Friday, 18 September 2009

The 'China Hedge' and Western Zombies

Earlier this week the Chinese Government did something that Governments don't usually do. State television began promoting Gold and Silver as a good investment.

So why is the Chinese Government telling its people to buy Precious Metals? Of course I have previously mentioned the Chinese Government increasing their own holding of gold but now it is telling its citizens to follow the same strategy. To me it would seem their leaders must realise that the economy is in a bubble and whatever they try and do, China is heading for a hard landing. The trick with governing people is to try and provide the illusion of prosperity. Its what the West did during the housing bubble. Despite average workers incomes stagnating, people were content as their home was rising in value, giving them a false sense of wealth. People didn't mind that NHS waiting lists got worse, Governments role in the economy expanded along with deficits so long as their homes kept appreciating. When that disappeared, then people became restless. Recently with the 'green shoots' (read another dose of inflation from the government) people again believe how good it is that their houses will hopefully hold or increase in value and we can return to the old days of easy living. The problem comes when people realise the green shoots were in fact weeds, and that the asset prices will fall back - then we go back to unrest.

The Chinese Government aware of this dilemma, seem to be trying to hedge their citizens from the global depression. Their exports continue collapsing, millions of jobs are being lost, the Baltic shipping index is once more on the slide similar to 2008 before the financial carnage occurred. To cover their citizens against this and falling stocks and real estate they are encouraging people to buy precious metals. As recent as 7 years ago citizens were banned from owning such assets. This illustrates how radical the policy is. What does this mean for the price of such assets? I do not know. All I know is that the Chinese Government, again, seem to have studied their history and see where we in the West are now leading the whole world. China has grown phenomenally in the past 30 years, but its still America, Europe and Japan who have the most influential economies. It seems that we wish to create a new set of zombie institutions just like Japan did to try and maintain our illusion of past 'prosperity'.

Western Zombie Banks

"At the moment the investment slump is being compensated by public spending. As long as global growth is supported by public help, we cannot talk of sustainable growth"
Yves Mersch, ECB Council Member

Whenever I mention to people that what we are doing is creating Zombie Banks that will stagnate the economy for years just like Japan I am greeted with exactly the same comments before the housing bubble burst. "It's different this time", "We are not like Japan", "It won't happen here". Well it will happen and as the years go on it will become more evident to everyone.

We haven't learnt anything from the events last year. Bankers are getting their bonuses once more. Banks have merged creating even larger "too big to fail" institutions with the Government guaranteeing all of them. They will use Lehman from now on to scare people, to legitimise further government involvement. Politicians don't dare bring up any previous discussions regarding reforms as they all try to maintain this illusion of prosperity but it won't work. Earlier posts back before Lehman collapsed that I wrote had some hopeful comments, on what needed to be done - saving, the abandonment of wasteful consumption, independent thinking. However I thought we would try and prop up everything, repeating the same mistakes of history with everyone tricked into believing the governments 'solution'. We should have made sure there were more Lehman's. Its just finance. People would have rebuilt their lives. We would still would have all our tools, skills and infrastructure.

So how long will China pursue Gold?

As I have previously mentioned China are acquiring gold to try and build a reserve currency contender against the US Dollar. I have read many articles on how the USD is going to collapse or be replaced by the Euro or some other currency. But as I've said before where is the alternative? The Euro has too many soft nations such as Spain, Italy and Greece. If it was just the sounder economies such as Switzerland, Germany, France, Norway then maybe there would be a sounder alternative. The Chinese RMB is pegged and that's before we come onto the smaller size of the economy compared to the US. I can not see the government letting the RMB float freely while the current crisis is present, they will keep it under control not risking further dislocation that could ensue by allowing it trade in the markets. The Japanese economy has gone nowhere for two decades and despite what people may say that they are due a boom I can't see it happening. The Government has to walk the right path first and I'm yet to see it.

If China did wish to challenge the USD as an alternative world reserve currency then the only way I can see other nations taking up the offer would be to peg it to Gold. The Chinese could then say "sure you can have your paper dollars backed up by American Governments lies as they continue to devalue them, or you can use our currency, fully convertible into Gold". Whoever holds the reserve currency status has a huge advantage in that they can export their inflation to others just like the US has been doing for decades. China and Russia may discuss alternative world currencies but they would both secretly prefer their own nations currency as the reserve standard. In order for China to do this they still have to accumulate a lot of gold. The 1,000 tonnes they already have would not be enough. China still has a lot more to accumulate, just as the gold bull market still has a lot further to go.

1 comment:

  1. Before a world reserve currency, we need a common international language, like Esperanto :)

    Your readers may be interested in seeing Professor Piron was a former translator with the United Nations

    A glimpse of the global language,Esperanto, can be seen at