In order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates. Of course the number one foreign nation that we depend on to participate in our system is China. China accounts for more global trade than anyone else on the planet (including the United States), and most of that trade is conducted in U.S. dollars. This keeps demand for our dollars very high, and it ensures that we can import massive quantities of goods from overseas at very low cost. As a major exporting nation, China ends up with gigantic piles of our dollars. They lend many of those dollars back to us at ridiculously low interest rates. At this point, China owns more of our national debt than any other country does. But if China was to decide to quit playing our game and started moving away from U.S. dollars and U.S. debt, our economic prosperity could disappear very rapidly. Demand for the U.S. dollar would fall and prices would go up. And interest rates on our debt and everything else in our financial system would go up to crippling levels. So it is absolutely critical to our financial future that China continues to play our game.
Unfortunately, there are signs that China has now decided to start looking for a smooth exit from the game. In November, I wrote about how the central bank of China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves”. That means that the pile of U.S. dollars that China is sitting on is not going to get any higher.
In addition, China has signed a whole host of international currency agreements with other nations during the past couple of years which are going to result in less U.S. dollars being used in international trade. You can read about many of these agreements in this article.
This week, we learned that China started to dump U.S. debt during the month of December. Many have imagined that China would try to dump a flood of our debt on to the market all of a sudden once they decided to exit, but that simply does not make sense. Instead, it makes sense for China to dump a bit of debt at a time so that the market will not panic and so that they can get close to full value for the paper that they are holding.
As Bloomberg reported the other day, China dumped nearly 50 billion dollars of U.S. debt during the month of December…
China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.
The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday.
This is how I would do it if I was China. I would try to dump 30, 40 or 50 billion dollars a month. I would try to make a smooth exit and try to get as much for my U.S. debt paper as I could.
So if China is not going to stockpile U.S. dollars or U.S. debt any longer, what is it going to stockpile?
It is going to stockpile gold of course. In fact, China has been voraciously stockpiling gold for quite some time, and their hunger for gold appears to be growing.
According to Bloomberg, more than 80 percent of the gold that was exported from Switzerland last month went to Asia…
Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said today in an e-mailed report. It imported most from the U.K.
Hong Kong was the top destination at 44 percent on a value basis, with India at 14 percent, the Bern-based customs agency said in its first breakdown of the gold trade data since 1980. Singapore accounted for 8.6 percent of exports, the United Arab Emirates 7.9 percent and China 6.3 percent.
When China imports gold, most of it goes through Hong Kong. We know that imports of gold from Hong Kong into China are at an all-time record high, but we don’t know exactly how much gold China has accumulated at this point because they quit reporting that to the rest of the world a number of years ago.
When it comes to global finance, China is playing chess and the United States is playing checkers. China knows that gold is a universal currency that will hold value over the long-term. As the paper currencies of the world race toward collapse, China could end up holding most of the real money and that would be a huge game changer when they finally reveal that fact…
The announcement of China’s new gold hoard will send shockwaves through the financial markets, and make China and the Chinese yuan (their national currency) even bigger players at the international table.
International banking expert James Rickards compared it to a game of Texas Hold ‘Em poker:
“You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes [metric tons] of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player.”
There are some really good points made in the quote above, but I do take exception with a couple of things. First of all, I believe that China now has far more than 5,000 tons of gold. Secondly, I seriously doubt that the U.S. still actually has 8,000 tons of gold or that Europe still actually has 10,000 tons of gold.
As China (and eventually the rest of the world) moves away from a U.S.-based financial system, the consequences are going to be dramatic.
For instance, right now the average rate of interest that the U.S. government pays on debt is just 2.477 percent. That is ridiculously low and it is way below the real rate of inflation. It is simply not rational for anyone to lend the U.S. government money so cheaply, and at some point we are going to see a dramatic shift.
When that day arrives, interest rates are going to rise dramatically. And if the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.
Even more frightening is what a rapidly changing interest rate environment would mean for our banking system. There are four large U.S. banks that each have exposure to derivatives in excess of 40 trillion dollars. You can find the identity of those banks right here. Interest rate derivatives make up the biggest chunk of those derivatives contracts. As John Embry told King World News just the other day, when that bubble bursts the carnage is going to be unprecedented…
“Stockman brought up a brilliant point, the fact that we have hundreds of trillions of dollars of interest rate swaps, which are polluting the world’s banking system. If we see growing volatility in interest rates, and I think that’s inevitable with what’s going on, that would cause spasms in the financial system. And if something goes wrong in the derivatives market, Heaven help us because the leverage that is imparted to the banking system through these derivatives is unholy.”
Unfortunately, very few of the “experts” will ever see this crash coming.
Very few of them saw it coming in 2000.
Very few of them saw it coming in 2008.
And very few of them will see it coming this time.
I really like what Paul B. Farrell had to say about this…
Early warnings of a crash are dismissed over and over (“just a temporary correction”). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard. Financial historian Niall Ferguson put it this way: Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash.
