Not as crazy as it sounds, actually. Asia is crazy about gold. This is looked upon not as innovation but as tradition.
New Eastern Outlook
Russia Gets Very Serious on De-dollarizing
F. William Engdahl
New Eastern Outlook
Russia Gets Very Serious on De-dollarizing
F. William Engdahl
17 comments:
but it is crazy isn't it? If you peg your currency to gold, you give up all the advantages of a free floating currency, plus since nobody else is on a gold standard, they can influence the price of gold and indirectly affect your fiscal and monetary policy option.
Where is the advantage in that?
I don't think that the plan at present is to revert to a gold standard, although that would be immensely popular with Asians.
Rather, the plan seems to be to hold central bank reserves in gold rather than USD. Russia and China also have the advantage of having the largest gold deposits in the ground, so they don't have to buy gold on the market. The way it works in Russia is the banks buy gold output from the producers and sell it to the Central Bank of Russia. This injects RUB into the Russian economy (miners and suppliers get paid) and provides liquidity to the banking system (cb issues RUB in payment).
Even though gold reserves make zero operational difference in the present monetary system, the fx market perception is of a sounder currency, which strengthens the RUB in spite of RUB issuance in the process.
Tom,
I don't know what to make of it, but Jim Rickards, part crackpot and part insider, claims the real reason that China and Russia are hoarding gold is that it is an insurance policy as they divest themselves away from US treasuries, which they see, pace Michael Hudson, as financing the US military bass that now ring them. If they can somehow pressure the US treasury market and initiate a decline, which will somehow hinder US military spending, then gold will skyrocket (the insurance policy).
On first sight it sounds like a semi-plausible geopolitical argument, but on reflection it doesn't quite gel. Are China and Russia in actual fact divesting themselves of US treasuries? Would it make any difference even if they did divest themselves of treasury securities? After all, it's not as if there isn't a huge demand for the most liquid risk free asset! And lastly, to quote Paul Krugman's nice observation, a world in which the safe free asset is no longer safe is not a world to look forward to, it is "a mad max world".
I wonder how useful Michael Hudson's analysis is. Is it as simple as he claims? That China and Russia are financing the military bases that now surround them, and that they can put an end to US military spending by refusing to buy treasuries? It doesn't sound very MMT!
Jim Rickards is an idiot. And Michael Hudson has taken on an air of self-importance that is totally ridiculous, which I think has also started to cloud his views.
I asked Hudson to be on my podcast and after ignoring my emails for months, he finally responded with a, "I don't have time for that."
What a busy, (self) important man.
Mike,
Jim Rickards may or may not be a so-called insider, but he most certainly is, as you say, "an idiot". Insiders can be idiots too.
In one interview he claims that the US has dumped Saudi Arabia and has made a strategic alliance with Iran! Other than proclaiming the US has dumped Nato and made a strategic alliance with North Korea, I've never heard anything so demonstrably absurd.
My favourite Rickards nonsense, however, is his explanation that come the next financial crisis, with all the central banks ammo having been used to prop up the system post-2008, it's the central banks who'll need to be bailed out! And who'll do that? The IMF will bail out the world's central banks by issuing SDRs! Because the central banks will have "run out of money"! WTF? WTF? WTF?
And people pay him money to hear this advice? What masochism!
As much as I like Michael Hudson, I can't make head or tail of some of his arguments. But to his eternal credit, he's the only person to have ever fired Alan Greenspan!
Tom and Mike,
Are currency markets really so backward in their thinking that they believe huge reserves of gold makes a currency more sound? What century are they living in? The 17th? Ok, let's be charitable, early 20th, more than a hundred years ago?
Yes, they do believe such things and much worse. Gold is after all an asset on the cb's balance sheet. Most of these people think that central banks can go broke, just like governments, and that it's the bond and currency vigilantes that restrain them by sunning their product if they act "irresponsibly." That's why it's not too hard to take money away from those idiots. It's the stupid money.
I wonder how useful Michael Hudson's analysis is. Is it as simple as he claims? That China and Russia are financing the military bases that now surround them, and that they can put an end to US military spending by refusing to buy treasuries? It doesn't sound very MMT!
Virtually all countries are under the US thumb financially and economically to some degree that the US can use as political leverage and has shown that it is willing to do so. These countries have concluded that they need to break this financial and economic power of the US them, or else roll over and become US vassals, basically, colonies sending tribute to the imperial center.
This means shedding connection with the USD and breaking free of economic dependence on the US and its vassals that can be counted on to the master's bidding. This is one of the chief dynamics in the global economy right now and it is just getting going. The emerging world is figuring out that it has to choose between joining those trying to create alternatives to the empire or else join it as vassal states. Some have already made the choice others are sitting on the fence. The most important of the latter is India, but I don't believe that India will choose to become a US vassal. They will play both sides until they are in the position of having to make a clear choice.
