THE GLOBAL FINANCIAL
Kristie Pelletier and Michael S. Coffman, Ph.D
August 27, 2013
Part II—China, Currency Wars and the U.S. Dollar
“For the first time in human history, the entire global economy relies on a paper currency – the U.S. dollar – which is not linked or backed up by any reserve commodity (such as gold). Around the world, roughly 60% of all bank reserves are U.S. dollars... Its standing as the world's reserve currency permits America's leaders to do what no other country in the world can do: legally print money to repay debts.If confidence in the dollar were to fail, what on Earth could be used to stop the panic? There are no reserves.” -Porter Stansberry S&A Digest, June 1, 2013
The world is increasingly unstable economically. Europe is technically bankrupt and can never repay the huge debts it is accumulating except by currency devaluation (i.e. inflation or hyperinflation), which in turn, can have a domino effect on the United States (U.S.). However, no nation threatens the U.S. as greatly as China. Even while China reels from its own debt problems, it is systematically attacking the U.S. through a currency war and undermining the U.S. dollar as the world’s reserve currency. Very few people understand that if China is successful, it will instantaneously make the U.S. dollar worthless.
Sovereign entities as well as various terrorist groups have already seized the opportunity afforded by the current world economic situation to hit us where we are most vulnerable. It is to be expected that nations will move for their own national security and interests first. Some do so with only slightly veiled belligerence. It is no secret that China has been aggressively and actively positioning itself to move to the top of the proverbial food chain.
In a report by the FBI in the summer of 2012, it was revealed that China has already negatively affected American industry through the theft of trade secrets. Companies’ own employees are recruited to do the dirty work. This is continual and pernicious problem within American companies whether they are doing business here or elsewhere.
Additionally, American products are sold to companies in countries with whom we do business, and then are resold to nations where we legally cannot do business, like Iran. It’s all a lot to grasp, but simply put, an American soldier may be serving his country in Iraq and be killed in an attack coordinated with radio parts made by American companies. So many facets to this kind of warfare… and we are woefully vulnerable to all of it.
China has its problems too – major problems. In its drive to conquer the world economically, China would have the world believe that it is prospering in some kind of unholy free market/communist mutation. However, they can’t have true free market while they are still perpetrating heinous social and economic human rights violations against their people and imprisoning and torturing citizens for even going to a Bible study. Social repression ultimately translates into economic suppression.
When it comes to China’ seconomy, things are not as rosy as the government of China would like the world to believe. China’sdebt is far worse than they earlier reported. In late June, 2013, China’s seven-day repurchase agreement rate between banks shot from 3.3 percent to as high as 30 percent. It was an unparalleled credit crisis for China. If banks can’t inexpensively borrow from other banks on a short term basis, the economy grinds to a halt.
Robert Wiedemer, a managing director of Absolute Investment management, reports:
“For years now, the Chinese growth engine has been dependent on increasing amounts of debt and part of it is from its so-called shadow banking systems — analogous to the burgeoning sub-prime mortgage lending market in the United States during the housing boom. Much of the shadow banking debt is short term and much is invested in empty real estate. Its ratio of total debt (public and private) to gross domestic product in China has risen from 148 percent in 2008 to 205 percent in 2012.”
The economic growth of China since 2008 was heavily dependent on rapidly increasing debt created by printing money out of thin air similar to the Quantitative Easing by the U.S. Federal Reserve. There is no better example of such waste than the ghost cities built in China with the enormous amounts of money created by the People’s Bank of China in the wake of the 2008 crisis. The ghost cities were built with the two or three trillion dollars of money printed by the Bank of China. These cities are large, and have a great infra¬structure, but no one lives there. They have become costly monuments to the horrendous waste that unbridled monetary creation generates.
China’s June crisis hit the headlines for about a half a minute and then disappeared as the Bank of China printed even more worthless yuan. Morgan Stanley reported that China’s growth rate is only half of the 7-8% that they claim. Some analysts are skeptical that it is even half. It might even be less than zero. China has finally admitted they simply don’t know how much debt local governments have created since 2008, when the debt stood at 10.7 trillion yuan. Fitch Ratings has warned that wealth products worth $2 trillion of lending are in reality a "hidden second balance sheet" for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.