Till then, life just goes along quietly, hypnotizing us, making us vulnerable, till a shocker like Lehman Brothers upsets the balance. Then, says Ferguson, the crash is “accelerating suddenly, like a sports car … like a thief in the night.” It hits. Shocks us wide awake.
Don’t let the upcoming crash take you by surprise.
The warning signs are very clear.
Get ready while you still can.
During 2013, America continued to steadily march down a self-destructive path toward oblivion. As a society, our debt levels are completely and totally out of control. Our financial system has been transformed into the largest casino on the entire planet and our big banks are behaving even more recklessly than they did just before the last financial crisis. We continue to see thousands of businesses and millions of jobs get shipped out of the United States, and the middle class is being absolutely eviscerated. Due to the lack of decent jobs, poverty is absolutely exploding. Government dependence is at an all-time high and crime is rising. Evidence of social and moral decay is seemingly everywhere, and our government appears to be going insane. If we are going to have any hope of solving these problems, the American people need to take a long, hard look in the mirror and finally admit how bad things have actually become. If we all just blindly have faith that “everything is going to be okay”, the consequences of decades of incredibly foolish decisions are going to absolutely blindside us and we will be absolutely devastated by the great crisis that is rapidly approaching. The United States is in a massive amount of trouble, and it is time that we all started facing the truth. The following are 83 numbers from 2013 that are almost too crazy to believe…
#1 Most people that hear this statistic do not believe that it is actually true, but right now an all-time record 102 million working age Americans do not have a job. That number has risen by about 27 million since the year 2000.
#2 Because of the lack of jobs, poverty is spreading like wildfire in the United States. According to the most recent numbers from the U.S. Census Bureau, an all-time record 49.2 percent of all Americans are receiving benefits from at least one government program each month.
#3 As society breaks down, the government feels a greater need than ever before to watch, monitor and track the population. For example, every single day the NSA intercepts and permanently stores close to 2 billion emails and phone calls in addition to a whole host of other data.
#4 The Bank for International Settlements says that total public and private debt levels around the globe are now 30 percent higher than they were back during the financial crisis of 2008.
#5 According to a recent World Bank report, private domestic debt in China has grown from 9 trillion dollars in 2008 to 23 trillion dollars today.
#6 In 1985, there were more than 18,000 banks in the United States. Today, there are only 6,891 left.
#7 The six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.
#8 The U.S. banking system has 14.4 trillion dollars in total assets. The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.
#9 JPMorgan Chase is roughly the size of the entire British economy.
#10 The five largest banks now account for 42 percent of all loans in the United States.
#11 Right now, four of the “too big to fail” banks each have total exposure to derivatives that is well in excess of 40 trillion dollars.
#12 The total exposure that Goldman Sachs has to derivatives contracts is more than 381 times greater than their total assets.
#13 According to the Bank for International Settlements, the global financial system has a total of 441 trillion dollars worth of exposure to interest rate derivatives.
#14 Through the end of November, approximately 365,000 Americans had signed up for Obamacare but approximately 4 million Americans had already lost their current health insurance policies because of Obamacare.
#15 It is being projected that up to 100 million more Americans could have their health insurance policies canceled by the time Obamacare is fully rolled out.
#16 At this point, 82.4 million Americans live in a home where at least one person is enrolled in the Medicaid program.
#17 It is has been estimated that Obamacare will add 21 million more Americans to the Medicaid rolls.
#18 It is being projected that health insurance premiums for healthy 30-year-old men will rise by an average of 260 percent under Obamacare.
#19 One couple down in Texas received a letter from their health insurance company that informed them that they were being hit with a 539 percent rate increase because of Obamacare.
#20 Back in 1999, 64.1 percent of all Americans were covered by employment-based health insurance. Today, only 54.9 percent of all Americans are covered by employment-based health insurance.
#21 The U.S. government has spent an astounding 3.7 trillion dollars on welfare programs over the past five years.
#22 Incredibly, 74 percent of all the wealth in the United States is owned by the wealthiest 10 percent of all Americans.
#23 According to Consumer Reports, the number of children in the United States taking antipsychotic drugs has nearly tripled over the past 15 years.
#24 The marriage rate in the United States has fallen to an all-time low. Right now it is sitting at a yearly rate of just 6.8 marriages per 1000 people.
#25 According to a shocking new study, the average American that turned 65 this year will receive $327,500 more in federal benefits than they paid in taxes over the course of their lifetimes.
#26 In just one week in December, a combined total of more than 2000 new cold temperature and snowfall records were set in the United States.
#27 According to the U.S. Census Bureau, median household income in the United States has fallen for five years in a row.
#28 The rate of homeownership in the United States has fallen for eight years in a row.
#29 Only 47 percent of all adults in America have a full-time job at this point.
