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Did China Just Fire The First Salvo Towards A New Gold Standard?
08-15-2013, 03:52 AM,
Did China Just Fire The First Salvo Towards A New Gold Standard?
Did China Just Fire The First Salvo Towards A New Gold Standard?

In a somewhat shockingly blunt comment from the mouthpiece of Chinese
officialdom, Yao Yudong of the PBoC's monetary policy committee has
called for a new Bretton Woods system to strengthen the management of global
liquidity. In an article in the China Securities Journal, Yao called
for more power to the IMF as international copperation and supervision are
needed. While comments seem somewhat barbed towards the rest of the world's
currency devaluers, given China's
growing physical gold demand and the fixed-exchange-rate peg that
'Bretton Woods' represents, and contrary to prevailing misconceptions that the
SDR may be the currency of the future, China just may opt to have its own hard
asset backed optionality for the future; suggesting the new 'bancor' would be the
barbarous relic (or perhaps worse for the US, the Renminbi). Of course, the
writing has been on the wall for China's push to end the dollar reserve
supremacy for over two years as we have dutifully noted - since
no 'world reserve currency' lasts forever.

Over the last two years, we have noted:

Takes Another Stab At The Dollar, Launches Currency Swap Line With

and the PBOC announced a currency swap",

And China will Enable Direct Currency Convertibility",

Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In
Direct Currency Trade",

Russia Drop Dollar In Bilateral Trade",

And Iran To Bypass Dollar, Plan Oil Barter System",

"India and Japan sign
new $15bn currency swap agreement",

Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India
Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees",

USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs
China Currency Swap"
As a reminder, we
noted here:

The question why China has been scrambling to internationalize the
CNY has nothing to do with succumbing to Western demands at reflating
its currency to appreciate it and thus to push its current account even lower in
the country with the shallowest stock market and the most bank deposits (i.e.,
most prone to sudden, abrupt bursts of inflation), nearly double those of the
US, and everything to do with preparing the world for the "final monetarism
frontier", which will take place when the BOJ's reflation experiment fails, and
last remaining source (at least before Africa, but that is the topic for another
day) of credit formation - the PBOC - finally ramps up.

As we pointed out a few days ago when we discussed
the accelerating Chinese credit impulse and its soaring 240% debt-to-GDP

What should become obvious is that in order to maintain its unprecedented (if
declining) growth rate, China has to inject ever greater amounts of
credit into its economy, amounts which will push its total credit pile ever
higher into the stratosphere, until one day it pulls a Europe and finds
itself in a situation where there are no further encumberable assets (for
secured loans), and where ever-deteriorating cash flows are no longer sufficient
to satisfy the interest payments on unsecured debt, leading to what the Chinese
government has been desperate to avoid: mass corporate defaults.

At that point it will be up to the PBOC to do what the Fed, the ECB,
the BOE and the BOJ have been doing: remove any pretense of money
creation via the commercial bank complex (even if these are merely glorified
government-controlled entities), and proceed to outright monetization of de novo
created assets, thus flooding the system with as much money as is needed to
preserve the illusion of growth. Naturally, with the Chinese stock market having
proven itself to be a horrible inflation trap (and as a result the bulk of new
levered money creation goes into real estate), the inflation explosion that
would result would be epic.

And that, in a nutshell, is the reason why China is doing all it can
to prepare for the moment when capital flows will soar once the PBOC no longer
has the option to extend and pretend its moment of entry into the global
reflation race. Yes, it will be caught between a rock (hyperinflation)
and a hard place (a very hard crash landing), but the fact that neither of those
outcomes has a happy ending will hardly stop the PBOC from at least preserving
the alternative. That alternative will of course be to be ready and able to hit
the switch when the BOJ's printer burns out, and someone else has to step in and
fill its shoes in the global "money creation" strategy, which sadly is the only
one the world has left.

Finally, the question then will be not if, or how long, the US Dollar
will remain the world's reserve currency, when even the Developed world
is forced to admit the PBOC's monetarist primacy over the Fed, but just how much
unencumbered gold one has to hedge against what will be the final, global bout
of hyperinflation, the one spurred by every single DM and EM central bank is
forced to print for dear fiat status quo life, or else.


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