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China’s problem of plenty

January 16 2013 Leave a comment

Someone posted an interesting comment on Simon Rabinovitch’s article about Chinese banks in the FT today, which describes a thorny problem facing mainland lenders: too much cash.

Rabinovitch sums up by saying:

There are some glimmers of hope that money in China is beginning to flow away from banks. Non-bank sources of credit, including bonds, exceeded bank loans in the second half of 2012, an important step towards a diversified financial system.

And attracts this neat retort:

Rabinovitch totally misses the point here. In a country where there is too much ‘private’ debt, and you’re coming off of three years of the world’s largest expansion of debt ever, the last thing you want is for the controls on new debt issuance to ‘flow’ away from banks. That prevents the government from full control over the expansion of credit, and allows for bad ‘WMPs’ to flourish (insuring that more malinvestment occurs and that creative destruction is not allowed to start). As noted by the head of the Bank of China, nothing more than “Ponzi schemes.”

Banks aren’t lending because there’s too many NPLs and they cannot expand their balance sheets anymore. So, the PRC government is letting ‘non-bank’ lenders continue to fuel the expansion of debt. While it may be necessary to some small extent (the country is running pretty much on empty as far as real growth), the reality is that 1/3rd of the total savings in China is now invested in these ‘non-bank’ debt instruments (or, nearly 1/2 of annual GDP). That’s not good at all, and not a source of “hope”…

Categories: economics, money

Apocalypse when?

November 21 2012 Leave a comment

Jim Rickards is still at it. The former LTCM general counsel is obsessed with gold and seems to think the rest of the world is too. Indeed, he reckons gold is so important that it could lead to a new world war:

Rickards envisages the Chinese getting pissed at US monetary easing and retaliating by using its gold reserves as a financial weapon of mass destruction.

Clearly, Rickards thinks a gold standard would solve all this, but in fact his war game describes precisely the problem with using commodities as currency. He argues that China could hoard a huge amount of gold (using derivatives) and then sell it all into the open market to destabilise the global economy.

What he doesn’t say is why this would be less of a problem under a gold standard. If the dollar was backed by gold, the US would hardly be better off if China (or anyone else) chose to dump (or hoard) huge amounts of the stuff — and I can easily invent a plausible geopolitical scenario in which that could end up happening.

After all, history is full of examples of precisely this kind of thing, all the way back to Sparta and the ancient Greeks. Ever wondered why no country on the planet uses gold to back its money supply today?

By using an arbitrary metal as your currency, you open yourself to attack by anyone who can control enough of that metal — and you devolve monetary policy to foreign miners.

None of what Rickards says makes any sense at all from a security point of view, yet the US military pays him to share this nonsense with them. (I’ll let them read this blog post for free. Though I wouldn’t be offended by an offer of payment…)

The lunacy of Rickards’s apocalyptic prediction is on full display when he describes Chinese “hackers” taking control of the Fed and the Treasury, as well as turning off the internet and the power grid. Scary!

So scary, in fact, that it makes you wonder why China would bother spending trillions of dollars buying gold?!?!

Cyber warfare is a genuine threat, and it also demonstrates why his entire theory is obsolete. China doesn’t need gold to cause economic havoc. It just needs an internet connection and a few people who know how to use a computer, which is why we should work on being China’s friend instead of trying to think of reasons for bombing it.

The best money that money can buy

November 15 2012 1 comment

The internet is full of crazies who think that gold is the only real money. They talk about “fiat” or paper money as a Ponzi scheme and usually subscribe to delusional ideas about the world being run by Jewish lizards from outer space.

But some of the gold enthusiasts seem like serious, rational people. Jim Rickards is one. The former general counsel of failed hedge fun Long Term Capital Management, Rickards is obsessed with the idea that gold still dominates international relations. In his view, Italy isn’t a basket case economy crippled by corruption and inefficiency — it’s one of the richest countries in the world thanks to its gold reserves.

Since around 2009, Rickards has been saying that the world is in the middle of a currency war, driven by central bank money printing.

Any day now, he’s been saying for three years, the Russians or the Chinese will orchestrate an attack on the dollar and we’ll be looking at world war three.

Rickards is an adviser to the US military. In other words, the military pays him to come up with creative ways to justify defence spending. He’s certainly earning his money.

Jim Lehrer is another prominent advocate who has written on the subject in the Wall Street Journal’s op-ed page. In a letter to the Journal last year, he called for a return to the gold standard:

What the world now needs is a true gold standard without official reserve currencies, a monetary policy with which the U.S. can now lead the way. Prompt settlements of residual balance-of-payments deficits in gold and budgetary equilibrium, will mean the end of inflation and a world-wide economic boom.

Both these ideas — that gold money promotes peace and encourages prosperity — are exactly backwards. Every country on the planet has rejected gold-backed currency systems. Every single one. Even Switzerland.

The historical case, which gold fanatics often point to, makes the case even more obvious. Consider the Romans. During the early republic, Rome realised that a commodity currency made it dependent on countries that controlled such commodities — its rivals to the east. The only way it could get hold of that money was to trade with its enemies, on its enemies’ terms. Or conquer them.

Contrary to the popular image of the marauding Roman empire, they chose a more peaceful option: fiat currency. By minting coins from readily available local metals such as copper (with values unrelated to their commodity value), the Romans were no longer at the mercy of their enemies and from 700bc to 200bc they built a sophisticated and modern republic.

It was only after the Romans had been ravaged by the Punic wars that they succumbed to the voodoo of commodity money. And I mean that almost literally. The Romans adopted commodity money based on a prophesy, according to some accounts.

The result was a few centuries of marauding Romans, on the lookout for gold and silver, and the decline from republic to empire, with grotesque income inequality, slavery and all the horrible things we associate with the Romans.

This is the period of Roman history that Rickards admires — the one that embraced conquest, military power, slavery, divine rulers and an absurdly rich ruling class. In other words, the Rome that epitomises imperial decline.

This is Rickards channelling Roman history on Twitter to make a point about the terrorist attack in Benghazi:

Rickards thinks that this is something to admire, which explains why he thinks gold money is a good idea. He’s a warmonger.

And war certainly has a good track record under gold money systems. Consider the European voyages of discovery and the eventual rise of the British Empire. Remarkably, folks like Rickards use this as evidence of gold’s wealth-creating power.

But the reality is that gold didn’t “create” wealth. The Spanish slaughtered millions of people in South America, and enslaved millions more to dig out the gold for them. The British then slaughtered the Spanish to steal the gold from them. And on.

That was good for whoever had the gold — Dutch, Spanish, Portuguese — but more or less disastrous for humanity on the whole. The era of colonisation wrought havoc around the world and its legacy still has a profound effect globally.

And so it went on until two world wars finally brought the old system to its knees.

It’s still the case that the only rich countries in the world are, basically, the Europeans — plus the US and Japan. No other countries have joined the club during the past century.

This is the enduring legacy of the damage done by colonisation and the obsession with gold and silver.

Since Nixon formally ended the gold standard in 1971, some countries have at least come close to becoming rich — Korea and Taiwan, notably. And Hong Kong and Singapore, which are more like tiny island states than countries, are even richer.

Anyway, I shall return to this subject to jot down some further ideas about the history of money — and address the great lie of gold enthusiasts: that gold-backed money somehow restrains governments.

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