#30 The unemployment rate in the eurozone recently hit a new all-time high of 12.2 percent.
#31 If you assume that the labor force participation rate in the U.S. is at the long-term average, the unemployment rate in the United States would actually be 11.5 percent instead of 7 percent.
#32 In November 2000, 64.3 percent of all working age Americans had a job. When Barack Obama first entered the White House, 60.6 percent of all working age Americans had a job. Today, only 58.6 percent of all working age Americans have a job.
#33 There are 1,148,000 fewer Americans working today than there was in November 2006. Meanwhile, our population has grown by more than 16 million people during that time frame.
#34 Only 19 percent of all Americans believe that the job market is better than it was a year ago.
#35 Just 14 percent of all Americans believe that the stock market will rise next year.
#36 According to CNBC, Pinterest is currently valued at more than 3 billion dollars even though it has never earned a profit.
#37 Twitter is a seven-year-old company that has never made a profit. It actually lost 64.6 million dollars last quarter. But according to the financial markets it is currently worth about 22 billion dollars.
#38 Right now, Facebook is trading at a valuation that is equivalent to approximately 100 years of earnings, and it is currently supposedly worth about 115 billion dollars.
#39 Total consumer credit has risen by a whopping 22 percent over the past three years.
#40 Student loans are up by an astounding 61 percent over the past three years.
#41 At this moment, there are 6 million Americans in the 16 to 24-year-old age group that are neither in school or working.
#42 The “inactivity rate” for men in their prime working years (25 to 54) has just hit a brand new all-time record high.
#43 It is hard to believe, but in America today one out of every ten jobs is now filled by a temp agency.
#44 Middle-wage jobs accounted for 60 percent of the jobs lost during the last recession, but they have accounted for only 22 percent of the jobs created since then.
#45 According to the Social Security Administration, 40 percent of all U.S. workers make less than $20,000 a year.
#46 Approximately one out of every four part-time workers in America is living below the poverty line.
#47 After accounting for inflation, 40 percent of all U.S. workers are making less than what a full-time minimum wage worker made back in 1968.
#48 When Barack Obama took office, the average duration of unemployment in this country was 19.8 weeks. Today, it is 37.2 weeks.
#49 Investors pulled an astounding 72 billion dollars out of bond mutual funds in 2013. It was the worst year for bond funds ever.
#50 Small business is rapidly dying in America. At this point, only about 7 percent of all non-farm workers in the United States are self-employed. That is an all-time record low.
#51 The six heirs of Wal-Mart founder Sam Walton have as much wealth as the bottom one-third of all Americans combined.
#52 Once January 1st hits, it will officially be illegal to manufacture or import traditional incandescent light bulbs in the United States. It is being projected that millions of Americans will attempt to stock up on the old light bulbs before they are totally gone from store shelves.
#53 The Japanese government has estimated that approximately 300 tons of highly radioactive water is being released into the Pacific Ocean from the destroyed Fukushima nuclear facility every single day.
#54 Back in 1967, the U.S. military had more than 31,000 strategic nuclear warheads. That number is already being cut down to 1,550, and now Barack Obama wants to reduce it to only about 1,000.
#55 As you read this, 60 percent of all children in Detroit are living in poverty and there are approximately 78,000 abandoned homes in the city.
#56 Wal-Mart recently opened up two new stores in Washington D.C., and more than 23,000 people applied for just 600 positions. That means that only about 2.6 percent of the applicants were ultimately hired. In comparison, Harvard offers admission to 6.1 percent of their applicants.
#57 At this point, almost half of all public school students in America come from low income homes.
#58 Tragically, there are 1.2 million students that attend public schools in the United States that are homeless. That number has risen by 72 percent since the start of the last recession.
#59 According to a Gallup poll that was recently released, 20.0 percent of all Americans did not have enough money to buy food that they or their families needed at some point over the past year. That is just under the all-time record of 20.4 percent that was set back in November 2008.
#60 The number of Americans on food stamps has grown from 17 million in the year 2000 to more than 47 million today.
#61 Right now, one out of every five households in the United States is on food stamps.
#62 The U.S. economy loses approximately 9,000 jobs for every 1 billion dollars of goods that are imported from overseas.
#63 Back in 1950, more than 80 percent of all men in the United States had jobs. Today, less than 65 percent of all men in the United States have jobs.
#64 According to one survey, approximately 75 percent of all American women do not have any interest in dating unemployed men.
#65 China exports 4 billion pounds of food to the United States every year.
#66 Overall, the United States has run a trade deficit of more than 8 trillion dollars with the rest of the world since 1975.
#67 The number of Americans on Social Security Disability now exceeds the entire population of Greece, and the number of Americans on food stamps now exceeds the entire population of Spain.
#68 It is being projected that the number of Americans on Social Security will rise from 57 million today to more than 100 million in 25 years.
