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JimPhillips

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Reply with quote  #1 

Huge news yesterday in the international banking/money front. The UK has joined China in the AIIB (Asia Infrastructure and Investment Bank) over protests and complaints (and probably more than a few threats) from the US about the wisdom of US allies supporting efforts to break the Dollar.

China understands that the next step in overtaking the US, is to break the hold that the US has on the financial institutions of the world. To break this, China has been involved in several efforts to undermine US influence, including BRICS, (Brazil, Russia, India, China and South Africa,) which is a bank, essentially dedicated to the divestiture of dollars. The idea behind this is to divest from Dollars, reinvest in BRICS, a conglomerate of currencies, and thereby end the Dollar as the international global currency. It hasn’t worked. Brazil’s economy and Russia’s economy are in the tank, China and India are still fighting over borders--lots of problems. And of course the US has greatly strengthened it's currency in the wake of the attacks on it from Russia and China, a price the whole world is paying for.

A note on the first BRICS summit read this way:

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In the aftermath of the Yekaterinburg summit, the BRIC nations announced the need for a new global reserve currency, which would have to be "diversified, stable and predictable". Although the statement that was released did not directly criticise the perceived "dominance" of the US dollar – something that Russia had criticised in the past – it did spark a fall in the value of the dollar against other major currencies. (The drop in the Dollar value referenced was in 2009.)

So the AIIB is simply another effort by China (the fourth by my count) to undermine the Dollar as the world’s currency. There already is an Asian Investment Bank, but that is dominated by the US and by Japan, which makes it doubly distasteful to China. And, as in the case of BRICS, the US does not want it’s allies having much to do with AIIB.

Enter yesterday’s news from the Financial Times that the UK has elected to join the AIIB over American protests.  The following is from the Financial Times

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On Thursday, a senior US administration official told the Financial Times that the British decision was taken after "virtually no consultation with the US" and warned of the UK’s trend toward constant accommodation of China, which is not the best way to engage a rising power".

Some influential Chinese experts saw special significance in the British decision and hailed it as evidence of China’s growing global influence and a victory in President Xi Jinping’s campaign to realise the "great rejuvenation of the Chinese nation".

"The AIIB has actually managed to sow discord between the US and UK," Li Yunlong, a professor of international strategic studies at the Central Communist Party School, the top training academy for China’s leaders, wrote on his microblog Friday. "Britain can no longer be bothered with [the special relationship with the US] and is using the AIIB to betray its master and ingratiate itself [with Beijing] to enter the booming Chinese market. If America is angry then too bad."

 

Yes, too bad. But too bad for who? Ask Canada about the wisdom of sitting out the Gulf War, and the near collapsing of Canadian Agriculture by the US (I’m sure there really was hoof and mouth disease somewhere in Canada) because of it.

To me, this shows that Britain has realized how desperate their international position has become. They should have studied Bible Prophesy. I have been talking about this for thirty years. When I point out that Tarshish must be the richest nation in the world and greatest trading nation in the world, I am routinely told, Britain will be brought back to that position. To which I answer, how? Think about what will happen at the time of the end. The EU will break up, and Britain will be out. Currently, her greatest trading partner is Germany, her third greatest trading partner is France, and her biggest trade region is the EU. She loses all this when Europe rallies behind Russia.

Imagine losing your biggest trading partner, then having to develop all new relationships against heavy competition from the three greatest trading nations of the world, the US, China, and Japan all at the same time, while growing to become the world’s greatest economy. That will not happen by natural means.

Now as Britain contemplates her vote to exit the EU in 2017, she is face to face with these facts. Enter her new special relationship with China. How reliable a partner can China be? How long is anyone’s memory? Apparently long enough among some in China. From the same Financial Times article about China’s reaction:

 

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But the decision was not universally welcomed in China, with some influential voices pouring scorn on a country that is still widely regarded as second only to Japan among the colonial powers that "humiliated" China in the 19th and early 20th century.

"At first this sounds like it gives us a lot of ‘face’ but actually the sun has set on the [British] empire and in international organisations [the UK] is really just a [pot stirrer] and America’s thug for hire," Gao Cheng, an associate researcher at the National Institute of International Strategy in the Chinese Academy of Social Sciences, a top government think-tank, wrote on her public microblog account. "When it really counts [the UK] is pragmatic. Just look at the Ukraine situation, [the UK] is not following [American] meddling but just stays silent and makes money."

 

So in the end, it is a banking deal led by Communist China, which may, or may not be a great economy; which may, or may not have actual money; but who certainly does have a 200 year hatred of all things British. And alienating your second largest trading partner (US) in the deal.  What could possibly go wrong?