If there are unruly capital outflows, the idea is that reserves can be drawn upon rather than having to sell the domestic fiat to worthlessness which can lead to political instability. Gold is better than USD because it is politically neutral and can't easily be used to extort counterparties. It doesn't mean they are pegging the value of their currency to gold. It simply means they can buy foreign currency with gold rather than their own currency or USD or Euro, or RMB which is a good idea. In places like China or Russia which have used alot of foreign denominated debt and deposits, their banking systems are leveraged on hot money deposits and those capital flows can quickly become so large as to overwhelm fx markets and make the domestic currency difficult to use because of the unpredictability of the value. China was fine and immune until they opened their capital markets, now they are increasingly vulnerable. China's state administrator of foreign exchange has indicated that the country no long runs external surpluses and has significant capital outflows that exceed their current account inflows. They want to prevent a weakening of the Yuan because it could result in a tidal wave of outflows that would be hard to control. It is why they are creating a deposit insurance scheme, why they are creating debt markets, improving the use and convertibility of the yuan, promoting trade and international use of their currency generally. The US and most analysts based in the US imagine everything that happens in the world is related to the US or US policy and evaluates every thing in terms of "threats" which is completely obtuse for something like a currency market which is not a weapon. Except in the imagination of delusional economists. In US terms, the US is generally running smaller current account deficits which means foreigners are being forced to save less USD. So whether China or Russia are buying gold to escape dollars or because there is less supply, who knows, two sides of the same coin. When the US began to use more renewable energy and produce more domestic energy, the world was forced to find alternative ways to save besides USD because their hoarding was causing the value of the USD to rise too much. So now they are selling a bit and helping to keep a lid on the dollar value.
Tom: "That's why it's not too hard to take money away from those idiots. It's the stupid money."
Are you being serious? Just my luck to be poor at a time when people (especially rich, stupid bastards) are throwing away their money. I'll have a word with my rich friend who led me to MNE!
Tom: "These countries have concluded that they need to break this financial and economic power of the US them, or else roll over and become US vassals, basically, colonies sending tribute to the imperial center."
There may be no other way around it, but wouldn't breaking this imperial grip lead to an implosion of the US economy and by extension the rest of the world economy?
Maybe I'm misreading Mosler, but he seems to argue that the dollar is nothing but a "numeraire" and that it doesn't really mean anything whether it's a reserve currency or not. Admittedly I am not an economist, but this argument does not seem right. It seems that the role of the dollar is absolutely central to US power and influence, and as you say, Tom, you can see how central it is by simply observing US geopolitical behaviour.
The US looks as if its losing control and is absolutely desperate to bring Russia and China to heel. The irony is that the more it pressurises Russia and China, the more likely the US will bring about the very thing it is intending to stop. And then it really will be a "mad Max world". Well, given a choice between a financial "mad Max world" and financing the US empire in its surrounding of China and Russia, I'm not surprised by the choice Moscow and Beijing have made.
>Tom: "That's why it's not too hard to take money away from those idiots. It's the stupid money."
Are you being serious? Just my luck to be poor at a time when people (especially rich, stupid bastards) are throwing away their money. I'll have a word with my rich friend who led me to MNE!.
While I was writing that, I was thinking to add that "Bond King" Bill Gross and just about everyone at Zero Hedge lost their shorts (pun intended) shorting the US Treasury market in anticipation of hyperinflation because QE (hugely expanding monetary base). I thought to be kind and not include it, but now that you bring it up. Same with the "widow-maker" trades shorting JGB. Then there as President Obama was crowing about the collapse of the Russian economy as the RUB was stablizing.
Tom: "These countries have concluded that they need to break this financial and economic power of the US them, or else roll over and become US vassals, basically, colonies sending tribute to the imperial center."
There may be no other way around it, but wouldn't breaking this imperial grip lead to an implosion of the US economy and by extension the rest of the world economy?
Well of course it is not possible to know the outcome of counterfactuals like this, but presumably it would not happen overnight and the global economy would adjust. It's more an intermediate to long-range goal rather than at immediate one. This is the significance of a many of the institutions that BRICS are building and inviting others to join. However, there is an immediate objective to circumvent the US dominated payments system, which could collapse an economy in short order if a country were to be summarily excluded. That's already in the works.
I don't see this as necessarily affecting the US or the US-UK-EZ adversely. In fact, a more balanced global economy would benefit everyone. It would just reduce US geopolitical power and therefore unipolarism. I think it would also benefit the good side of liberalism and offset the bad side, which is now to the fore.
Mike imo your interview with Hudson would have went just like your interview with Paul Craig Roberts....
Rsp
I was so looking forward to Mike interviewing Paul Craig Roberts.
PCR has this hilarious habit of laughing to himself about truly awful things: "Economic collapse...hahaha...environmental destruction...hahaha...world war three...hahaha...nuclear extinction...hahaha... there's gonna be nothing left...hahaha...I'm happy I won't be around when it all ends...hahaha..."
Tom, let's hope it works out that way, otherwise Paul Craig Roberts will get to laugh himself to death while the planet goes up in smoke...hahaha...
The US is pursing a mindless policy of global hegemony and empire based on the belief that if the US doesn't create a Pax Americana under liberalism (really neoliberalism) then liberalism will succumb to some illiberal system "under a country like China making the rules" instead of the US. So the US has to have the power to write all the rules of the game.
This is a recipe for either disaster are a result of military adventurism, or the US losing its objective of imposing liberalism through political and economic overreach.
History has a liberal bias. US soft power coming out of WWII was sufficient to drive liberalism as the Zeitgeist since the 18th century.
Now the US is just getting in the way by trying to stuff its version of liberalism down the throats of other nations and cultures illiberally. But the US leadership doesn't see this contradiction likely because there is so much money on the table in this game and the leadership doesn't want to leave any behind.
Matt:
You're probably right.
John:
Tom answered it. They are that backward in their thinking.
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