#69 Back in 1970, the total amount of debt in the United States (government debt + business debt + consumer debt, etc.) was less than 2 trillion dollars. Today it is over 56 trillion dollars.
#70 Back on September 30th, 2012 our national debt was sitting at a total of 16.1 trillion dollars. Today, it is up to 17.2 trillion dollars.
#71 The U.S. government “rolled over” more than 7.5 trillion dollars of existing debt in fiscal 2013.
#72 If the U.S. national debt was reduced to a stack of one dollar bills it would circle the earth at the equator 45 times.
#73 When Barack Obama was first elected, the U.S. debt to GDP ratio was under 70 percent. Today, it is up to 101 percent.
#74 The U.S. national debt is on pace to more than double during the eight years of the Obama administration. In other words, under Barack Obama the U.S. government will accumulate more debt than it did under all of the other presidents in U.S. history combined.
#75 The federal government is borrowing (stealing) roughly 100 million dollars from our children and our grandchildren every single hour of every single day.
#76 At this point, the U.S. already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.
#77 Japan now has a debt to GDP ratio of more than 211 percent.
#78 As of December 5th, 83 volcanic eruptions had been recorded around the planet so far this year. That is a new all-time record high.
#79 53 percent of all Americans do not have a 3 day supply of nonperishable food and water in their homes.
#80 Violent crime in the United States was up 15 percent last year.
#81 According to a very surprising survey that was recently conducted, 68 percent of all Americans believe that the country is currently on the wrong track.
#82 Back in 1972, 46 percent of all Americans believed that “most people can be trusted”. Today, only 32 percent of all Americans believe that “most people can be trusted”.
#83 According to a recent Pew Research survey, only 19 percent of all Americans trust the government. Back in 1958, 73 percent of all Americans trusted the government.
So do you have any numbers from 2013 that you would add to this list? If so, please feel free to share them by posting a comment below…
Anyone that thinks that the U.S. economy can keep going along like this is absolutely crazy. We are in the terminal phase of an unprecedented debt spiral which has allowed us to live far, far beyond our means for the last several decades. Unfortunately, all debt spirals eventually end, and they usually do so in a very disorderly manner. The chart that you are about to see is one of my favorite economic charts. It compares the growth of U.S. GDP to the growth of total debt in the United States. Yes, U.S. GDP has certainly grown at a decent pace over the years, but our total debt has absolutely exploded. 40 years ago, the total amount of debt in our system (government debt + corporate debt + consumer debt, etc.) was about 2 trillion dollars. Today it has grown to more than 56 trillion dollars. Our debt has grown at a much, much faster rate than our economy has, and there is no way in the world that we will be able to continue to do that for long.
Posted below is the chart that I was talking about. The blue line is our total debt, and the red line is our GDP. As you can see, this chart kind of speaks for itself…
So how did we get here?
Well, of course the federal government has been the biggest offender. It would be a tremendous understatement to say that the politicians in Washington D.C. have been reckless. Since the year 2000, the size of the U.S. national debt has grown by more than 11 trillion dollars.
Posted below is a chart that demonstrates the dramatic growth of the national debt as a percentage of GDP. In particular, our debt has absolutely exploded as a percentage of GDP since the financial crisis of 2008…
Does that look sustainable to you?
Of course it isn’t.
Right now, the mainstream media is very excited that the federal budget deficit for this year might be less than a trillion dollars, but they are really missing the point. The debt of the U.S. government is still growing much, much faster than the economy is, and the United States already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain.
What we are doing to future generations is absolutely criminal. We are piling up mountains of debt that will haunt them for the rest of their lives just so that we can make the present a little bit more pleasant for ourselves.
As I noted in another article, during Obama’s first term the federal government accumulated more debt than it did under the first 42 U.S presidents combined. And now we are entering a time period when demographic forces are going to put a tremendous amount of pressure on the finances of the federal government.
The Baby Boomers have started to retire, and they are going to want to start collecting on all of the financial promises that we have made to them.
As I have written about previously, the number of Americans on Medicare is projected to grow from a little bit more than 50 million today to 73.2 million in 2025.
The number of Americans collecting Social Security benefits is projected to grow from about 56 million today to 91 million in 2035.
Where are we going to get the money to pay for all of that?
Boston University economist Laurence Kotlikoff has calculated that the U.S. government is facing unfunded liabilities of 222 trillion dollars in the years ahead.
There is no simply no way that the U.S. government is going to be able to meet those obligations without wildly printing up money.
And of course the federal government is not the only one with massive debt problems. We just saw the city of Detroit go bankrupt, and there are lots of other communities all over the nation that could soon follow.
Posted below is a chart that shows the growth of state and local government debt over the years. In particular, please take note that the total amount of state and local government debt has grown from about 1.2 trillion dollars in the year 2000 to about 3 trillion dollars today…
But the chart posted above does not even take into account the massive unfunded pension obligations that state and local governments are facing. According to the Detroit Free Press, state governments are facing unfunded pension obligations of nearly a trillion and a half dollars…
From Baltimore to Los Angeles, and many points in between, municipalities are increasingly confronted with how to pay for these massive promises. The Pew Center for the States, in Washington, estimated states’ public pension plans across the U.S. were underfunded by a whopping $1.4 trillion in 2010.
