One step forward and one step back… towards a break in confidence!…” Call it what you want, call it a deflationary collapse or call it hyperinflation, the end result will be “confidence” in the U.S. dollar will collapse.”
By Bill Holter
GoldSeek.com
Friday, 5 June 2015
Jim suggested a big picture topic to write about. Each step forward by the Chinese to make a foothold for the yuan is one step backwards for the grip the dollar has held over the globe. This topic has several nuances to it, let’s take a look from several vantage points. As a spoiler, any “steps back” in today’s fiat currency world are steps toward a break in confidence. Call it deflation or hyperinflation, a break in the confidence of fiat currency will end with many currencies being replaced, this is a major part of your coming “re-set”.
The first and most obvious is we live in a world with an economic and financial pie of a given size at any point in time. Each deal, each transaction and each “platform” that is done or created by the Chinese for using yuan instead of dollars means the size of the of the pie “slices” change. Any increase in the usage of yuan means a smaller slice for the use of dollars. Yes, theoretically the pie gets larger over time and we’ll get to this shortly, I am simply saying here that in a static system, more yuan usage means less dollar usage.
The next logical step is to equate the usage of a country’s currency with “power”. As any currency becomes more popular for usage, the confidence in that country also increases and vice versa. In today’s world (but not for long?), fiat currencies with no backing are free to create. In the case of the dollar since 1971, more usage (via petro-dollar reinvestment) allowed for more “creation” of dollars and thus the power generated from the “privilege” to print. This so far is simple logic and merely a description of how our monetary world works.
China has done many things over the last several years with an eye to moving their currency, the yuan forward. They have purchased massive amounts of gold to be held as reserves, we will very soon find out how much they have accumulated as they announce for their entrance into the SDR. China has also set up two dozen “currency hubs” all over the world in major cities. They have done this to aid in the conversion of local currencies into and out of yuan. Clearly this move will aid and grease the gears for trade done with China. It will also aid in currency movements looking to “buy” yuan if deals are contracted to settle in yuan. In essence, China is simply “making it easy” to purchase and use their currency. They have also set up credit facilities such as the AIIB and new exchanges for gold, the SGEI. China is actively seeking “new customers” and trade partners along the “Old Silk Road” as they can see the writing on the wall …as well they should since they are the ones doing the writing!
If you look at nearly everything China has done in recent years from a financial and economic standpoint, it can be seen they are preparing the yuan to become a “major” and international currency. They have requested the yuan to become part of the IMF’s SDR which gives us an approximate time guideline. Whatever percentage the yuan gains of the SDR pie will come at the expense of the dollar’s piece. The flip side of the coin is the U.S., what exactly has the U.S. done in recent years to “promote” or make it easier to use dollars? This is a simple case of losing market share!
Now, let’s look from a different angle. Any economic (financial) system is either increasing in size or decreasing. It may be increasing at an increasing rate or the rate is slowing. The system may also be decreasing at an increasing rate, or the contraction is slowing. In a fiat system where debt is the underlying asset holding up values and ultimately the currency itself, debt outstanding (growth) by definition MUST increase in the long run and it must grow at an increasing rate. This is an “absolute” because there does not exist the “dollars” today to pay future interest, they simply do not exist …”yet”. The only way they will ever come into creation is by creating more debt or using the electronic printing press. In the words of Richard Russell, “it is either inflate or die!”.
Let us now look at the “die” part. If (when) China makes the yuan convertible and international, this will immediately take “market share” away from the dollar. This is where it gets interesting because there is a major fork in the road, it is called the debate between the “inflationists and the deflationists”. One theory is that any decrease in dollars outstanding (and being used) will cause existing debt to default and create an unending cycle of default. This the deflationists say will actually make “dollars” worth more. The inflationists say this can never happen because the Fed will simply “print” more dollars and thus ruin the value of existing dollars via common hyperinflation.
The Rest…HERE