The Third Currency War
China is stockpiling gold in massive amounts. They are purchasing 100% of domestic production of gold, and they have imported 750 tons of gold in the past year. That is over a quarter of global output. Some believe China is positioning itself to back its currency with gold. Which will hold more power;the debased U.S. dollar, or a gold backed Chinese yuan? The only thing that may derail this effort is if China’s debt were to be exposed as orders of magnitude greater than they are admitting. That would potentially neutralize the yuan’s advantage over the U.S. dollar.
Many financial experts, intelligence officers, and even the FBI believe we are not currently in a place where we will withstand a well-organized attack on our economy. They are warning of the potential of an all-out currency war. The FBI has already claimed that the cold war is not over but rather has merely moved to the global marketplace in the form of economic espionage. The FBI prioritizes counterintelligence to fight this growing threat second only to counter terrorism efforts. It is become frightfully clear that these two threats are inextricably interwoven.
China is not alone in its dreams of being the world superpower. It is very likely that those seeking to destroy our nation as we know it and settle America for Islam will use economic terror tactics as a major weapon in their arsenal. A simple recipe of the theft of trade secrets mixed with cyber espionage; throw in a pinch of criminal big bank money laundering, and add global currency manipulation, and there you have all that is needed in the right hands, or better said, the wrong hands, do very serious harm the economy of the U.S.
In its most basic form a currency war breaks out when nations begin to internationally devalue their currency against each other to supposedly help boost their economies. However, James Rickards, economist and security advisor to the Pentagon, CIA and the Director of National Security cautions:
“The flawed logic goes like this, if you make your currency cheaper, [it] makes your exports cheaper. It also theoretically makes your country more appealing to foreign investments, since foreign currencies now buy more inside your borders. And the powers-that-be figure that'll solve a floundering economy. History has shown this not to be the case time and time again.”
What it does do, however, is make the debt you repay to other countries worth less. Not surprisingly, this angers the countries to whom you owe money. They then devalue their currency in retaliation. Rickards, billionaire Steve Forbes (Forbes Media), Bob Wiedemer, economist and author of NY Times Best-Seller Aftershock, and Sean Hyman, global currency analyst and advisor, believe it has already started. Rickards calls it the “third global-currency war in history.”
The first currency war was with the Weimar Republic following WWI and led to hyperinflation. The second was in 1965 when France and Spain converted U.S. dollars into gold, which collapsed the London Gold Pool, thereby destabilizing the global financial system. This caused President Nixon to take the U.S. off the gold standard. Says Rickards: “It started a chain reaction of skyrocketing unemployment, an oil crisis, a crashing stock market, and runaway inflation that lasted through Carter's presidency and into Reagan's.”
The second currency war didn’t quite get to hyperinflation, but anyone who lived through it has vivid memories of long gas lines and dizzying inflation. What happened was enough to cause Rickards to warn that in the Third Currency War, “the devastation could be almost immeasurable. The outcome of conventional currency wars always results in stagnation, inflation, austerity, and financial panic… [Innocent civilians] will be the ones to get hurt by dangerous inflation, unstable and volatile investment markets, and the complete loss of financial security.” It’s already underway.
Rickards, Steve Forbes, Bob Wiedemer, and Sean Hyman, have produced an online video called “Currency Wars” state: “Right now we are locked in a conventional Currency War with China, Europe, and most of the world.” These proven experts blame the Third Currency War on the Afghanistan and Iraq wars, the reckless spending of Bush and especially Obama and the U.S.’s rapidly worsening trade imbalance ($500-700 billion/year) with the rest of the world.
In summation Rickards warns: “To put it plainly, this intentional currency debasement will destroy the dollar and your wealth. And that's in the best-case scenario. In a worst-case scenario you've got a global Great Depression, as well as international turmoil that could escalate to military conflicts.”
