U.S. Calls China a “Currency Manipulator”

Don’t you just love it when politicians put their foots in their mouths and say things, stupid things? Especially words spoken (or in this case written) that have huge repercussions for their countries? On the other hand, some people believe such snafus might even be planned and staged, for a more sinister purpose. In the following case, I’ll leave the decision up to you.

In a written response to questions from senators debating his confirmation, Mr Geithner accused China of “manipulating” its currency and promised that the Obama team would push “aggressively” for Beijing to change its policies. The sharp tone and use of the legally-loaded term “currency manipulation” ricocheted through financial markets as investors shuddered at the prospect of a Sino-American spat in the midst of a global slump.

Tim Geithner

Clearly this was not a slip of the tongue. It might, conceivably, even have been a bureaucratic snafu. The tough language came in a 102-page document answering numerous questions from senators — an odd place from which to lob a bombshell at Beijing. If so, it speaks poorly of a man who is already in trouble for failing to pay attention to his taxes. Most likely, therefore, Mr Geithner’s language suggests a change in Washington’s tactics towards China.

American policymakers have long pushed Beijing to accelerate the appreciation of the yuan, arguing that China’s exchange-rate policy played a big role in creating the global imbalances and that—both for the sake of China’s economy and the rest of the world—the currency needs to strengthen. However, Hank Paulson’s Treasury studiously avoided accusing Beijing of “currency manipulation”, a term that carries legal implications.

Every six months, the U.S. Treasury must publish a list of countries which it deems to be currency manipulators. Once a country appears on that list, formal negotiations to end the manipulation must begin. The Treasury under George Bush, particularly in recent years, preferred a softer behind-the-scenes approach and refused to brand China a manipulator. Although Mr Geithner did not commit himself to any specific action, the use of the m-word suggests Team Obama will take a tougher line.

Exactly what it means is uncertain. It is not even clear who will manage America’s economic strategy with China (there is some speculation, for instance, that Hillary Clinton wants the State Department to take the lead). But there is no doubt that Barack Obama’s economic team includes a number of people who are frustrated with the world’s failure to convince Beijing to strengthen the yuan. Mr Obama himself supported legislation in the Senate to get tougher on China. More important, his advisers see tough words now as a prophylactic—a warning that Beijing must not be tempted to prop up its staggering economy by weakening the yuan.

Domestic politics also plays a big role. China’s bilateral trade surplus with America has long been a lightning rod in Congress, and with unemployment up the protectionist pressure is sure to rise. The $800 billion stimulus package making its way through Congress already has dubious “Buy American” measures that demand government spending should be on American goods. By sounding tough up front, the logic goes, the Obama team will be better able to diffuse the more extreme protectionist sentiment.

Unfortunately, this strategy is dangerous on a number of counts. The basic economic analysis—that a stronger yuan, on a trade-weighted basis, is necessary to rebalance China’s economy away from exports—is surely right. But the world’s immediate problem is a dramatic shortfall in demand across the globe and that will not be righted by exchange-rate shifts. Currency movements switch demand between countries; they do not create it. In the short-term, therefore, the outlook for the world economy depends on whether governments’ stimulus packages are successful and, right now, team Obama would do better to focus on the scale, nature and speed of Beijing’s stimulus measures than rant about the currency. What’s more, the evidence for currency manipulation is weakening. Although China still runs a huge current-account surplus, it is no longer accumulating foreign-exchange reserves at a rapid clip, as capital is flowing out of the country.

Like all politicians, he qualified his statement with various good wishes toward the Chinese, but the damage was quickly done. Markets began to wonder if China would retaliate by scaling back its massive purchases of U.S. government debt, contributing to a 70-basis-point sell-off in 10-year U.S. Treasury bonds between Jan. 26 and Feb. 4.

More important, the political calculus could easily misfire. Domestically, Mr Geithner’s comments may simply fan congressional flames for tougher action on China. Lindsey Graham, a senator who first pushed for a 27.5% tariff against China in 2005, called the comments “music to my ears”. And Sino-American economic tensions are already rising as Chinese officials hotly dispute the idea that their savings surplus had anything to do with the current global mess. (An official at China’s central bank recently called the idea “ridiculous” and an example of “gangster logic”). Traditionally, Chinese officials do not respond well to public admonition and, given the scale of China’s economic woes, they are likely to be pricklier now.

