Saturday, September 19, 2009

China's Position on Precious Metals

The general perspective by most western governments is that precious metals now serve no role as money and are not needed to back any currency. Government fiat currencies, floating against each other in an international market, are supposed to have given the western world a prosperity no other generation has experienced. The ability a central bank has to manipulate the currency supply "as needed" has been hailed as a miracle worker for ensuring there is enough new money (credit) in the economy to allow sufficient growth. Apparently economies did not grow when gold was money (sarcasm).

What is the perspective of the Chinese on this topic? Well, they have their own fiat currency, the yuan, so at least some within the Chinese government like having a central bank and do not see much use for precious metals as currency. Though, this appears to be changing. There have been many recent events in regard to Chinese policy that would indicate that they do understand precious metals serve a major role in a sound economy.

The government of the fastest growing economy in the world has been reported to have done the following:

1. China has recently constructed a new precious metals storage facility in Hong Kong.

2. China has recently requested that Britain return to Hong Kong all of China's gold bullion that is stored in the L.B.M.A in London.

3. China has recently told its citizens to invest in precious metals; they have opened up bullion shops in its cities so that citizens can easily purchase bullion.

4. China has been buying large amounts of gold bullion over the last 12 months. It has more than doubled its gold reserves to over 1054 tons.

5. It is now Chinese Government policy to buy gold bullion when it becomes available in the marketplace.

6. China is limiting the exportation of all precious metals.

Recently, as I have previously quoted, Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, had some interesting things to say in regard to the current economic situation. Taken from this article, Mr. Cheng has made the following quotes which seem to agree with most observations made by Ron Paul, Peter Schiff, and other Austrian economists:
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies"
Mr. Cheng has identified asset bubbles in his own country; he identifies this with being linked to interest rates being kept too low to keep the yuan in line with the US dollar:
"Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down."

Mr Cheng said the Fed's loose monetary policy was stoking an unstable asset boom in China. "If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.
In regard to the West's obsession with the CPI as a measure of inflation:
This is where Greenspan went wrong from 2000 to 2004. He thought everything was alright because inflation was low, but assets absorbed the liquidity.
And finally, finishing it off hitting the nail on the head and then a quote from Benjamin Franklin:
The US spends tomorrow's money today. We Chinese spend today's money tomorrow. That's why we have this financial crisis. He who goes borrowing, goes sorrowing.
The size of China's economy is still a fraction of America's, but I wonder, given the differing actions and the obvious trends of the West and China, what will the world look like 10, 20, or 30 years from now? Currently the Chinese middle class earns a fraction of the purchasing power the middle class of the West earns every year. But what will happen if our governments continue to destroy our currencies as they keep interest rates near 0% and continue to inflate asset bubbles doomed to pop? Wealth will continue to be destroyed and the purchasing power of the middle class will shrink as inflation starts bare its ugly head. Meanwhile, the middle class in China is steadily increasing its purchasing power and are being encouraged by its leaders to invest in precious metals to protect their wealth.

The Chinese government is encouraging its middle class to purchase silver, our leaders tell us to go to the mall and shop; doesn't that say it all?

Can anyone name one empire that rose on the back of fiat currency and fell with a switch to a currency backed by precious metals? Nope.

Can anyone name one empire that rose on the back of a precious metal currency and then fell after a switch to fiat currency? All of them.

The problem we face today, the looming crisis which will impoverish us all, is not peak oil, global warming, or terrorists. Its the destruction of our currency.


Christopher said...

I'm pretty sure banks were creating money out of thin air even when gold was still the standard medium of exchange. This is what you don't get, and why you are a gold bug.

Josh said...

No. Banks didn't create money out of thin air. They created notes that were redeemable for gold and silver. The money was still the gold and silver.

Christopher said...

No, sorry, you are wrong. They kept a certain amount of gold in their vaults, a reserve, to pay for normal demand for gold-as-currency. Based on that reserve number, they made money out of thin air by giving loans out to people, EXACTLY like the federal reserve.

Josh said...

What time period and location are you referring to?

Christopher said...

The time period when the banks started loaning money without a corresponding, equal amount of reserve.

Josh said...

They didn't loan money, they provided claims to money they didn't have, meaning, they committed fraud and would often fail because of it.

Christopher said...

Yes, and that is the nature of the banking system.

Josh said...

Yep, its fraudulent.

That's why there shouldn't be a Federal Reserve, it enables this fraudulent behavior and counterfeits to do so.

Christopher said...

"Yep, its fraudulent.

That's why there shouldn't be a Federal Reserve, it enables this fraudulent behavior and counterfeits to do so."

That's why the bankers created the FED, because they are naturally fraudulent. Of course, how the bank would ever make money without some sort of loans scheme, I do not know.

Josh said...

First of all, worrying about how banks make money should not be a reason to legalize fraud.

Second of all, they would do what they were meant to do. As an individual I would go to a bank to store my wealth and pay them a fee to do so, with the understanding that my wealth is there to get it when I want it; not just a fraction of it.

If they wanted to offer services where they provide you an option to invest your money in ways that provide you a return with the understanding that the money will not all be available, then that would be up to the consumer to agree to; but you wouldn't need a "lender of last resort" for this, unless you want to legalize fraud.