And many large cities are dealing with similar situations. Detroit was the first to go down, but could Chicago or Los Angeles eventually be forced to declare bankruptcy too?…
Chicago recently saw its credit rating downgraded because of a $19-billion unfunded pension liability that the ratings service Moody’s puts closer to $36 billion. And Los Angeles could be facing a liability of more than $30 billion, by some estimates.
According to a report that was released earlier this year, the largest U.S. cities are facing hundreds of billions of dollars in unfunded pension liabilities at this point…
Early this year, the Pew Center released a survey showing that 61 of the nation’s largest cities — limiting the survey to the largest city in each state and all other cities with more than 500,000 people — had a gap of more than $217 billion in unfunded pension and health care liabilities. While cities had long promised health care, life insurance and other benefits to retirees, “few … started saving to cover the long-term costs,” the report said.
So where will all of that money come from?
That is a good question, and nobody has an easy answer at this point.
Meanwhile, U.S. consumers have been racking up staggering amounts of debt over the past several decades. Just consider the following numbers…
-Total home mortgage debt in the United States is now about 5 times larger than it was just 20 years ago.
-Car loans just keep getting longer and longer, and approximately 70 percent of all car purchases in the United States now involve an auto loan.
-The total amount of student loan debt in America recently surpassed the one trillion dollar mark.
-One study discovered that approximately 41 percent of all working age Americans either have medical bill problems or are currently paying off medical debt, and according to a report published in The American Journal of Medicine medical bills are a major factor in more than 60 percent of the personal bankruptcies in the United States.
-Consumer debt in the United States has risen by a whopping 1700% since 1971, and 46% of all Americans carry a credit card balance from month to month.
Sadly, most people don’t realize how damaging credit card debt can be. If you just carry an “average balance” on your credit cards each month, and those credit cards have just an “average” interest rate, you could end up paying millions of dollars to the credit card companies by the end of your life…
Let’s say you are an average American household, and you carry an average balance of $15,956 in credit card debt.
Also, as an average American household, let’s assume you pay an average current rate of 12.83%.
Finally, let’s assume you carry this average balance for 40 years, between ages 25 and 65. How much did your credit card company make off of you and your extreme averageness?
Incredibly, a large percentage of the population does not seem to understand these things. An astounding 43 percent of all American families spend more than they earn each year.
Are you starting to understand why approximately half of all Americans die broke?
We are a nation that is completely and addicted to debt.
If you do not believe that it will ever catch up with us you are being delusional.
We have piled up the biggest mountain of debt in the history of the planet, and a day of reckoning is fast approaching.
What in the world is China up to? Why are the Chinese hoarding so much gold? Does China plan to back the yuan with gold and turn it into a global reserve currency? Could it be possible that China actually intends for the yuan to eventually replace the U.S. dollar as the primary reserve currency of the planet? Most people in the western world assume that China just wants a “seat at the table” and is content to let the United States run the show. But that isn’t the case at all. The truth is that China doesn’t just want to compete with the United States. Rather, China actually plans to replace the United States as the dominant economic power on the planet. In fact, China already accounts for more global trade than the United States does. So what would happen one day if China announced that it was backing the yuan with gold and that it would no longer be using the U.S. dollar in international trade? It would cause a financial shift so cataclysmic that it is hard to even imagine. Most of those that write about the “death of the U.S. dollar” usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned. China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States. Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative. But a gold-backed yuan would change all of that very rapidly.
And without a doubt, the Chinese government has already been very busy promoting the use of the yuan in international trade. In a recent note, John McCormick of RBS Group stated the following…
Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD 5-6 billion daily – double what they were a year ago.
A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.
For China, having a global reserve currency is not just about economics. It is also about power.
McCormick ended his recent note this way…
China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound.
But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.
Similar sentiments were echoed in a recent article in the Wall Street Journal…
Beijing is undertaking a long, gradual campaign to establish the yuan as a more market-oriented, international currency. China’s State Council, or cabinet, said in a statement this month that the country would draft a plan to allow the yuan to become fully convertible. Meanwhile, the People’s Bank of China is guiding the currency higher and set the median point of its permitted daily trading band last week at the strongest level ever.
We don’t hear much about these sorts of things in the western media, but the convertibility of the Chinese yuan is a very big deal. Up until recently, the yuan was only directly convertible into dollars and yen. But now that is rapidly changing. So far this year, the Chinese government has entered into currency convertibility agreements with Australia and New Zealand.
So instead of having to change yuan into U.S. dollars to trade with Australia and New Zealand, now China can cut U.S. dollars completely out of the process.
