The Crumbling World Order and Who Will Pick Up the Crumbs?

reservesThe chart on your left was provided by Hugo Salinas Price in an article he recently wrote with the above noted title. Mr. Price pointed out that international monetary reserves have fallen by $752 billion or 6.52% since August 1, 2014 to $11.28 trillion. That’s a remarkable contraction for a mere fifteen months. He provides an answer to the dynamics behind this contraction in monetary reserves that appear ominous for the existing world financial order. Here are major points made by Mr. Price:

• Since 1971 when the international gold standard was discontinued by President Nixon, net exporting nations have held debt instruments rather than asset money, mostly in the form of dollars. In essence, the exporting countries have really never gotten paid. They have simply accepted U.S. Treasury IOU’s (debt) created out of thin air by the U.S. Treasury whereas prior to 1971 they received not debt but an asset, namely gold in exchange for their exports.

• Now, with rates rising, those U.S. Treasuries will become ever more worthless, and the longer dated Treasuries will lose an enormous amount of value even with small rate increases. Understandably, the Chinese and other net export nations don’t like this set up especially now that interest rates are rising because U.S. Treasuries are losing value. At the same time, capital is leaving China very rapidly, so China needs to sell its Treasuries to fund its own capital needs. This dishoarding of U.S. Treasuries is also putting upward pressure on interest rates. Indeed one of the reasons the Fed may feel forced to raise rates is to generate an appetite on the part of Americans and foreigners to buy U.S. Treasuries to replace a growing list of unhappy net exporting nations who hold them. Otherwise the Fed will have to buy all of the U.S. debt.

• Essentially, this liquidation of dollar Treasury debt by China and other nations who are now bailing out of U.S. Treasuries is a short cover of the dollar, thus creating upward pressure on the dollar as I have often noted would happen when the credit system would finally reached its maximum limits. I believe we may have now reached that point. In fact, I think my IDW displayed below provides evidence in that direction. Keep in mind that as the dollar continues to rise vis-à-vis commodities, developing nations, are having an ever more difficult time servicing their dollar-denominated debt thus adding to even more instability in the global dollar-centric financial system. Indeed as this dollar-short covering process has begun, the dollar has already gained about 41% over the past few years, which makes it even more onerous to debtor nations owing dollars. This leads to an even more urgent dollar-debt exit strategy causing more assets to be sold and dollars purchased for debt repayment creating a viscous cycle of dollar-short covering

• In October 2016, when the Chinese Yuan will be accepted into the IMF’s SDRs basket, China will have its own reserve currency so the selloff in international reserves (most significant of which is the dollar) is likely to increase even more as China exchanges a losing U.S. Treasury investment for a rising dollar, which it will likely continue to exchange for gold and/or other “real” assets. (Remember, the dollar is itself nothing more than an IOU).

• Seeing this vision, the Chinese have been planning over the long term to build their own monetary system based not on liability money but on asset money—gold. Their idea has been “don’t antagonize the U.S. over its dishonest monetary system, because the U.S. is in a self destructing mode.” So the Chinese have been hording gold mined from their own mines as they have been acquiring most of the West’s gold from very ignorant Keynesian indoctrinated economists at the Fed and throughout the financial world. If you think building gold reserves have not been a top priority of the Chinese, consider the fact that China is now the world’s largest gold producer and in fact has an army division charged with mining the yellow metal!

• As the current global depression continues to progress, each country will ultimately forget treaties it has signed if and when they get in the way of taking care of their own populace. Because China will not want to be trapped in a liability-based monetary system in the future, it will and indeed has already begun to trade using gold rather than dollars. As we noted recently, Russia has been gaining massive amounts of gold from China through its sales of oil to China. This is a trend that I think is inevitable as countries become ever more willing to accept “IOU-nothing” money like the U.S. dollar. Countries will have to come up with gold to buy their goods because they are clearly moving out of the current liability based monetary system put in motion by Nixon in 1971. The move away from the dollar-IOU-nothing system is surely becoming ever more pressing on the Chinese as they see their U.S. Treasury holdings becoming ever more worthless in a rising rate regime and as global currency wars are brewing everywhere with countries devaluing their currencies in search of exports in a contracting economic environment.

Given recent reports among the BRICS, especially Russian oil sold to China for gold, not dollars, I believe the process is already underway, albeit at the very early stages. This can only be seen as bullish for gold.

Jay Taylor’s Inflation/Deflation Watch (IDW)

IDW 2015-12-18

Clearly the global system is breaking down. I think that is evident from my IDW which is plummeting now as equities are beginning to roll over. I believe the “strong” dollar is a result of the dynamics Hugo Salinas Price had talked about, namely the short covering of borrowed dollars. Treasuries and other assets that are less essential are sold in order to repay debts and remain solvent. And that is happening because the dollar-debt based system has reached its optimum peak. I believe very firmly that the Fed did not want to raise interest rates, but with the system reaching its debt limits, the Fed had no choice. Although part of the excuse for raising rates was that the Fed wanted to retain some credibility, I think it was bound to lose its credibility whether or not it raised rates. Had it not raised rates, even the most loyal Wall Street sheeple would have begun to doubt the Fed’s honesty. But now that rates are being raised, we saw Wall Street’s reaction this week when manufacturing in the U.S. has now entered recession. The day of reckoning appears to have come. God help us all.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.