The stakes are extremely high. Everyone knows that protectionism and beggar-thy-neighbour policies exacerbated the Depression. With the global economy in its most dangerous circumstances since the 1930s, rising Sino-American tensions is the last thing anyone needs.

There’s even more bad news. Geithner’s utterance caused interest rates to jump, costing prospective American homeowners (and many that were seeking to refinance existing mortgages) around 10% more in interest charges. Making home loans more expensive is not a great way to get the housing market moving — nor is it a great way to instill confidence in debt markets. The sell-off quelled a major rally in Treasuries as investors who had been flocking to the safe haven of government paper amid the global recession questioned whether Treasuries had become too expensive. In the last four months of 2008, yields (which decline as prices rise) dropped from 4% to a low of 2.25%.

But the rally isn’t over. The fear that China will stop buying U.S. debt is unfounded. Beijing can’t buy anything else with its excess dollars. There are simply no alternative investments that are large enough or liquid enough. But more importantly, there are fundamental reasons why Treasury prices will move much higher (and yields lower) — and why the current opportunity to go long U.S. Treasuries should be grasped with both hands.

There are two aspects of the ongoing recession that may come as a surprise to some observers as events unfold. The first will be the failure of central banks to re-ignite credit growth in the ailing banking system. The second will be the failure of governments’ debt expansions to increase the cost of funding. In other words, the long end of the yield curve will continue to be depressed, just as it has been in Japan for the past 16 years. In the early 1990s observers in Japan argued that 10-year Japan government-bond yields of 3.5% could not persist for long. That was when the government debt-to-GDP ratio was around 50%. It now stands at 150% and 10-year yields are 1.36% (having gone as low as 60 basis points in the interim).

In our view, yields on U.S. 10-year Treasury notes will fall to between 1.5% and 2% by the end of 2009. This is because the banks are broken and their customers are keen to spend less. The monetary base, the money element that the Fed can control, is a fraction of credit outstanding in the U.S. system ($2 trillion versus $47 trillion). No matter how fast base money is pumped up, the reduction in credit outstanding will overwhelm it. During this phase we should expect credit contraction and its attendant deflationary effects on asset prices and consumer goods and services.

Yields are also bound to go lower because demand for U.S. government debt will easily match supply, even though Washington must sell hundreds of billions of dollars in bonds in coming months to fund stimulus measures and bank rescues. Consider the uncanny parallel between the composition of assets on bank balance sheets in 1929 and balance sheets at the start of this crisis. The ratio of loans to investments, which include Treasuries and other securities, was 2.6:1 in 1929 and 2.8:1 in 2008. During the early period of the Great Depression, banks restructured their balance sheets to reflect a much more conservative lending stance. They reduced loans — in absolute and relative terms — and increased investments in safe assets, mostly Treasuries.

Of course, there are major differences between today’s banking and monetary systems and those of the 1930s, but the one constant is human behavior. Personal balance sheets, corporate balance sheets and bank balance sheets will inexorably move into safer instruments given the wealth destruction that has occurred in riskier assets over the past year (and which will continue for the foreseeable future). If the banking sector alone were to move toward its more conservative 1935 ratios, then the increased demand for government paper from that source alone would be $700 billion.

It’s likely that shifts in household and corporate investment patterns will produce even greater demand — which is why U.S. 10-year notes remain attractive, not for their paltry yield but for their capital-gain potential. The next bull market will be concentrated in government paper — even as confidence in government itself erodes.

Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.

For a trusted and reliable source of U.S. Gold and Silver Eagle Coins that is the only sure way to protect your family’s finances from inflation and recession, we put our stamp of approval on the Silver Snowball Program promoted by Ed Freeman and Dr. Tom O’Brien. International shipping is also available to all investors for a flat rate of $6. Silver Snowball – The World’s Most Affordable Gold and Silver Program.

More About The Common Fallacies of Gold

We already covered 15 of the most common fallacies and myths behind holding and investing in gold held by the general public. Surprising, there are even more myths ingrained in the minds of people. However, holding a few of them shouldn’t stop you from purchasing and investing in gold, silver or other precious metals. Odds are, you already know the value of gold and silver, or at least, your parents or grandparents do.

