China, Gold, and the "Boom of the Century"

"China's foreign exchange reserves have not increased for almost two years...."

The Califia Beach Pundit provides an extraordinarily canny assessment of Chinese monetary policy, its dollar peg, foreign exchange accumulation, and gold's commodity price:

China's decision in early 1994 to peg the yuan to the dollar was a key factor driving China's growth, since it brought Chinese inflation rapidly down to the level of the U.S. The prospect of a stable currency not only reduced inflation and its multiple distortions, it also increased the market's confidence in China, and helped boost investment in the country since it all but eliminated foreign exchange risk. Indeed, since the yuan has only appreciated against the dollar since 1994, foreign investors benefited from strong Chinese growth and yuan gains. China was the boom of the century.

Pandawiki

Image courtesy of Pandawiki.net

 

Massive inflows of foreign capital seeking to benefit from rapid Chinese development essentially forced the BoC to buy over $3 trillion of foreign exchange, with a commensurate increase in the Chinese money supply. Converting capital inflows into yuan is the only way foreign capital could actually enter the economy, because you can't build a factory or hire workers with dollars—the dollars need to be converted to yuan, and it is the proper role of the BoC to buy those dollars and issue new yuan in the process. Yet despite massive forex purchases, which relieved pressure on the yuan to appreciate, the BoC still had to allow the yuan to float irregularly upwards. A stronger yuan helped to keep the inflationary pressures of rapid growth under control.

As I explained in this post, it now appears that this process of forex purchases and yuan appreciation is at an end. This is a big deal. China's foreign exchange reserves have not increased for almost two years, and the yuan has been stable against the dollar for the past two or three months. Capital flows and trade flows appear to have reached some kind of equilibrium, just as Chinese and U.S. inflation have converged.

... China's central bank started buying up capital inflows in earnest in early 2001, right about the time that gold was hitting a multi-year low. This came to an end in early 2011, as net capital inflows approached zero, and shortly thereafter gold peaked. Both forex purchases and the price of gold increased by many orders of magnitude over roughly the same period.

Is there a plausible explanation for the strong correlation between these disparate variables? I think there is, but I can't say so with authority.

...

Don Luskin ... argues that the outstanding stock of gold is relatively fixed—growing only about 3% per year—but that the demand for gold has jumped by orders of magnitude since China, India, and other emerging markets have enjoyed explosive growth and prosperity gains. In other words, the number of potential buyers of gold has risen much faster than the supply of gold, so naturally gold's price has increased. This is not a story about massive money printing and hyper-inflationary consequences, it is a story about a one-time surge in the demand for the limited supply of gold.

There has been considerable speculation by savvy observers -- such as financier and author James Rickards -- that "China this year or next will announce a tripling or quadrupling of its gold reserves after acquiring the metal surreptitiously."  As Evans-Pritchard observes in the UK Telegraph, "It is no secret that China is buying the dips, seeking to raise the gold share of its reserves well above 2pc. Russia has openly targeted a 10pc share. Variants of this are occurring from the Pacific region to the Gulf and Latin America."

The FT observed in late 2011, central banks are net buyers of gold for the first time in 20 years.

Can a classical gold standard be far behind?

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The Most Important Thing Holding Up the US Dollar

by Ron Paul

Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.

Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

Piketty’s Gold?

April 21, 2014

In terms of public policy, though, we favor honest money. It works out better for more people. And there is a moral dimension to the question of honest money. This was a matter that was understood — and keenly felt — by the Founders of America, who almost to a man (Benjamin Franklin, a printer of paper notes, was a holdout), cringed with humiliation at the thought of fiat paper money. They’d tried it in the revolution, and it had been the one embarrassment of the struggle. They eventually gave us a Constitution that they hoped would bar us from ever making the same mistake.

Read More

 


The Rueffian SynthesisJohn D. Mueller

Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.

By John D. Mueller

Rueff Restates the Quantity Theory of Money

... Rueff argued that the real problem with the monetarists is not that they focus too much, but rather too little on the supply of money; namely, they assign too little importance to the concrete mechanisms by which money is actually created. Most monetarists adopt the convention that the government can control the nominal supply of money, while demanders of money control its value. Rueff pointed out that under a properly functioning monetary system, even the nominal supply of money is determined by people’s demand for it.

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Excerpts From:


by Lewis E. Lehrman

"The economist defines money as a medium of exchange. It is the token we supply in order to effect payments for the goods we demand. Money is especially a standard like a yardstick – a unit of measure by which we value and price economic goods. Money units express prices which are the vital information necessary for efficient exchange. Money is surely a store of value."

Learn More

 

Laksmi, The Goddess of Prosperity

Ralph J. Benko  |  Apr 24, 2014
Indian culture long has held a high appreciation for gold.  The Vedic faith records four historical ages, the highest being the Satya Yuga.  Per Wikipedia, "when humanity is governed by gods, and every manifestation or work is close to the purest ideal and humanity will allow intrinsic goodness to rule supreme.

So Long, So Slow: IMF Not So Optimistic on World Recovery

Kathleen Packard  |  Apr 23, 2014
“Here’s the short story: The U.S. has exited from financial crisis: Asia and Europe have not,” wrote Rana Foroohar in TIME at the beginning of this year. “China, the second largest economy in the world, is pretty much where the U.S. was five years ago – deeply in debt...Japan, where...
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World Press
George Melloan

In Going Long, the Fed Is Short-Sighted

Stock and bond traders spent most of last year in a state of high anxiety over what would happen when...
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Key Monetary Writings
John D. Mueller

Comment on Martin Wolf's «We Need a Global Currency»

A discussion between Martin Wolf, James Stodder and John D. Mueller about global economic policy including the need for a...
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Prosperity Through Gold
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