The Dow rose 105 points yesterday. Gold fell $8 an ounce. Nothing proven one way or another. We don’t know what will happen this year. Nor does anyone else.
Meanwhile, the newspapers are reporting the rise of the Chinese currency, the renminbi. It is already the Avis of world currencies: No. 2 in terms of trade. And it’s gaining on the world’s current No. 1, the US dollar.
“Era of Renminbi dawns as China’s influence grows,” a headline in the Financial Times tells us.
Dear readers who expect the dollar to reign supreme forever are destined for disappointment. Most likely, it will be the renminbi that gives the buck a good run for its money.
You know how the system works. Government is always and everywhere a reactionary institution. It benefits the people who control it. The insiders are, by definition, the rich… the powerful… and the elite. They have more to lose from change than to gain from it. Thus do they look into the future with a wary eye, and do all they can to prevent the future from happening.
But the future is what happens when you let things take their course. So, the feds intervene – manipulating, meddling and strong-arming – to try to stop it. That is why we have QE. And ZIRP. And taxpayer-funded bailouts of failed businesses.
All of those things are designed to keep the old system going. The Fed tries to boost demand through the power of cheap credit. More demand means more sales and profits. Which means more sales clerks. And more orders placed… to China.
Yes, the system is fundamentally weird. But it suits everyone. The elite in the US like it because it keeps asset prices rising. The Chinese like it, too. They take their sales revenue and build more output capacity and more infrastructure. Empty towns. New factories. Big highways. Plenty of opportunity for sweetheart deals, bribes and kickbacks. Who cares, as long as the masses can collect their crumbs from under the table?
Japan doesn’t have a choice. It faces a grim combination of debt and demography. Over more than a quarter of a century, Japanese citizens loaned their money to the government. Now, they’re retiring… and looking to the government to get their money back. But the Japanese feds spent the money on stimulus projects of their own. Now, there’s no way they can pay it back.
Under pressure, look for Action Man Japanese prime minister Shinzo Abe to come up with more and more stimulus tricks. He’s stimulating exporters to export more. And he’s stimulating consumers to buy more, too. Mostly, he’s just leaning on his accomplice Haruhiko Kuroda at the Bank of Japan to buy more bonds to keep the scam going – just like the Americans.
Everyone is happy… as long as it lasts. But it won’t last forever. The US has a monopoly position with the world’s reserve currency. It aims to hold onto it as long as possible.
Sic Transit Gloria Money
This is a big topic of discussion at Bonner & Partners Family Office, the family wealth advisory we set up back in 2009 to help families hold onto, and pass on, their wealth.
That’s because families that have all their wealth denominated in US dollars may find themselves in trouble when the dollar ceases to be the world’s reserve money.
When that happens, all hell will break loose. Then those trillions of dollars in vaults all over the world will get out their passports and head home.
They will fill the airports… clog the customs lines… and ultimately swamp US markets with unwanted monetary refugees. The price of the dollar will collapse along with dollar-denominated assets.
But wait. Don’t ditch your dollars right away. This sort of thing takes time.
• In the 16th century, Spain had the world’s leading currency.
• In the 17th century, the Netherlands took the number one place.
• In the 18th century it was France’s turn.
• In the 19th century, the British pound was the world’s money.
• And in the 20th century, the greenback was as good as gold.
Now, we are in the 21st century. And a new power has its elbows out. Since 1980, the US economy has roughly doubled in size. During that same time, the Chinese economy has grown by a factor of 13… or more than six times faster. (That is on a per capita basis, by the way.)
Will that continue?
Not likely. But the Chinese economy is still growing twice as fast as the US. Both are delusional figures, of course. Buying things with money you don’t have makes you no better off than making things for people who can’t pay for them.
But the delusion is only part of the story. The other part: China is poor and getting wealthier. The US is rich and getting poorer.
Somewhere they will battle it out… maybe in the marketplace… maybe in a hot war. And someday the upstart (if not China, then someone else) will win.
In the meantime, Chinese stocks are in bargain territory. You can get a dollar’s worth of Made in China stock market earnings for just $7. Each dollar of US corporate earnings, on the other hand, will set you back closer to $20.
We’ll take the challenger…
How to Protect Yourself from a Dollar Crack-Up
At Bonner & Partners Family Office (where I serve as Investment Director) we take the end of the dollar’s world reserve status seriously.
In fact, we believe it will be one of the most important financial trends of the next 20 years.
The supply of fiat money is limitless. Central banks can create as much of the stuff as they wish. But trust in fiat money is limited. When those limits are breached you don’t want to be left holding a bunch of worthless paper.
Our favorite “currency” is gold. Unlike fiat currency, the supply of gold is limited. There is only so much of it in existence. And trust in gold has been proven over hundreds of years.
This is why… when the fiat money system fails… gold will be the “last man standing.”
As Richard Russell, at Dow Theory Letters, puts it:
Over the decades and the centuries, the safest place to keep your wealth has been in gold. Even Picassos can go out of style. Colored diamonds are currently taking precedence over white diamonds. But gold is built into the DNA of man. In coin form, in brick form, in necklace form, in the form of Rolex watches, gold has always been a magnet for men.
If you are concerned about the long-term trajectory of the dollar, our advice is simple: Own some gold, preferably in bullion form. It’s the best protection on offer.