More often then not the question is where to purchase gold, what types to purchase and how to store it safely and securely. I’ll return to that topic in another article.

Meanwhile let’s continue with some other common myths about gold and other precious metals.

Here are some more common myths about gold and owning gold:

16.  There is not enough gold in the world to use as money.

Wrong.  Twice as much refined gold exists in the world today as there was 30 years ago.

There is “not enough gold” only for those people who have none.  If that describes you, you should buy gold immediately!

If you are a liberal socialist, or communist, remember to avoid buying “more than your fair share,” which is 7/10ths of an ounce, or seven tenth-ounce gold coins.  At $320/oz., that’s $224 worth.  (130,000 tonnes, or 4.18 Billion ounces of gold in the world, divided by 6 Billion people, is .69 oz. each.)

Of course, that price reflects today’s low valuations.  If gold were to be valued the same as dollars (100 times more), then there would be $22,400 worth of gold (the same 7/10ths of an ounce) available per person on earth.

17.  There is too much gold in the world today to use as money.

Wrong.  With $8 Trillion dollars in M3 in the U.S., and $1 Trillion worth of Gold in the world (valued at today’s prices), there is certainly much less “gold value” in the entire world than there are dollars in the U.S.  Gold will jump up in price quite nicely for those who hold it.

18.  The supply of gold is not flexible enough to use as money.

Wrong.  There is always enough of gold to use it as money.  When there is little gold, the gold has more value, which, in turn, causes a mining boom, which brings out more gold.  When there is a lot of gold, it has less value, and mining slows down.  Gold is inherently both flexible enough, and stable enough, to use as the perfect money.

19.  Nobody accepts gold and silver.

Wrong.  As recently as 1964, 90% silver coins were in use in the United States, and for over a hundred years previous to that.  The U.S. Constitution says gold and silver are the only forms of lawful money.  Worldwide, gold and silver are probably more widely traded and recognized than the U.S. paper dollar.

20.  Gold is a bad investment because you can’t spend it, I mean, the supermarket will not take it.

That’s bad reasoning.  You can’t spend a bond, or a share of stock, or the title to a piece of land at the supermarket either, but those are all accepted as investments.  In fact, if you negotiate directly with any store manager or owner, you’d have a greater chance of getting them to accept precious metals as payment than any other investment vehicle.  Gold is the most liquid investment available; it is the very definition of “liquidity”.

Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.

For a trusted and reliable source of U.S. Gold and Silver Eagle Coins that is the only sure way to protect your family’s finances from inflation and recession, we put our stamp of approval on the Silver Snowball Program promoted by Ed Freeman and Dr. Tom O’Brien. International shipping is also available to all investors for a flat rate of $6. Silver Snowball – The World’s Most Affordable Gold and Silver Program.

More Common Fallacies of Gold

I’ve previously covered 10 of the most common fallacies and myths behind holding and investing in gold held by the general public. If you’ve been following this series of articles you would be way ahead of most people in realising the need to build up your financial reserves in inflation-proof commodities like gold and silver.

Well let’s continue with today’s discussion, here’s 5 more common myths about gold and other precious metals.

Here are some more common myths about gold and owning gold:

11.  Gold does not pay an interest rate.

Wrong.  From 1971 until 1980, gold increased from $35/oz. to $850/oz.  That was an increase of about 24 times, 2400%, or an annual increase of 34%.  Even a bond paying 34% would not be as good, because a bond paying that high of a rate would most likely default, and remember, gold can not default.  The best investor in the world, Warren Buffet, has only been able to increase his portfolio at an annual increase of about 20% over the years.  Gold, as an investment, for a certain time period, has vastly outperformed the best money managers in the world, and gold will do so again for everyone who owns it now.

12.  The world can never go back to gold and silver.

Wrong.  For over 6000 years, gold and silver have been money.  They continue to be money today (metals are loaned out at an interest rate, and are still used and held by banks and nations and wise investors), and will be the most popular money on earth again, (if it isn’t right now).

