The government is very good at making things overly complicated for the purpose of obscuring what’s really going on from the public,” observed hedge fund manager Erik Townsend during our interview in May.
He was making a point about the 2008 bailouts. The Federal Reserve played a leading role, applying trillions in paper-clip and rubber-band solutions. The Fed’s balance sheet swelled from $900 billion in September 2008 to $4.4 trillion as we go to press.
Luckily for you, our friend Jim Rickards is just as good at elucidating the muddled world of finance as the government is at obscuring them.
“The United States and China have a shared interest in keeping the gold price low,”
Rickards writes, “until China acquires its gold… Once the rebalancing is complete,
probably in 2015, there will be less reason to suppress gold’s price,
because China will not be disadvantaged in the
event of a price spike.”
Simply put, next time, printing another $3 trillion-plus won’t be politically feasible. “The specter of the sovereign debt crisis suggests the urgency for new liquidity sources, bigger than those that central banks can provide, the next time a liquidity crisis strikes. The logic leads quickly from one world to one bank to one currency for the planet.”
Leading the way, says Rickards, will be the International Monetary Fund. “The task of re-liquefying the world will fall to the IMF [International Monetary Fund] because the IMF will have the only clean balance sheet left among official institutions.”
“The IMF will rise to the occasion with a towering issuance of SDRs, and this monetary operation will effectively end
the dollar’s role as the leading reserve currency.”
In The Death of Money, Rickards goes a step further: He says Western powers are making room at the table for China — using the precise mechanism we described in our “Zero Hour” scenario.
Western central banks have “leased” their gold to commercial banks, and those commercial banks have sold that gold to Asian buyers — including the Chinese central bank.
“The gold price must be kept low,” Rickards writes, “until gold holdings are rebalanced among the major economic powers, and the rebalancing must be completed before the collapse of the international monetary system.”
The metric the power brokers are using to judge when China is ready to take its seat at the table? Gold reserves as a percentage of GDP. Recall the Chinese central bank last disclosed its gold holdings in April 2009 — 1,054 tonnes. Conservative estimates put that figure today at 2,710 tonnes. And as you see from the before-and-after tables nearby, it won’t take much more before China’s gold-GDP ratio equals America’s.
“The United States and China have a shared interest in keeping the gold price low,” Rickards writes, “until China acquires its gold… Once the rebalancing is complete, probably in 2015, there will be less reason to suppress gold’s price, because China will not be disadvantaged in the event of a price spike.”
His research and documentation is peerless. “Get the annual report from the Bank for International Settlements,” he told us during our dinner talk. “Read the footnotes. I understand it’s geeky, but it’s there. They actually get audited — unlike the Fed and unlike Fort Knox.”
Yet, we still wondered, who or what is the IMF’s biggest enemy in carrying out its plan?
Time, replied Mr. Rickards. “A financial panic in the next several years, caused by derivatives exposure and bank interconnectedness, may trigger a global liquidity crisis worse than the 1998 and 2008 crises,” he writes in his book. The IMF will step in but “the emerging circumstances will mean the process will be carried out on a crash basis, without reference to carefully constructed infrastructure now contemplated.”
And as he suggested in Currency Wars, the IMF might even swallow its pride and resort to some form of gold standard if that’s what it takes to restore confidence in the system.
But if that’s what it takes, expect some ugly times ahead, like Ferguson, Missouri, but worse. “Riots, strikes, sabotage and other dysfunctions,” complete with a “neofascist” response from well-armed authorities.
What can you do? What should you do?
“Any citizen can go on a personal gold standard by buying gold with paper dollars…”
He says our Zero Hour remains a distinct possibility — in which the price of real gold you hold in your hand runs away from the “paper price” quoted on CNBC. He thinks it could even be the trigger for the next crisis.
“As long as [gold] holders remain in paper contracts,” he writes, “the system is in equilibrium.
If holders in large numbers were to demand physical delivery, they could be snowflakes on an unstable mountain of paper gold. When other holders realize that the physical gold
will run out before they can redeem their contracts for bullion,
the slide can cascade into an avalanche, a de facto bank run,
except the banks in this case are the
gold warehouses that support the exchanges and ETFs.”
Ah… the SDR. That’s shorthand for “special drawing rights.”
The name is cryptic. The mechanism will prove far more inscrutable than the Fed’s alphabet-soup bailout programs in 2008. But the objective will be the same… to print money in the interest of keeping a rotten system functioning.
Boiled down to its essence, the SDR is a kind of super money printed by the IMF and then circulated among central banks and governments. Indeed, the IMF has issued SDRs three times since their creation more than 40 years ago. Each time was linked to a crisis of confidence in the U.S. dollar…
1969: The French and others recognized the United States was printing too many dollars. At the time, foreigners could still exchange dollars for gold, and there was a run on Fort Knox. The IMF created the SDR to smooth the rough monetary seas, issuing 9.3 billion SDRs through 1972.
