Miles Report No. 50 - Golden Yuan

Golden Yuan

Both the National Post and the Globe and Mail today (Monday, October 20, 2014) had articles concerning business in Canada hoping for the establishment of a renminbi (yuan) exchange in Canada. This would most likely occur in Toronto, where Bay Street rules, or in Vancouver, where proximity and Asian ethnic populations are important, or both.

In the Globe (“Canadian renminbi hub would boost exports: report,” Report on Business, B3) the argument for the exchange(s) is that it “could boost Canadian exports to China by as much as $32 billion and save importers $2.8 billion in transactions.” You will find out shortly why I italicized ‘transactions’. Currently Canadian businesses/governments have to go elsewhere to “where there are renminbi hubs, such as London or Singapore.” The next line is the really important line:

They must often first convert from Canadian dollars into U.S. dollars, and finally into renminbi.

That is where the ‘transactions’ are important, as the U.S. dollar, being the world’s reserve currency, dominates the vast majority of all transactions in the world, earning money each time it is exchanged. Being the reserve currency it has other important functions as well, but I will leave that aside for now.

The article continues with some caveats and then a summary of the growing usage of the renminbi, having quadrupled its usage globally in one (1) year! Amazing statistic, but it still only stands at 8.7 percent - although if you quadruple that again in a short time, it is over 1/3 of global transactions with the loss coming at the expense of the U.S. dollar.

If it did get that far the more than likely circumstances are so bad it would destroy the U.S. dollar….

Golden Dollar

Our dollar superficially seems quite sound as it is backed by - well nothing, really, except for Canada’s arguable reputation as having sound banks. We have a ‘petro-dollar’ dependent on two factors: the price of oil, and the worth of the U.S. dollar.

Currently on international gold exchanges (physical gold, not ETFs or ‘paper’ gold) gold is flowing in great amounts towards India (traditional buyers of gold) and China (a relatively new buyer) and other nations and their central banks, mostly in the developing world. No problem?

Except that Canada has no gold - a paltry 3.4 tons compared to its original supply of just over one thousand tons. Consider the following three items, not necessarily cause and effect, but very strongly correlated:

(1) Brian Mulroney, free trade champion, governs from 1984 - 1993,

(2) Largest sell off of Canada’s gold reserves, 1983 - 1994,

(3) NAFTA ratified in 1994.

So what? Well, what the combination of having no gold and being tied into the NAFTA treaty has done is effectively tied the Canadian dollar’s value to that of the US$ - not that it is the same, but the US$ is its main base of support.

Well so what again, the US$ and economy are doing well!

Except that perhaps they are not. The U.S. fully discarded the gold standard in 1971 (Nixon era) and without ties to gold, the U.S. began the long ascent of printing money to support its increasingly financialized debt-ridden consumer society. The US$ is based on - well nothing, again. Except for its role as the reserve currency for the world, which means that most if not all things are priced in US$, and that means that most if not all ‘transactions’ are conducted in US$ (a relic of the post WW II Bretton Woods agreement).

This gives them profits on all transactions, as well as a great deal of control over the many cross currents of activity in the global economy - in a sense they are controlling and manipulating it as they see best for their own hegemony over others.

The problem is….

The problem is that the U.S. has minimal gold reserves for the size of its debt and for the size of its money printing. The U.S. Fed (the private bank that ‘prints’ or creates US$) has made many trillions of US$ since the 2008 economic crash. That money has been used to support the stock market but not to increase productivity and value of production. In simple terms, the more money that is printed, the less value each dollar carries. Which is fine until someone realizes that they really are only valued because people believe they have value….

...and the Chinese do not. They are amassing large gold reserves, while those of the west are rapidly depleting. They are arranging foreign exchanges with various countries, and especially important for today’s geopolitical tensions, with Russia (and they do not back sanctions on Russia, along with many other developing world countries).

The Chinese could destroy the dollar immediately if they wanted, by selling off their huge trillions of dollars of US$ reserves, or by selling off their US treasury bonds (those things that lend money to the U.S. and help keep it going as a consumer indebted country).

So why haven’t they?

Gold is cheap, and they want it to remain there so they can buy as much as they can. The more China has, the more they have the ability to survive the next economic crash. The U.S. wants cheap gold because it gives the illusion that the trillions and trillions of US$s are strong, which is why the gold commodities market (the ETF paper market) is so highly rigged - essentially unregulated - forcing the price of gold down.

Tipping point

However, China does not want the U.S. to be global boss anymore, and eventually there will come a tipping point where the US$ will die: either because China (allied with Russia) becomes overtly economically aggressive and destroys the dollar; or more likely, the inherent weaknesses of the US$ become apparent to investors causing the stock market to crash, or the derivatives market - the shadow banking system - to crash, or the Euro will fold, or…..

Tie all this together….

Canada sold off its gold reserves, the US$, while depicted as strong is fundamentally weak and without support, the Canadian dollar is tied to the US$ with about 75 per cent of our economy tied to the U.S.economy - and finally, China is buying massive amounts of gold and wishing an end to US$ hegemony (along with Russia, and many other countries).

So when - not if, but when - the US$ realizes its true potential of worthlessness through some perhaps anticipated event or unanticipated ‘black swan’ event - so will the Canadian dollar then be worthless!

Unless…

Unless the Canadian government and Canadian business people arrange now to have some convertibility of the Canadian dollar to the renminbi. That is the real reason for wanting to establish the exchanges in Toronto and Vancouver, and then hope that the Chinese will be nice to us and keep using our dollar instead of destroying it along with the US$ (start buying renminbi, folks).

That is why these two articles appeared today, although on alternate web programs these ideas have been discussed since just after the last crash in 2008. It’s just that the mainstream hoped that all the Federal Reserve printing would cure the ills of the economy instead of what it actually has done by making it spectacularly worse for the fundamentals, even if the superficial gloss of statistics are still manipulated to look good (as they are).

Don’t believe me? Check out: Jim Rickards “Currency Wars” (Penguin, 2012); James Sinclair at jsminest.com; Alasdair MacCleod at financeandeconomics.org; Greg Hunter at usawatchdog.com; Peter Schiff (who called the 2008 collapse) at youtube.com/user/PeterSchiffChannel; Jim Willie at godlenjackass.com; Paul Craig Roberts (former assistant Secretary of the treasury under Reagan) at paulcraigroberts.org; among many you could search yourself.