Under a gold standard, society prospers and human productivity increases, which causes the gold you own to be able to buy more and more over time.  Under a gold standard, entrepreneurs are better able to plan for the future, and invest wisely, and thus, create a better life for everyone.

13.  The banks are selling gold.

Yes and no.  Officially, they have sold a mere 10% of their reserves in the last 10 years, from about 34,000 to 30,000 tonnes.  And many banks have bought gold.  Besides, annual supply is 2500 tonnes, and demand is 4000 tonnes.  There is not an oversupply, but an under supply of gold in the world.

Actually, the banks are selling gold, but they are doing it secretively, through loaning it out, but still claiming it as a holding and asset on their books.  The best estimates are that about half or less of the approximately 30,000 tonnes of central bank “official” gold remain in their vaults.

And why are they selling gold secretively?  The people who create and control the dollar (Alan Greenspan and the Federal Reserve) must attempt to force the price of gold and silver down to keep the dollar strong.  If people see gold and silver going up, they will be more likely to spend dollars for gold.  And if people flee the dollar, and buy gold and silver, the con game of paper money comes to an end.  But their con game will end, as they all do.

But the real point is that central bank sales or loans are not, and can never be, an infinite supply; but rather, a limited supply.  When that supply stops, as it must and eventually will, (and there’s no way to tell exactly when this will happen) it will create a huge and immediate “supply and demand” system shock and imbalance.  That shock will cause prices to skyrocket much faster than when the price of gold went from $35/oz to $850/oz when the United States finally stopped selling gold (redeeming gold for dollars and went off the gold standard) in 1971.

14.  The Federal Reserve, the United States government, and the powerful banks are all lined up to keep gold low, and they are too powerful to fight by investing in actual gold myself.

Wrong.  The default on the dollar in 1971 proved the vulnerability and fallacy of the attempt of the bankers to keep the price of gold fixed low.  It proved the fallacy of thinking one can use the printing press to create wealth.  Nobody can fight market forces forever, and market forces are the strongest economic force and reality.

I believe the powers that are systematically suppressing gold know exactly what they are doing.  They are using public companies to do the dirty work of short selling gold and taking on the gold derivative contract obligations.  This way, when the bullion banks such as J.P. Morgan and Goldman Sachs fail, the primary ones hurt will be the owners of those stocks.  In other words, the ones hurt will be the little guy who thought he could own “a piece of the house” in the rigged game played with dollars.

You are not alone if you buy gold.  You would ally yourself with the stronger and larger side of the market that is buying the 4000 tonnes per year, as opposed to the 2500-tonne annual mine-supply.

15.  We can determine when central bank sales will end.  If there is a 1000 tonne supply/demand deficit, and the central banks of the world have 15,000 tonnes left, then gold will not rise for the next 15 years.

No, it’s not that simple.  

First, the supply/demand deficit is not a static number; it is rapidly rising, which will cut the time substantially.

Second, not all the banks will sell gold until they have nothing left.  Back in 1971, the U.S. stopped selling when a third of the reserve still remained, so that will also shorten the time.

Third, many of the central banks of the world have no interest in helping the U.S. dollar stay alive for a few more months, when it is certain to crash.  They will want to hold onto gold, or accumulate more gold, to keep their own currencies strong, or to have a reserve in case of currency collapse.

Fourth, and most important, there is a tremendous supply of paper wealth that could pour into the gold market and absorb all supply at any moment.  The 15,000 tonnes of gold still held by the central banks, at $330/oz., is valued at a mere $160 Billion.  The world, in a panic, could buy that much gold at that price in a single hour.  In fact, there are many investment funds that control far more than $160 Billion in capital.  Thus, a single investment fund that realized the truths presented in this article could make a snap decision that would bring the investment opportunity of a lifetime to a swift end.

Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.

For a trusted and reliable source of U.S. Gold and Silver Eagle Coins that is the only sure way to protect your family’s finances from inflation and recession, we put our stamp of approval on the Silver Snowball Program promoted by Ed Freeman and Dr. Tom O’Brien. International shipping is also available to all investors for a flat rate of $6. Silver Snowball – The World’s Most Affordable Gold and Silver Program.

