Moneyization: The global financial phenomenon
of individuals and businesses moving their funds to
monies in which they have the highest confidence,
or money which has a higher store of faith.
Or, Devaluation of Dollar Has
Waking up this morning, 21 July, the world
was a little different. Before our feet hit the floor,
more than US$200 billion of purchasing power was destroyed.
Ultimately and in total, hundreds of billions of dollars
of real value will be destroyed by the upward valuation
of the Chinese renminbi. That $200 billion dollar number
is simply the degradation in value of U.S. dollar M-3
alone, a broad measure of money supply. If you have
had your wealth in dollar denominated assets, before
your morning coffee you were 2% poorer. Foreign central
banks alone lost $30+ billion of purchasing power, based
on their holdings of U.S. government debt.
While that was happening, chaos was running
rampant in London due to a terrorism scare. With all
this excitement, the morning question for viewers on
CNBC was the following:
Which is a better buy? Google or EBay.
Huh? The burning issue of the day? Perhaps
the time has arrived for adults to be put in charge
of the cable business media. Maybe the producers of
CNBC just need to put down their Harry Potter books
in the morning. At least we are gaining some insight
into why so many people are going to be reading Harry
Potter rather than watching television.
Moneyization is the force pushing the
Chinese renminbi's value up. The amount of money that
has flowed into China to escape the devaluation of the
dollar has been so great that the People's Bank of China
really had no choice. The U.S. dollar had to be devalued.
Investors, businesses and just plain, common folk
have learned to move their wealth to monies of higher
faith. Their faith in the Chinese renminbi
is greater than their faith in the U.S. dollar.
A new paradigm perhaps?
That this action is being referred to
as a devaluation of the U.S. dollar is very intentional.
A global power relationship has been altered
by this action. China is dictating the value
of the U.S. dollar. For over 70 years, the U.S. has
been dictating the world's financial terms. More than
a 2% change in money values is involved. The future
for global monetary history is unfolding. Do not take
lightly what has happened.
The implications of the devaluation of
the U.S. dollar by the People's Bank of China are many,
some of which will remain hidden for a considerable
time. A short-list, which should certainly not be considered
complete, of the ramifications are as follows:
- U.S. trade deficit will rise
- Purchasing power of dollar denominated
- Bank of China will buy less U.S. government
- U.S. interest rates will rise
- Argument over U.S. housing bubble will
- Reduction in U.S. military power
- China is rising global monetary hegemon
- $Gold will rise in price, Gold price
of U.S. dollar will fall
- Obsolescence of national monies, like
Canadian dollar, accelerated
- Who would have guessed ten years ago
that the People's Bank of China would determine $'s
In the short-term especially, the U.S.
trade deficit will rise. Trade deficit with China will
increase as the price of Chinese goods will rise in
terms of dollars. The modest dollar devaluation will
not cause factories to be put on boats and transported
to new sites in the U.S. That artificial Christmas tree
or microwave oven that some U.S. consumer plans to buy
will still be bought. They will just pay more for it.
Consumers are not going to just buy 98% of a microwave.
They have to buy the whole thing. One of the messages
of this article, which had been in planning before the
Bank of China acted, is that the U.S. has a structural
trade deficit that for the foreseeable future is immune
to the value of national monies.
Higher prices for imported goods means
that the purchasing power of anyone that is dollar denominated
has been reduced. Dollar denominated people are poorer
this morning, and destined to become poorer. The humor
writers working for the U.S. government may not be able
to continue issuing fictional inflation numbers in the
future. Reality is that
U.S. dollar denominated wealth and income are worth
less this morning, and the future trend is negative.
Such is true, regardless of the comedy routine called
inflation reporting in the U.S. In the card game of
the real world, Bank of China trumps hedonic adjustments.
The devaluation cat is out of the bag.
China has unleashed the future for national money values.
National money values will likely now be more determined
by money flows, the markets, rather than delusions over
U.S. economic growth and the power of the Federal Reserve.
For until today, two big players existed in the world
of national monies. However, the U.S. is increasingly
unable to exercise hegemonic control due to the debt
situation. And unfortunately, Europe lacks the unity
to supervise the global money system. By this action,
China is now stepping into a meaningful roll in global
finance. How will they exercise that power and what
will be the impact? Whatever the answers to these question
might be, owning the dollar and being short Gold or
Silver are not the right ones.
As mentioned above, the devaluation of
the U.S. dollar will have little impact on the U.S.
trade deficit. Remember, the U.S. trade deficit is the
central problem and the culprit of the dollar's fall.
The structural trade deficit of the United States prevents
minor dollar devaluations from being effective. To understand
the situation, consider the first graph. The first graph
plots two data series. U.S. monthly trade deficit, in
thousands of dollars, is plotted with small squares,
and uses the left axis. The solid line is the number
of workers employed in goods producing industries, and
uses the right axis in thousands of workers.