This is all happening when the world is on a spending binge. The U.S. and E.U. are not the only ones creating the equivalent of Quantitative Easing (QE). While it took QE1 and 2 over three years for the U.S. to create $4 trillion out of thin air, the rest of the world printed $4 trillion out of thin air in one year! China’s money supply has grown about 19 percent a year over the last decade and, as stated earlier, is buying gold and gold mines to attempt to make the yuan the world’s reserve currency.
It’s happening fast. Between the years 2005 and 2012, the American dollar lost 40 percent of its strength compared to the Chinese yuan. Ironically, the U.S. is devaluing the dollar deliberately, according to Steve Forbes. Says Forbes, “cheapening the dollar is a form of currency manipulation.” Yet Obama blames the Chinese for being currency manipulators? While the Fed is dueling with China, the American people are having their wealth stripped from them without them knowing it. Forbes calls Ben Bernanke, the Fed Chairman, “the worst central banker, just about in American History… That’s why we have chaos in the world.”
While inflation will be discussed in detail in Part III of the Financial Death Spiral series, the Third Currency War has already increased food prices by 148 percent since 2001 and energy prices by 468 percent. (See graph previous page) This while our government insists the inflation rate is only 2.5 percent.
Demise of the U.S. Dollar as Reserve Currency
The only thing that is saving us now is that the U.S. dollar is the world’s reserve currency. The dollar forms the basis of the world's financial system. It is what banks around the world hold in reserve against their loans. That means every nation must use the dollar to conduct trade on goods and services with other nations. As long as that is true we can continue to print more money out of thin air because the rest of the world must use those dollars to trade. The Federal Reserve reports 70 percent of all U.S. currency is outside the country, compared to just 50 percent 20 years ago.
China is not so secretly attempting to destroy the U.S. by replacing the U.S. dollar with the yuan (renminbi) as the world’s reserve currency. China and Russia are buying tremendous amounts of gold and other strategic commodities and assets all around the world. They're using their dollars as fast as they can to reduce their enormous exposure to the U.S. dollar.
China is the second largest world economy; soon to be the first. China is making deals all over the globe to assure its position as the holder of THE reserve currency. These are just some of the countries that have made currency deals with China: Germany, Russia, Brazil, Australia, Japan, Chile, the United Arab Emirates, India and South Africa.
As explained in Part I of the Financial Death Spiral series, these new trade agreements area direct attack on the U.S. dollar and the dollar may cease being the world’s reserve currency in the near future. When we wrote on this same subject in 2011, this was only being discussed as a possibility. It is now happening – in a big way! The federal government, the Fed, and the blood-sucking opportunists do not want you to know that. Sadly, most Americans don't even know what a "reserve currency" is or that the U.S. dollar is under attack.
China is leading the global effort to create these international agreements to conduct an increasing amount of trade in currencies other than the U.S. dollar. If successful it will have catastrophic effects on the U.S. dollar and economy. It’s a real threat. As Alan Wheatley global economics correspondent for Reuters warns:
“the truth is that the United States is not the only superpower in the world anymore. The Chinese economy is actually projected to become larger than the U.S. economy by 2016, and by some measurements the Chinese economy is already larger. So Chinese leaders have been very open about the fact that they believe that it just doesn't make sense that the vast majority of all global trade should continue to be conducted in U.S. dollars, especially considering the reckless money printing that the Federal Reserve has been doing. At a time when the status of the U.S. dollar is already slipping, QE3 is deeply undermining confidence in U.S. currency. And when the U.S. dollar does lose reserve currency status, the consequences for the United States are going to be absolutely catastrophic.”
It is extremely important to realize that multiple dozens of well-known and respected economists are warning the Fed is laying the foundation for the catastrophic economic destruction of the U.S. via its Quantitative Easing program, primarily through the loss of the dollar’s reserve currency status. The true threat of QE3 will be discussed in Part III of the Financial Death Spiral series. The average American doesn’t have a clue.
