. If one was to guess an outcome for this dilemma, it would be that Saudi’s largest customer, China, could come to the rescue. And it would be expected that China would gain some influence over the disposition of Saudi’s oil sales.
MD: A proper MOE process (i.e. real money) cares nothing about religion … or superstitions of any kind.
It would be a typical Chinese strategy, repeating in the case of energy what China has already achieved in gaining control over the global economy. Other than America, whose consumption exceeds its supply by a significant margin, Russia is the largest global supplier (just), followed by Saudi Arabia. Between them they account for 22.4% of global supply. Other Asian suppliers in the SCO or allied to it gives a further 12%, making 34.4%. Coordinating these supplies gives China and her partners more production leverage on the global oil market than Saudi Arabia had in the 1970s.
MD: You do what I do when my consumption overwhelms my ability to supply? I increase supply or reduce consumption. Governments should try that.
Already, China is showing a preference to settling trade and energy deals in yuan, but to take this much further, it will need to offer gold convertibility to compete with the dollar. This appears to be being pursued in two steps, the first being oil suppliers given the opportunity to sell their oil for yuan, and to sell their yuan on the Shanghai futures exchange for gold, before the second step, a formal yuan convertibility, is eventually offered.
The yuan-gold contract already exists, the oil-yuan contract will shortly be introduced. The Shanghai International Energy Exchange is currently training potential users and carrying out systems tests prior to launch later this year. Obviously, these futures contracts in gold and oil may need to be initially supported by the state banks to enable them to build liquidity. But importantly, it will allow Iran, Russia and other Asian producers to avoid Western banking sanctions by selling oil for gold.viii
MD: With “real” money, the contract creating the money is strictly binding to the trader creating the money. He has what he traded for and his trading partner has the money he created … which he puts into circulation as he acquires things he needs. If the money creating trader defaults, those are mitigated immediately by interest collections … usually from other unreliable traders according to “their” propensity to default. Responsible traders “never” have an interest load.
Geopolitics could set the timing
MD: A proper MOE process cares nothing about politics … geo or otherwise. It, by its very nature, is immune to political intervention.
The course of economic and monetary events in Asia was predetermined by the Chinese some time ago. We saw evidence of this in the UK, when China decided its international financial markets would be operated between Hong Kong and London, cutting out New York entirely and the dollar as much as possible. The Hong Kong Exchange bought the London Metal Exchange in 2012, and a year later London’s role was cemented when the then Chancellor of the Exchequer, George Osborne, visited China. This was followed by Britain becoming the first developed nation to join the Chinese-led Asia Infrastructure Investment Bank, much to the annoyance of the US.
The Obama administration had no effective response to China’s strategy, and continued to attack China’s partner, Russia, through proxy wars in Ukraine and Syria. The bid to take control of resource-rich Afghanistan failed. The election of President Trump brought with it uncertainly in US foreign policy, prompting a visit by President Xi to President Trump last April. There was no doubt that Xi decided he needed to assess Trump personally. He is likely to have come away with the view that Trump was unpredictable, and so it has proved.
MD: Well, if we had a “Money Delusions Exposure” administration we would have a response to China’s strategy. We would institute a proper MOE process. Their strategy would then have to be doing the same as we did. If they don’t they’re not competitive. They wilt on the vine.
We can only guess as to whether Xi’s visit has caused the Chinese to accelerate their planned move away from the dollar to their ultimate trade settlement and monetary plans. The threat of an American invasion of North Korea will be watched closely by Beijing in this context. The prospect of American troops on the Chinese border only 500 miles from Beijing will be prevented at all costs, so retaliation by an attack on the dollar would be the most effective response.
The removal of Steve Bannon last week and the control of the White House passing to three generals are important developments. In his last interview while still officially appointed, Bannon correctly analysed the geopolitics between China and the US. His analysis was very much on the lines presented in this article. However, his assessment was that the US needed to fight a trade and financial war against China, and forget anything military. In his words, “unless someone solves the part of the equation that shows me that 10 million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you are talking about, there’s no military solution here, they got us.”ix
Bannon’s mistake is to assume America still wields its traditional financial power, when it is clear to informed outsiders that this is no longer true. However, the generals now in charge of the White House are more likely to stoke up proxy wars, either because that is where their skills lie, or more cynically perhaps they are influenced by the arms manufacturers who are looking for defence contracts. They have taken no time in ratcheting up the American presence in Afghanistan and clearly have a desire to gain influence in Pakistan, both of which are on China’s eastern flank, where she is building commercial and infrastructural ties.