But right now there is nothing that really gives the Chinese yuan a significant competitive edge over the U.S. dollar. If Chinese authorities truly want the yuan to end up replacing the U.S. dollar as the primary reserve currency of the planet, they need to do something that will make the rest of the world want to use it.
And they could do that by backing the yuan with gold. In fact, there are persistent rumors that China has been busily preparing for that.
For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush, is claiming that China has plans to turn the yuan into “a hard, gold-backed currency” that will have a distinct competitive edge over the rapidly depreciating paper currencies that the rest of the globe is currently using…
The most interesting piece of the puzzle is that the Chinese have emerged as the biggest buyers of gold, mainly off-market. They want the yuan to emerge as a hard, gold-backed currency in a world where everyone else has chosen to inflate and devalue.
The recent bilateral currency deals with Australia, France, Russia and Singapore, and many others, reflect this desire to displace the USD as the world’s reserve currency.
It may be an interesting and long race between the Chinese reaching for convertibility and the Western central banks straining credibility.
Other analysts are also fully convinced that the goal of the Chinese is a gold-backed yuan. The following is what money manager Stephen Leeb told King World News recently…
Countries have been battling each other in order to cheapen their currencies. The problem with a cheaper currency is that commodities cost more. So China has decided to opt for a higher currency.
The move in the yuan overnight was one of the most significant upticks I have seen. Like I said, the yuan moved to an all-time high. The yuan has advanced roughly 5% against the US dollar in just nine months. China also imported over 200 tons of gold for the most recent month. That is an extraordinary number. At that rate that’s over 2,400 tons of gold per year on an annualized basis.
This simply speeds up the point at which China will be the largest gold holder in the world. China saw gold come down and they didn’t just buy on the dip, instead they bought as much as the market would give them. And, again, you see the yuan going up so that is making the price of gold even cheaper for the Chinese.
It’s only a matter of time before the Chinese back the yuan with gold. This will push the yuan front and center as a key element in terms of being part of the world’s reserve currency basket. China gets the message. They are doing whatever it takes to establish their dominance in the world, particularly in the commodity arena. Their currency is flying and they are importing as much gold as they possibly can.
And without a doubt, China has been hoarding massive amounts of gold. Everyone agrees on that. But what nobody knows is exactly how much gold China currently has stockpiled, because China is not telling anybody.
One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could potentially be far higher than that. When China does finally tell the rest of us how much gold they have, they will probably be just a move or two away from checkmate.
What we do know is that China is importing absolutely enormous amounts of gold right now even though China is also the number one gold producer on the planet.
According to Reuters, more than 223 tons of gold was imported into China from Hong Kong in March. That smashed the previous record of 114 tons in December.
Overall, Chinese imports of gold from Hong Kong tripled in 2012, and the final number for 2013 is going to absolutely smash what we saw in 2012.
Obviously something is happening.
China is massively hoarding gold at the same time that it is trying to substantially raise the international influence of the yuan.
It doesn’t take a genius to see where all of this is headed.
If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar. At that point you could forget about cheap gasoline or cheap Chinese imports. Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively. If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living. Today, most U.S. currency is actually used outside of the United States. If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.
So keep an eye on China, and look out for any news about the yuan.
It won’t happen next week or next month, but eventually we could see China back the yuan with gold.
When that happens, it is going to be a complete and utter financial disaster for the United States.
Reckless money printing by Federal Reserve Chairman Ben Bernanke has pumped up the Dow to a brand new all-time high. So what comes next? Will the Dow go even higher? Hopefully it will. In fact, it would be great if the Dow was able to hit 15,000 before it finally came crashing down. That would give all of us some more time to prepare for the nightmarish economic crisis that is rapidly approaching. As you will see below, the U.S. economy is in far, far worse shape than it was the last time the Dow reached a record high back in 2007. In addition, all of the long-term trends that are ripping our economy to shreds just continue to get even worse and our debt just continues to explode. Unfortunately, the Dow has become completely divorced from economic reality in recent years because of Fed manipulation. All of this funny money that the Federal Reserve has been cranking out has made the wealthy even wealthier, but this bubble will not last for too much longer. What goes up must come down. And remember, a bubble is always biggest right before it bursts.
Fortunately, it looks like an increasing number of people out there are starting to recognize that the primary reason why stocks have been going up is because of the Fed. Just check out this excerpt from a recent article by the USA Today editorial board…
The Federal Reserve’s purchases have driven interest rates to near zero. This has stimulated the economy but not without cost. Savers, particularly older ones trying to live on income from their investments, are starved for safe options. They’ve been forced into stocks, which is one reason the market has been acting as if it’s on steroids. Further, with borrowing costs low, Congress and the White House have less incentive to rein in the national debt. Rock-bottom interest rates have also distorted markets.