Exposing the Common Myths About Gold

 Many false ideas about gold, silver and other precious metals prevent many people from investing in them or even owning them.  Today we shall refute some of these common myths so that everyone can protect their wealth against inflation by owning gold. 

False ideas about gold have been systematically put forth through the schools and universities, newspapers and TV for generations.  These myths are deeply rooted in the minds of many people, having become a part of popular world-view of American culture.  Only a few people see through the myths to recognize self-evident truths easily.  Others need more help, which is the purpose of today’s article.  Most people will only begin to wake up to reality when they see the price of gold move far higher than they thought possible, and they start struggling to understand what is going on.

 Here are some common myths about gold and owning gold:

1.  I can’t afford the risk of investing in gold.

Wrong. The real risk is in not having any gold.  If you do not own gold, you have put 100% of your portfolio at risk to go to zero.  Every investment is a risk.  The value of cash can go to zero with runaway inflation.  The value of stocks can go to zero after bankruptcy.  The value of land can go nearly to zero in a depression when there are no buyers, and you have no ability to pay an assessed property tax, and the government puts the property up for auction to pay the tax.

Today, in the fall of 2002, the United States is experiencing large trade deficits, which is putting very strong pressure on the dollar to devalue about 30%, or more.  So there is a huge risk for holding cash or bonds.  The flat out truth is that gold and silver are the very safest investments you can own.

2.  U.S. Treasury Bonds are the safest investments in the world, my broker told me so.

Wrong.  Your broker does not work for you; brokers work for investment banks.  The banks are partners with the government, and the government has bonds to sell.  Bonds have a risk that gold does not have.  Bonds can drastically swing down to zero value in two different ways, either due to inflation or default.  Gold represents “payment in full,” and it cannot default, it will never be inflated away, and it will always be worth something substantial.

The U.S. has actually defaulted on its monetary obligations numerous times in history.  In the revolutionary war, money to pay the soldiers was printed up that became worthless.  In the civil war, greenbacks were printed up that became worthless.  Then, the fed defaulted on the dollar in 1933 and later in 1971.

And even if U.S. Treasury Bonds are paid off by printing more paper money, who is to say that the paper dollar of the future will have any value at all?

U.S. Treasury Bonds are a con game that has two purposes.  First, bonds enslave the government to the ones who issue the debt, because the borrower is the servant to the lender.  Second, by offering bonds to the public, bond purchases help to siphon money away from people in the economy who would otherwise have no other option but to either save their money, or to invest directly into the economy which would allow them to prosper and accumulate wealth.

3.  I’ll buy options or futures contracts on gold when the time is right, not gold itself.

Don’t be deceived.  Options and futures contracts are not the same as gold, and are no substitute.  They are contracts that will be defaulted on when gold makes the big move up.  Futures contracts in platinum already defaulted in the year 2000 when there was a platinum shortage. 

4. Why do I need gold if the dollar is still backed by gold?

The dollar is not backed by gold, or silver, though it once was.  Dollars could no longer be redeemed for gold within the U.S. since 1933.  The overseas dollar defaulted on the promise to be redeemed in gold in 1971.  Since then, there is absolutely NO gold backing the dollar whatsoever.

5.  Ever since the U.S. won WWII, the dollar is supported by our military might, and oil, so we don’t need gold to back the dollar.

In point of fact, there is a huge supply and demand deficit in gold.  But the most important point of all is that the U.S. can’t make war on everyone in the world who buys gold or refuses to hold paper dollars.

Investors wanting to buy gold or silver should go with the bullion coins: American Eagles, Maple Leafs, or Krugerrands. These coins move dollar for dollar with the world price of gold, and are easy to buy, sell, and trade or redeem. Additionally, tracking the value of these coins is easy. No “expert” has to look at them: they are widely recognized and accepted from money changers to coin dealers in all parts of the world today.

For a trusted and reliable source of U.S. Gold and Silver Eagle Coins that is the only sure way to protect your family’s finances from inflation and recession, we put our stamp of approval on the Silver Snowball Program promoted by Ed Freeman and Dr. Tom O’Brien. International shipping is also available to all investors for a flat rate of $6. Silver Snowball – The World’s Most Affordable Gold and Silver Program.