MD: It is still the case. As long as they can make the objects they use for force, they can prevail. Oh … also, they have to keep their subjects stupid enough to want to carry those objects of force to their targets … return from the mission is not of import. Those directing the force never lower themselves to actually delivering that force personally.
So, geopolitics are back on familiar ground. Trump is now neutralised and will increasingly look like a cowed Obama. Perhaps more troops will be sent to Syria. Perhaps more advisors will be sent to Ukraine. Perhaps more missiles will be installed in Poland, or the Baltic states. North Korea will rumble on, in a stalemate protected by its nuclear weapons. But increasingly, China’s interests are now served by taking the next step to disentangling herself from the dollar, and that will mean selling down her dollar reserves to stockpile the copper and the other industrial materials she needs. It will also mean lending dollars to trade counterparties, such as Saudi Arabia, to be repaid in yuan.
MD: How do you conclude something that is proven to be absolute nonsense in its opening paragraph? It should have concluded right there.
China and Russia’s geopolitical strategy has been evolving long enough for observers to understand it and the implications for the West. We can assume the strategic thinkers and intelligence agencies of all the major players have a reasonable grasp of the implications, including America, which is determined not to lose in this Great Game. That was the point behind Steve Bannon’s candid interview with Politico.
Bannon was deluded about the extent of America’s economic and financial power. He is now out. We are back to geopolitics being decided by the military. Meanwhile, China’s interests have almost certainly moved firmly towards dumping the dollar. This can only be done successfully by linking the yuan to the characteristics of physical gold, the market which China has effectively cornered.
If gold crosses the $1300 Rubicon, it may be taken as an early sign that China’s long-term plan of monetising her gold is progressing towards the next stage. The oil-for-yuan futures contract is due to be launched very shortly, allowing countries like Iran to buy gold freely, paid for by oil sales.
MD: If gold crosses the $1,300 Rubicon, it’s still a ways below the Rubicon I acquired more than my fair share at. I acquired it when I was still drinking the gold-bugs coolade. I thought the train was leaving the station. Hopefully when we get back to my Rubicon, there will still be idiots out there to take it off my hands. If a “proper” MOE process gets instituted, I am toast.
Alternatively, if China defers securing the yuan to gold, the dollar still looks like weakening against other currencies, reflecting a US economy isolated from the positive Asian story. The pace of the rise in the gold price might be slower, but the direction seems equally certain.
Eventually, gold will need to rise to a level where the Chinese are prepared to set a conversion rate. Expect China to use its control over physical gold markets to achieve it at a time of its own choosing. Leaving the $1300 price behind could well be the start of the move towards this objective.
MD: Eventually, traders (like you and me) will take the bull by the horns and institute a “proper” MOE process. And they won’t let the money changers and governments instituted by them get anywhere near that process. And then we’ll all live happily ever after … unless we’re money changers, government workers, government suppliers, government contractors, or otherwise dependent on the government. There is absolutely nothing preventing us from doing it … that is other than “us” ourselves. Unfortunately, with 3/4ths of the fruits of our labor going to governments and those dependent on them, we’ll probably just have to wait for the collapse … iterative secession … and then institute a proper MOE process in our own space. Them them go pound sand.
MD: Ah … footnotes. As George W. Bush noted (one of his near non-existent wise observations), I have just read a “scholarly article”.
i The Exchange Stabilisation Fund was created under the Gold Reserve Act 1934 as a fund within the US Treasury. Its specific purpose is to manage the gold price. Congress has no right to any information concerning the Fund’s activities, so they remain a closely guarded secret out of the public eye.
ii For a description of the credit cycle and the current state of play see: https://www.goldmoney.com/research/goldmoney-insights/follow-the-money
iii The SCO now includes China, Russia, India, Pakistan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. Among other future members are Turkey, Iran and Afghanistan. The estimated population of this economic unit when all future members have joined is 3.3bn, nearly half the world’s population.
iv More background on China’s grand plan is available here: https://www.goldmoney.com/research/goldmoney-insights/time-for-a-new-gold-standard-for-asia
v It is crucial to understand the difference between GDP and genuine economic progress. It is a common misconception in Western financial markets that China’s credit bubble is more dangerous than those in Western welfare states. All credit bubbles are dangerous, more so if they do not finance economic progress.
vi The commodity rehypothecation scandal in 2014, the stock market collapse in 2015, and commodity speculation last year are examples of bubbles popped by state intervention.
vii For the background to my assessment of gold bullion owned by the Chinese government, see: https://www.goldmoney.com/research/goldmoney-insights/china-s-gold-strategy
viii At current rates of Iran’s oil exports to China and at current gold prices their annual value is approximately 300 tonnes of gold.
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