The economic struggle between China and the US is over what money the world uses

The economic struggle between China and the US is over what money the world uses, by Alasdair Macleod.

Since the great financial crisis the quantity of fiat [paper] money in the global currency system has expanded dramatically relative to the long-term average growth rate of money and bank credit. …

Total US bank deposits, i.e. total US paper currency.

On the back of China’s GDP growth, Japan, the EU and the UK are also enjoying export-led revivals. The US does not share these benefits, partly because China and Russia, the founders of the Shanghai Cooperation Organisation (SCO), are deliberately freezing America and her money out, and partly because of America’s own tendency towards trade isolationism …

In the US, Japan, the UK and through much of Europe, the populations have experienced a longer, generally more stable objective exchange value for their currencies. Under pressure from their governments to use only state-issued currency, they have lost the habit of regarding gold as money. …

Therefore, understanding the role of gold and the protection it can offer fiat [paper] currencies is split into two geographic camps: the governments of Asia which are actively accumulating, or would like to accumulate additional reserves of monetary gold, and the governments of North America and Western Europe which see the gold price as irrelevant from the monetary point of view. …

The monetary policies of the [US] Fed since the great financial crisis are predicated in the belief that gold is not money. This dichotomy is also shared with the Bank of England, the Bank of Japan, and the European Central Bank.

They all say that the world has moved on from the days when gold was part of the monetary system, so they are ill-prepared to discard the Keynesian beliefs upon which their current monetary policy is based. Their advanced, welfare-state economies are simply too far down the road of the state theory of money to turn back. However, this exposes their currencies, and particularly the US dollar as the world’s reserve currency, to a substantial loss of purchasing power as the rapid monetary expansion of the last nine years works its way through to consumer prices.

Trump has been neutralized by the swamp:

The election of President Trump promising to make America great again is turning out to be a failure. The removal only last week of Steve Bannon, his chief strategist, clears the way for the pre-Trump establishment to reassert itself. Gone is Bannon’s talk of a financial war against China and Russia, and doubtless, with a trio of the Generals Kelly, Mattis and McMaster now in control of the White House, it will be back to military options.

General Kelly, who was appointed to bring some order into the White House is doing this by removing dissenters from the mainstream. This was why Bannon had to go, and why President Trump himself will have to knuckle under and become as anodyne as President Obama. The mainstream is back and little has changed. …

China is going to back its currency with gold, as a superior alternative to the ever-inflating US dollar:

All the indications from China’s gold policy are that the end-plan is to tie the yuan to gold. …

China and her citizens are still accumulating gold. Basically, gold that goes into China does not come out. This contrasts with the US and the EU, where people are strongly discouraged from regarding gold as money or a store of value. For geopolitical purposes, it matters not who is right, but who has the power to be right. By ending the yuan’s exchange relationship with the dollar and transferring it to gold, global monetary hegemony would be transferred from America to China and her sphere of influence in one big step.

There are strong indications that gold will be part of the settlement medium for the SCO’s future trade. Not only is China driving the SCO in partnership with Russia, which appears to be gold-friendly as well, but central bank demand for physical gold has mostly been from SCO member states and affiliates. …

The most significant post-war financial agreement achieved by America was with Saudi Arabia, whereby the Saudis agreed to only accept dollars in payment for oil in return for American protection. The agreement was adopted by all OPEC members, in return for the ability to fix oil prices as they pleased. This put the American banks firmly in control of the expansion of global credit, as well as the recycling of the currency surpluses arising from sales of oil to oil consuming nations, particularly benefiting the friends of America. …

Already, China is showing a preference to settling trade and energy deals in yuan, but to take this much further, it will need to offer gold convertibility to compete with the dollar. … The yuan-gold contract already exists, the oil-yuan contract will shortly be introduced. The Shanghai International Energy Exchange  … will allow Iran, Russia and other Asian producers to avoid Western banking sanctions by selling oil for gold. …

The Obama administration had no effective response to China’s strategy, and continued to attack China’s partner, Russia, through proxy wars in Ukraine and Syria. The bid to take control of resource-rich Afghanistan failed. …

Steve Bannon had a clue, but has been replaced by the generals:

The removal of Steve Bannon last week and the control of the White House passing to three generals are important developments. In his last interview while still officially appointed, Bannon correctly analysed the geopolitics between China and the US. His analysis was very much on the lines presented in this article. However, his assessment was that the US needed to fight a trade and financial war against China, and forget anything military. In his words, “unless someone solves the part of the equation that shows me that 10 million people in Seoul don’t die in the first 30 minutes from conventional weapons, I don’t know what you are talking about, there’s no military solution here, they got us.” …

Bannon’s mistake is to assume America still wields its traditional financial power, when it is clear to informed outsiders that this is no longer true. However, the generals now in charge of the White House are more likely to stoke up proxy wars, either because that is where their skills lie, or more cynically perhaps they are influenced by the arms manufacturers who are looking for defence contracts. They have taken no time in ratcheting up the American presence in Afghanistan and clearly have a desire to gain influence in Pakistan, both of which are on China’s eastern flank, where she is building commercial and infrastructural ties.

So, geopolitics are back on familiar ground. Trump is now neutralised and will increasingly look like a cowed Obama. Perhaps more troops will be sent to Syria. Perhaps more advisors will be sent to Ukraine. Perhaps more missiles will be installed in Poland, or the Baltic states. North Korea will rumble on, in a stalemate protected by its nuclear weapons.

A long and complex article, but background issues like this have a way of becoming important even though they do not make the daily headlines. Lots more at the link.