The big picture is fairly easy to grasp.
U.S. trade deficit has tended to get bigger over most
of the time period shown. Employment in goods producing
industries, people doing real work and making real things,
rose, peaked, and has declined to a level about that
at the start of the graph. Two trend lines have been
added to help identify the changing situation, and note
the demise of U.S. manufacturing.
In the early part of the graph, the employment
trend is extremely positive. The slope of the trend
line is fairly steep. During the early 1990s, the U.S.
added considerably to employment in real industries.
During that period the trade deficit increased in a
moderate fashion to about minus 10 billion dollars a
month. The second trend line, with a much flatter slope,
highlights the beginning of a shift. The number of workers
added to employment for producing real goods and stuffs
slowed dramatically. A vertical bar has been inserted
to help identify the timing of that shift. During this
period, the U.S. trade deficit increased to a negative
$30 billion a month.
However, a serious problem was then about
to begin. Employment in real work collapsed in the U.S.,
and reached a level below that which existed in 1991.
A modest upturn has occurred, but certainly no explosion
in employment. Most of the workers added in the U.S.
are involved in activities like processing mortgage
applications, or similar non-work. The U.S. trade deficit,
out of necessity, collapsed to its current level in
the negative $55-50 billion range. U.S. trade deficit
exists because the factories, the real workers, the
real production are increasingly in other countries.
That trade deficit can only grow as employment in the
U.S. is increasingly concentrated in services, forms
A 2% devaluation
of the dollar will not cause factories in China to be
put on boats and transported to North Carolina.
What will it take? 10% devaluation? 25% devaluation?
4 yuan to the dollar? A $3 Euro? At this point, only
the direction for the dollar is known. The structural
trade deficit of the U.S. means that the dollar's devaluation
has only begun, and that it is a long term bear market.
The dollar has been, for a number of months,
in a false rally. A popular delusion on Wall Street
has been that the dollar's strength would continue.
The thinking being that any nation that could create
Google, which makes it easy to search for trivial sites
on the net, and EBay, an electronic flea market, was
too important not to draw investment dollars. Focus
on such trivial business ventures as these are exactly
the reason the U.S. has a trade deficit. Google and
EBay are not cures for cancer. This thinking though
created a seriously over bought condition for the U.S.
dollar. China's devaluation
of the U.S. dollar is a bell ringing that this situation
is about to be reversed.
Our second graph portrays $Gold with triangles,
using the left axis. The solid line is an oversold/overbought
oscillator for the U.S. dollar. The latter is built
on stochastic techniques, and calculated on a monthly
basis. That measure has been inverted, and uses the
right axis. A reading of minus 100 is maximum dollar
optimism. The negative plot lets it move more closely
with the $Gold price. In May, optimism reached a peak
and $Gold bottomed. The oscillator is now moving up,
much as a stochastics change when the price trend changes.
China's action suggests that the trend will
now be away from dollar optimism. On a strategic
basis, Gold's price trend has changed and investors
should be taking advantage of this condition to buy
Gold, and Silver.
One of the ramifications of China's move
to devalue the dollar over time is extremely negative
for U.S. interest rates, and therefore for housing prices.
When China was keeping the relationship between renminbi
and the dollar fixed, the Bank of China was forced to
make massive purchases of U.S. government debt. These
purchases were part of the process of sterilizing the
massive dollar inflows into the country. Without those
purchases the renminbi might have been forced dramatically
higher, something the government did not want to happen
in the short run.
As a consequence of the devaluation
of the U.S. dollar, the Bank of China purchases of U.S.
government debt will be smaller. Rationale
for making those purchases being partially muted by
the devaluation of the dollar. The same will be true
of other nations. One of the little bells that rang
this morning was for the beginning of the end of foreign
central bank financing of the U.S. deficits. Less
demand for U.S. debt means higher interest rates. Of
course the Federal Reserve will fight the trend, but
global markets are bigger than any central bank staffed
by mere mortals. U.S. interest rates are headed far
higher than any expect. Housing prices will take a far
bigger dip than any believe. The U.S. Great Recession
will start in 2006. 4 yuan to the dollar and a $3 Euro
are more likely than many can fathom!
While contemplating the many ramifications
of the devaluation of the U.S. dollar by the People's
Bank of China, a review of the Gold market would be
timely. As the dollar price of Gold rises when the value
of the dollar falls, Gold, and Silver, should be added
to your portfolios. On a strategic basis as shown in
the earlier graph, the massive level of over optimism
on the dollar is providing Gold prices that should not
be ignored. In the last graph are portrayed strategic
buying points created by vacillations in optimism over
the dollar. Recent buy signals suggest that Gold is
attractively priced for dollar denominated investors
and those in countries, like Mexico and Canada, that
are closely tied to the dollar. The
conductor blew the whistle this morning for the train
departing to $1,300 Gold. Get on board!
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.