With the U.S. Federal Reserve doing silly things—such as “targeting” increased inflation at a time when when unemployment is high and wages are reeling backwards—those holding U.S. debt start looking for remedies. China has one.
Holding most of the immediately-available access to rare earths—materials required for high-efficiency electric motors, mobile devices, hard drives, and other uses in the high-tech realm—China has decided to limit exports to other nations. This does a couple of things. The first is that it keeps China more likely to maintain control over manufacturing most tech-sector items. It also drives up the cost of the remaining available supply of rare earth materials for competing countries, or pushes those competing countries into expensive mining operations to create their own supply of rare earths materials.
One thing I notice immediately—this is a short-term game. Since over two thirds of the world’s rare earth resources actually lie (unmined) outside of China, other players in this market can break into this market. But that will take a while—perhaps several years—though it can be done.
So what’s the big deal? The answer may seem unrelated to this issue.
The U.S. government isn’t the only one whose central bank likes to use the printing press to cover the huge gaps between spending and revenue. It seems several European nations have similar afflictions. And who is holding most Western debt, but China?
China obviously prefers their investments make money, than lose money. No—that’s not quite accurate, since being paid back at all will make them plenty of money. But China has this odd hang-up of actually wanting an increase in value for their investment—not merely an increase in dollars or euros or pounds. (Imagine that.)
When central banks start printing currency to cover their debts, every dollar printed (and circulated) actually decreases the value of every other dollar in circulation. (Yes, I know this is a bit simplistic, but that’s the essence of how inflation destroys currency value.) If I loan you silver dollars and years later you repay me in drastically-devalued paper dollars (with interest), I lose and you win. You received valuable (undiluted) dollars in loan, and you repaid me with many more severely diluted paper dollars years later in return. So I’ve got more dollars, but they won’t buy nearly as many cheeseburgers or cars or computers as the dollars I’d originally loaned you because your government’s central bank fired up the printing press during the term of the loan. This is why the silver dollar in my pocket can only be bought today in exchange for nearly 25 paper dollars. The value of the U.S. dollar has since fallen to a mere four percent of what it was when silver dollars were in regular circulation, thanks to the printing practices of the Federal Reserve. That’s a loss of 96 percent in value!
So the big deal is that China is willing to risk losing their foothold on 90% of the world’s available rare earths supply in the short-term game of payback (choked supply of rare earths materials, causing spikes in prices) in exchange for western debt being repaid in devalued currency. China is playing an ace in a round of cards in which western governments hold no valuable cards—and they’ll certainly win this hand. I don’t think they’d play this card (and risk the corner they’ve got on the rare earths market) if they were given a fair deal on the debt they purchased.
This means U.S. citizens will pay dearly in the near future, as prices rise precipitously on goods coming from China (both from exorbitant tariffs and because the dollar is falling in real value) while their wages stagnate or fall or are cut entirely from unemployment. We also face the paying back of debt from our completely unprecedented government spending—with interest! I’ve written about our sorry national debt situation before, so I’m not able to hold an optimistic view of our future. Talk of raising taxes isn’t helping the situation, and in fact, serves to further undermine faith in the dollar on a global scale. And since our dollar is now a faith-based currency, this news is a harbinger of grim times ahead.
What to do?
If you’re a citizen forced to use the falling Federal Reserve Note (paper dollar) as your currency, start selling it for something of intrinsic value such as junk silver coins, energy stocks, guns, and other items that will retain their value even in the face of an economic collapse. These things will never be worth nothing. The flimsy dollar, however, is destined to be worth nothing in the near future on our current path. And once it’s worth nothing, it doesn’t matter if you’ve got ten dollars or ten thousand dollars—you won’t be able to buy bread!
If you’re the federal government of the United States, STOP SPENDING! No amount of taxation can turn us back from economic destruction.
Unfortunately, we’ve got evidence that the right action taken now may already be too late. As Puru Saxena writes in an excellent article at The Daily Reckoning:
Unfortunately, as any serious student of economic history knows, there is no such thing as a free lunch. By adding trillions of additional dollars to the monetary stock, Mr. Bernanke may succeed in bailing out his friends in high places but he is seriously jeopardising the US Dollar. In fact, bearing in mind the recent developments, it has become clear to us that the Federal Reserve wants to debase its currency. In our humble opinion, the US Dollar is a doomed currency and there is a real risk of an abrupt plunge in its value.
If our assessment turns out to be correct and Mr. Bernanke unleashes the second phase of quantitative easing, you can be sure that the US Dollar will slide against most un-manipulated currencies (which are few and far between) and hard assets. In fact, monetary inflation is the prime reason why we believe that the ongoing bull-market in stocks and commodities will continue for several more months.
Look. The US economy is swimming in debt and the total obligations (including social security, Medicare and Medicaid) now come in at around 800% of GDP! Furthermore, this year alone, Mr. Obama’s administration plans to spend another US$3.5 trillion, meanwhile the US Treasury will raise roughly US$2.2 trillion from issuing new government debt! Clearly, these numbers are unsustainable and you can bet your bottom dollar that the Federal Reserve will end up buying a large proportion of the newly issued US Treasury securities. As the American central bank funds more and more of Mr. Obama’s spending by creating new money, it will trash the value of its currency. In fact, given the growing imbalance between the government’s spending and tax receipts, very high inflation is inevitable and even hyperinflation cannot be ruled out.
For the sake of their financial well being, it is crucial that investors understand that inflation or even hyperinflation is a monetary phenomenon and a strong economy is not a pre-requisite for the debasement of a national currency. Whatever the reason, if a central bank decides to significantly increase the quantity of money in the system, that currency’s purchasing power will always diminish. This is how fiat-money regimes have operated since the beginning of time and this era is no different.
That’s such a long quote because I couldn’t have said it better myself. I highly recommend reading the rest of that article for a better understanding of our grave situation.
It’s time to take action for your own economic survival. Get rid of your paper dollars while they’re still worth something. If it turns out I’m wrong, you can always exchange your goods for cash in the future. If it turns out I’m right, you can send me a silver dollar as thanks—and buy yourself some bread.