The best indication that the Fed’s bond-buying purchases are pushing stocks up artificially is that investors run for cover whenever there is a hint that the Fed might change course, as happened recently. On Monday, billionaire superinvestor Berkshire Hathaway CEO Warren Buffett told CNBC that markets are on a “hair trigger” waiting for signs of change from the Fed. The market is “hooked on the drug” of easy money, Dallas Fed President Richard Fisher told Reuters.
Fisher’s comparison of Fed policies to a drug is apt. Markets might not like the idea of the drug being withdrawn now, when the Fed holds a portfolio of $3 trillion. But the withdrawal symptoms will be a lot worse once the portfolio grows to $4 trillion, or more.
Those sentiments were echoed by Gordon Charlop, a trader at Rosenblatt Securities, during a recent appearance on CNBC…
“The Wizard of the Fed, Ben [Bernanke], has done a great job propping up the market, but the question is how does the wizard move the pin from the balloon without blowing the whole thing up?” said Charlop. “This is getting out of balance and he’s got to figure out a way to justify the levels that we’ve gotten to and draw back on some of the stimulus.”
Of course, in the end, the bursting of this bubble is going to be very messy.
The Fed has dramatically distorted the market in an attempt to make things look good, but now the financial markets are completely and totally addicted to easy money. Is there any chance that the Fed will be able to take away that easy money without causing disaster?
There are only a few ways that this current scenario can play out. The following is what Stanley Druckenmiller recently told CNBC…
“I don’t know when it’s going to end, but my guess is, it’s going to end very badly; and it’s going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated you get a misallocation of resources and this is going to end in one of two ways – with a malinvestment bust which we got in ’07-’08 (we didn’t get inflation). We got a malinvestment bust because of the bubble that was created in housing. Or it could end with just monetizing the debt and off we go in inflation. So that’s a very binary outcome – they’re both bad.”
What the Fed has done to the money supply in recent years has been absolutely unprecedented. Just check out how our money supply has skyrocketed since the last financial crisis…
So what happens when the amount of money in an economy rises rapidly?
Well, if I remember Econ 101 correctly, that would mean that prices should go up.
And that is exactly what has happened. And since most of the money that the Fed has created has gone into the financial system first, it should not be a surprise that we have seen a bubble in financial assets.
In a previous article that I wrote last September, I warned that QE3 would cause stocks to go up…
So what have the previous rounds of quantitative easing accomplished? Well, they have driven up the prices of financial assets. Those that own stocks have done very well the past couple of years. So who owns stocks? The wealthy do. In fact, 82 percent of all individually held stocks are owned by the wealthiest 5 percent of all Americans. Those that have invested in commodities have also done very nicely in recent years. We have seen gold, silver, oil and agricultural commodities all do very well. But that also means that average Americans are paying more for basic necessities such as food and gasoline. So the first two rounds of quantitative easing made the wealthy even wealthier while causing living standards to fall for all the rest of us. Is there any reason to believe that QE3 will be any different?
Of course not.
So will stocks continue to go up indefinitely?
As I have also written about previously, the money printing that the Fed is doing right now is not nearly enough to stop the mammoth derivatives crisis that is coming.
A derivatives crisis was one of the primary reasons for the financial crash of 2008, but most Americans still have no idea what derivatives are.
They can be very complex, but I think that it is easiest just to think of them as side bets.
When someone buys a derivative, they are not buying anything real. They are simply betting that something will or will not happen.
For example, if you bet $100 that the Chicago Cubs will win the World Series this year, would you be “investing” in anything real?
Of course not.
Well, it is the same with most derivatives.
Today, Wall Street has become the biggest casino in the entire world and trillions of dollars of very reckless bets have been made.
In fact, most Americans would be absolutely shocked to learn how exposed to derivatives some of our largest financial institutions are. The following is an excerpt from one of my previous articles entitled “The Coming Derivatives Panic That Will Destroy Global Financial Markets“…
It would be hard to overstate the recklessness of these banks. The numbers that you are about to see are absolutely jaw-dropping. According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives. Just check out how exposed they are…
Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)
Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)
Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)
Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)
Bank Of America
Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)
Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)
Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)
Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)
That means that the total exposure that Goldman Sachs has to derivatives contracts is more than 362 times greater than their total assets.
When the derivatives crash happens, there won’t be enough money in the entire world to fix it.
So enjoy this little stock market bubble while you can.
It will end soon enough.
And of course stocks should not be this high in the first place. The underlying economic fundamentals do not justify these kinds of stock prices whatsoever.
A recent CNN article noted that the last time the Dow hit a record high that unemployment in the U.S. was much lower…
Consider this. When the Dow hit its now old record high back in October 2007, the economy was still in good shape — although it was just a few months away from the beginning of the Great Recession.
The unemployment rate in October 2007 was 4.7%. In January of this year, the unemployment rate was 7.9%.
