By now, you will of course know that China has ended their eleven-year old policy of fixing the "value" of their currency, the Yuan, to the US Dollar. Well, that's not quite accurate. What the Chinese have done is widen the "band" in which the Yuan can fluctuate from 0.0% to 0.3%. They have also widened the "currency basket" against which the Yuan can now fluctuate from one containing US Dollars only to one containing US Dollars and a number of other as yet undisclosed currencies. What they have NOT done is to "sever the Yuan's link to the US Dollar". They have merely demoted the US Dollar to being one (almost certainly the predominant one) of a number of currencies against which the Yuan will be semi-fixed.
In essence, what China has now started to do is what the "developed nations" started to do officially in 1973 at the dawn of the "floating currency" era. It is what Australia did - all at once - in 1983 when it ended its policy of fixing its currency against the US Dollar.
Here is the announcement from the Peoples Bank of China as reported in the People's Daily Online - English edition.
The "socialist market economic system"?! This is the latest in the now long-running sequence of "non sequiturs" which have now engulfed modern economics, finance and not least markets. The fact that it is a non sequitur - literally "it does not follow" - raises hardly a ripple nowadays. After all, such terms as "deficit spending" and "negative growth" have been part of the economic lexicon for decades.
A "socialist economic system" and a "market economic system" are opposites. Economically, a "socialist market economic system" is a farcical statement. But it is no more or less farcical than the many other antithetical terms strung together which purport to describe the workings of modern "economies".
But the most farcical aspect of all in the modern global economy is the simple fact that the nation which provides the world with its "reserve" currency is the world's most externally indebted nation. The nation is the US, the currency is the US Dollar, and the external debt is still increasing exponentially.
Up until early 2004, it was the Japanese which were the main supporters of the US Dollar by recycling their export earnings back into Treasury debt paper. Japan went even further than that. Throughout 2003 and into early 2004, they printed VAST quantitites of Yen and used them directly to buy up Dollars, thereby striving to keep the Yen/US Dollar exchange rate on an even keel. By mid-March 2004, Japan could do this no more.
From then until now, the main purchaser of Treasury paper has been China. Now, faced with a slowing economy and a GLOBAL current account surplus which is rapidly dwindling, the Chinese government has decided to drop their currencies fixed peg to the US Dollar. This will, over time, mean a lot of things. But one thing it will certainly mean is that Chinese demand for Treasury debt paper will lessen. So will the demand from the many other Asian nations which have immediately followed the Chinese lead in pegging their currencies to a "currency basket".
With US government "deficit spending" showing no signs of doing anything but continuing to accelerate, the UPWARD pressure on US interest rates will greatly increase. Given current US debt levels (as outlined in the current issue of The Privateer - #531), the outcome for the US economy is potentially devastating.
Of course, the world has known this for quite some time now. That is why most of the analysis in the immediate aftermath of the Chinese announcement has portrayed it as a "win" for American political "diplomacy" (read "pressure"). Perhaps the most farcical item of all in the "discussion" revolving around the Chinese currency's peg to the US Dollar has been the claim that it has undermined the ability of the US to "compete" in the global trade arena.
The US does not "compete" in the global trade arena, and has not done so for more than a decade now. What it buys are the real goods of the rest of the world. What it "sells" are US Dollars. What is expected of the rest of the world is that they send these Dollars back to the US by using them to buy Treasury debt paper. Up until now, that is what has happened. But the Japanese started to curtail this "recycling" early last year. Now, the Chinese have signalled the first step on the road doing likewise. So has the rest of Asia, which has instantly followed China's lead.
For years, it has been clear and obvious that the modern global fiat monetary system was unsustainable. Since the beginning of 2002, the US Dollar has dropped from 120 to 80 as measured by the $US index. So far this year, the Dollar has got about one-quarter of that loss back, trading as it has been at or about the 90 level on the $US index. The great currency reckoning has been postponed and sidestepped by every means available, political, diplomatic, and yes, even military.
But now, the signal has been given. Over time, the US is going to lose the LAST of the "captive" buyers for its currency, and therefore for the debt paper which its government continues to emit in an ever increasing flood. There is certainly no nation on earth ready, willing, or able to step into the breach which China has just opened.
What that means for Gold is equally obvious. As the crumbling of the global currency system worsens, and is SEEN to worsen, the need to find a way to protect wealth will increase. For the preservation of capital in times of crisis, there has never been an equal to Gold. Perhaps that is why, about a month ago, the Chinese government made it legal for Chinese citizens to buy, not just paper claims to Gold, but actual physical Gold itself.