As investment banker and best-selling author James Rickards writes in his new book Currency Wars: "If the currency collapses, everything else goes with it... stocks, bonds, commodities, derivatives and other investments are all priced in a nation's currency. If you destroy the currency, you destroy all markets and the nation." In testimony before the U.S. Senate Rickards warned:
“Right now we are locked in a conventional Currency War with China, Europe, and most of the world. I believe the U.S. government is also actively at war with our dollar and, as a dangerous consequence, the wealth of its citizens. Because when you simultaneously make the dollar weaker, lower interest rates, and unsustainably grow the Federal debt, you are robbing Americans of their financial security.”
“This is not something that may happen. From all evidence it IS happening! ”Stansberry warns: “As [the dollar] continues to lose its position as the world's reserve currency, it will cause a brutal downturn in our economy, which will be about 10-times worse than the mortgage crisis of 2008.”
Are We at War?
As already noted, China has launched an all-out attack on the U.S. dollar. It wants to replace the dollar with the Chinese yuan. China secretly bought one thousand metric tons of gold without anyone or any intelligence agency knowing it was happening. They did this in part by buying gold mines and becoming the biggest gold produce in the world. The rest was purchased covertly from dealers around the world and off the books from the central bank.
Part of that production is secretly shipped directly to Chinese vaults, under strict military control. To China,it is a military maneuver to potentially wage asymmetrical economic warfare against the U.S. China’s obvious goal is to use the gold as a hard asset to back up the yuan as the world’s reserve currency.
But there may be another, even more troubling reason. In preparing War Game scenarios for the Department of Defense and CIA, James Rickards said that if it was suddenly revealed that China had four thousand metric tons of gold, “then you have a nuclear strike to the American dollar. World confidence in it would be decimated. Gold, almost instantly, would surge to a bare minimum of $3,000 an ounce and, as a side effect, oil could become unaffordable… Oil, in an extreme case, would be about $450 a barrel, and, on average, about $190. I think you can imagine the devastation that would do to the savings and financial security of average Americans.” The U.S. is, in fact, in a financial war with China, which, if we lose, will be more devastating than a military war.
Sovereign Growth Funds
Then there are Sovereign Growth Funds. Sovereign Growth Funds are an investment fund that's controlled by a government, or central bank. Today there are about $5 trillion worth in the world. Asia has 40 percent of them, while the Mideast has 35 percent. Europe has 17 percent (although the European troubles are threatening them) and North America has a mere 3 percent. To this mix, in 2012 China and Russia decided to create a joint Sovereign Wealth Fund so they could share intelligence with one another. And this occurred while one of Russia's Sovereign Wealth Fund was buying up U.S. technology companies, including one that focuses on bandwidth-intensive, high-speed communications networks.
Without even putting up a fight in2012, Washington, D.C. gave China access to some of the most sensitive financial intelligence our country possesses. The White House and Congress also didn't raise a finger in protest when the Fed permitted three of China's largest banks to open branches in the U.S. Warns Rickards: “That gives them access to the Federal Reserve's money transfer system — Fed Wire. It's critical to running America's finances. China is in our network, in the plumbing. And it's much easier to attack an adversary from the inside than the outside. Especially, when your Russian ally is buying up U.S. tech companies with their Sovereign Wealth Fund. Remember, China is already suspected of attacking our financial infrastructure earlier this year."
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Will China use its gold and ability to tap into our financial network to attack the U.S.? Rickards explains a series of War Games actually run by the Pentagon and CIA; from Israel attacking Iran to China just attacking the U.S. financial system directly. None end well. Most result in a complete meltdown of the entire global financial system. And the Obama administration allowed the U.S. and the world to be put into this situation. Pray it doesn’t happen.
The game President Obama and the Fed are secretly playing with the people’s money and future stretches incredulity to the breaking point. It can only be described as evil beyond the pale. Whether it is because of ideological blindness or deliberate actions to destroy the U.S. becomes meaningless. The result is the same. The potential horror that faces the United States is incalculable and is discussed in Part III and IV of the Financial Death Spiral series.
I—The Disintegration of the Global Financial Architecture
Part II—China, Currency Wars and the U.S. Dollar
Part III—Inflation or Hyperinflation?
Part IV—The Bond Market Crash
Part V—The Failure of Keynesian Economics
Part VI—The Success of Austrian Economics
Part VII—The Root of What’s Wrong – Progressivism