And that same article also pointed out that GDP growth and housing prices were also much stronger back in 2007…
Gross domestic product grew 3% in the third quarter of 2007. Revised figures from the government last week showed that GDP in the fourth quarter of 2012 rose a scant 0.1%. But I guess that’s good news considering the first estimate showed a 0.1% decline.
And despite all the hoopla about the steady recovery in the housing market over the past year, real estate is still in a bear market. The most recent level of the S&P Case-Shiller 20-City Home Price Index, one of the most widely watched gauges of the health of housing, is still 24% below where it was in October 2007.
We have never even come close to recovering from the last economic crisis. Most Americans seem to have forgotten how good things were back then, but a recent Zero Hedge article included some more points of comparison between October 2007 and today…
- Dow Jones Industrial Average: Then 14164.5; Now 14164.5
- Regular Gas Price: Then $2.75; Now $3.73
- GDP Growth: Then +2.5%; Now +1.6%
- Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
- Americans On Food Stamps: Then 26.9 million; Now 47.69 million
- Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
- US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
- US Deficit (LTM): Then $97 billion; Now $975.6 billion
- Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
- US Household Debt: Then $13.5 trillion; Now 12.87 trillion
- Labor Force Particpation Rate: Then 65.8%; Now 63.6%
- Consumer Confidence: Then 99.5; Now 69.6
And of course anyone that reads my site regularly knows that the U.S. economy has been in a state of persistent decline over the past several years.
Just consider the following data points…
-The percentage of the civilian labor force in the United States that is actually employed has been steadily declining every single year since 2006.
-In 2007, the unemployment rate for the 20 to 29 age bracket was about 6.5 percent. Today, the unemployment rate for that same age group is about 13 percent.
-According to one study, 60 percent of the jobs lost during the last recession were mid-wage jobs, but 58 percent of the jobs created since then have been low wage jobs.
-Median household income in America has fallen for four consecutive years. Overall, it has declined by more than $4000 during that time span.
-At this point, an astounding 53 percent of all American workers make less than $30,000 a year.
That is the other side of the Fed’s insidious money printing. Incomes in the United States are going down, but the cost of living is skyrocketing. This is squeezing millions of Americans out of the middle class…
When Debbie Bruister buys a gallon of milk at her local Kroger supermarket, she pays $3.69, up 70 cents from what she paid last year.
Getting to the store costs more, too. Gas in Corinth, Miss., her hometown, costs $3.51 a gallon now, compared to less than three bucks in 2012. That really hurts, considering her husband’s 112-mile daily round-trip commute to his job as a pharmacist.
Perhaps you can identify with this. Perhaps your paychecks are about the same as they used to be back in 2007 but the cost of living has gone up dramatically since then.
I wish I could tell you that things were going to get better, but unfortunately there are all kinds of indications that things are about to get even worse for the U.S. economy. If you doubt this, just read this article and this article.
Yes, the Dow is at an all-time high. But do you want to know what else has hit an all-time high up in New York?
The following is from a recent report in the New York Times…
An average of more than 50,000 people slept each night in New York City’s homeless shelters for the first time in January, a record that underscores an unsettling national trend: a rising number of families without permanent housing.
And apparently families and children have been hit particularly hard over the past year…
More than 21,000 children—an unprecedented 1% of the city’s youth—slept each night in a city shelter in January, an increase of 22% in the past year, the report said, while homeless families now spend more than a year in a shelter, on average, for the first time since 1987. In January, an average of 11,984 homeless families slept in shelters each night, a rise of 18% from a year earlier.
Of course New York is far from alone. There has been a surge in homelessness all over the United States. In fact, at this point more than a million public school students in the United States are homeless. This is the first time that has ever happened in U.S. history.
But the Dow just hit a record high so we should all be wildly happy, right?
Hopefully we can get more Americans to understand that the “prosperity” that we are enjoying right now is just an illusion. It isn’t real. It is a bubble created by reckless money printing by the Fed and reckless borrowing by the U.S. government. If you can believe it, the U.S. government borrowed another 253 billion dollars during the month of February alone.
The Fed and the U.S. government will continue to engage in this kind of reckless behavior until the bubble eventually bursts.
So what should all the rest of us do?
We should be feverishly preparing for the hard times that are coming. As Daisy Luther recently wrote about, one of the most important things to do is to create an emergency fund. Instead of going out and blowing your money on the latest toys and gadgets, set some money aside so that you will have something to live on if the economy crashes and you suddenly lose your income.
Just remember what happened back in 2008. Millions of Americans suddenly lost their jobs, and because many of them had no financial reserves, a lot of Americans suddenly could not pay their mortgages and they lost their homes.
So put some money away in a place where it will be safe – and that does not mean the stock market.
Jim Cramer of CNBC and a lot of the other talking heads on the financial news channels are trying to encourage ordinary Americans to jump into “the bull market” right now and make some money, and many people will take their advice.
But the truth is that a bubble is always biggest right before it bursts.
This bubble is awfully big right now, and I don’t know how much larger it can possibly get.