1979: U.S. inflation soared out of control, past 14%. Oil-producing countries fretted the value of their dollar reserves was plunging. The IMF issued 12.1 billion SDRs through 1981.
2009: In response to the Panic of 2008, the IMF issued 182.7 billion SDRs during August and September.
A 42-page IMF paper published in January 2011 with the innocuous-sounding title “Enhancing International Monetary Stability — A Role for the SDR?” — lays out what Rickards describes. “A multiyear, multistep plan to position the SDR as the leading global reserve asset.
The study recommends increasing the SDR supply to make them liquid and more attractive to potential private-sector market participants such as Goldman Sachs and Citigroup… The IMF study recommends that the SDR bond market replicate the infrastructure of the U.S. Treasury market, with hedging, financing, settlement and clearance mechanisms substantially similar to those used to support trading in Treasury securities today.”
Not that you’d use it to buy a gallon of gas or a loaf of bread. “SDRs will perhaps never be issued in bank note form and may never be used on an everyday basis by citizens around the world. But even such limited usage does not alter the fact that the SDR is world money controlled by elites.”
In fact, it enhances that role by making the SDR invisible to citizens. “The SDR can be issued in abundance to IMF members and can also be used in the future for a select list of the most important transactions in the world, including balance-of-payments settlements, oil pricing and the financial accounts of the world’s largest corporations, such as Exxon Mobil, Toyota and Royal Dutch Shell.”
The genius of the scheme is that the SDRs would create inflation… but ordinary people wouldn’t know SDRs were causing it. “Any inflation caused by massive SDR issuance would not be immediately apparent to citizens. The inflation would show up eventually in dollars, yen and euros at the gas pump or the grocery, but national central banks could deny responsibility with ease and point a finger at the IMF.”
The most provocative proposition in Rickards’ book, however, isn’t hidden global inflation. It’s this: Before the SDR can assume its role as the new leading global asset, China must accumulate a much larger stash of gold. And the gold price is being manipulated for the express purpose of making sure China gets it relatively cheaply.
China has been accumulating an enormous amount of gold over the past few years. Mr. Rickards last explained the rationale:
“They [China] want to be in a position where they just raise their hand and say to the world, ‘Hey, we’ve got our gold, now we’re a player. Now when the international monetary system collapses and the world has to reconfigure the system, we get a big seat at the table.’”
As China was just declared to surpass the US as the world’s largest economy, Jim Rickards prediction last year, that China wants a seat at the table in regards to its currency after an economic collapse, has just come true.
USA Today reported this week,
“China is bidding to enter the heart of global finance by establishing its currency, the renminbi, as part of an ubiquitous monetary unit used in official transactions around the world.
The issue of whether the Chinese should be part of the International Monetary Fund’s Special Drawing Right, the composite reserve currency used in official financing, is highly technocratic, but the political questions at stake go to the core of world money and power – and will be discussed, in the background, at the annual meetings of the IMF and World Bank in Washington this week.”
“The decision on a new SDR structure, to be made in the next 15 months…”
” will influence how China and its currency can play a bigger part in driving world trade, investment and capital flows. The renminbi could eventually challenge the dollar and its pivotal position in world money — which is why the U.S. government and Federal Reserve are examining this with intense interest.
China is unlikely to mount an open campaign to enter the SDR, grouping the main reserve currencies, the dollar, the euro (linking countries in European monetary union led by Germany and France), the Japanese yen and British pound, and is valued at around $1.5.
Beijing would prefer the question of recalculating the composition of the SDR, which comes up for review in 2015, to follow market developments, reflecting a big increase in demand for renminbi financing from private banks, central banks, traders, corporations and asset managers.
An additional factor is China’s own action to galvanize emerging market economies toward reforming word monetary arrangements. This includes the five-nation Brics group’s decision to set up the New Development Bank in Shanghai, potentially challenging the IMF and the World Bank.”
“China believes it is close to earning the status of a reserve money, the first time that an emerging market currency
would attain this position.”
“Chinese entry into the “magic circle” has been advanced by the British government’s September decision to issue renminbi-denominated bonds, the first big government to take such a step, and allow the proceeds to be held as reserves by the Bank of England.
The main conditions for the renminbi to pass the SDR test are that it should be widely used in trade and be “freely usable” in international payments and asset management. Although a long way behind the dollar, the renminbi has made impressive strides recently and is challenging the euro in several key fields.
Next year’s planned review will touch, too, on the opportunity for the SDR to play a greater role on financial markets, for example in denominating bond issues. The SDR has lost ground as a financial vehicle in the past two decades, reflecting the surging importance of international private sector capital markets. But with the addition of the renminbi, it may be about to make a comeback.”
Article authored by Carol Serpa. You can find the original story right here.
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