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
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.
- U.S. interest rates will rise
- Argument over U.S. housing bubble
will be resolved
- 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
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
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
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 of non-work.
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
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
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