JimPhillips

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I get asked, quite a bit, about concepts surrounding money. People seem to want to know whether or not the world wants to go to a single currency, or a currency based upon gold or other precious metals, etc. I was asked to try and explain it, and following this article, it seems like a good place.

The answers are simple enough. Does the world want to go to a single currency, or a currency backed by precious metal? The rich folks of the world do. Will they be able to? Not a chance.

As the article points out, China wants to break the American Dollar as the world’s default currency. Why? Because the person/bank/nation who controls the value of currency, determines its worth. And if you control the value, you control the value of loans made, and the value of loans repaid. The Dollar is currently the world’s default currency, and so America controls the value of the world’s default currency giving them tremendous power. The value of currency is the most important economic power there is. It is more powerful than GDP (gross domestic product, or how much money you make) and it is more powerful than trade imbalances.

The theory behind money is this. Lets suppose I have 10 ounces of silver, and I use it to open a bank. I could, in theory, (not in practice because of US law,) hand out promissory notes (money) promising the bearer of the note a certain amount of my silver, up to 10 ounces. So if I say I Dollar is worth 1 ounce of silver, I could hand out notes up to 10 Dollars. If you have a widget you think is worth 1 ounce of silver, I could pay you one of my promissory notes for one ounce of silver, now called a Dollar, and you could save it, or trade it to someone else for an asset they have, or return it to my bank and take the promised silver.

If you came to my bank and traded the Dollar back to me for 1 ounce of my silver, my bank would only have 9 Dollars outstanding, as I would only have 9 ounces of silver remaining, plus one widget. But lets say I took the widget you sold me, and sold it to somebody else for 2 ounces of silver. Then I would have 11 ounces of silver in my bank, and I could print 11 dollars. The promissory notes (the money) I issued is said to be backed up by precious metal.

This is the way banks originally worked. But the governments soon realized that there was tremendous money to be made as the bank, and so governments made it illegal for anyone to create money, but governments. When the government got involved in the money supply, they also decided that if they quit that silly part about the "promissory note," then they had much more flexibility "for the benefit of the people." They would start out promising that the money supply reflected the precious metal they owned, such as what US had in Fort Knox. And they tied the money, in the case of the US, the Dollar, to the amount of precious metal they had on hand. But of course, they wouldn’t tell us what they actually had on hand, so no one knew.

The money supply was fixed to precious metal by weight. 1 ounce of silver was to be equal to one Dollar, and one ounce of gold was to be equal to 20 Dollars. What does that actually mean? Well, originally, it was intended to mean that a man would work a day for 1 ounce of silver, or a Dollar. Twenty Dollars reflected about a month’s wages, or 20 working days.

This all worked well when the banks issued the money. The government held them responsible for having the precious metal to back up their money. But, when the government took over the money supply, then you effectively had the wolf guarding the hen house. Eventually, all governments get into debt. To pay the debt, they can raise taxes on their citizenry, which leads to protests, unrest, and being voted out of office. Or, they can simply inflate the money supply. If the government is 10% lacking in the amount of money they need, compared to their money supply, they simply raise the value of the precious metal. I ounce of silver becomes worth $1.10 Dollars, instead of $1.00 Dollars. 1 one ounce of gold becomes worth $22.00 Dollars, instead of $20.00. Then the government can pay its debt.

You can see what a tremendous power this is. One nation may increase its worth through legitimate business by 5% while the nation controlling the money remains at 0% increase. But the nation who controls the money, simply inflates the money supply by 10%, and the controlling nation then "out performs" the nation with legitimate gains by 5%.

Eventually, the need for precious metal became too confining. The government decided that there were things worth money besides silver and gold. Why shouldn’t they issue Dollars against those things? In other words, using my example, when I paid you 1 Dollar for your Widget, my bank only had 9 ounces of silver left, so could only issue 9 Dollars. But wasn’t the Widget worth 1 ounce of silver? Why couldn’t I issue a Dollar against my new Widget?

So they did. The government figured out what "things" they owned, and printed Dollars against all those things. But a balance was always supposed to be maintained. You could only print so many Dollars against your things, or just like in the Dollars printed against precious metals, the value of the Dollar and what people would trade for it would go down.

So the creation of money, began to look like a bookkeeping ledger sheet. You have so many assets. Against those assets you can produce so many liabilities, or Dollars. But the problem was, how do you measure your assets, and how are you going to tell the government not to print too many Dollars, against their assets? Well, you couldn’t, and consequently they did. And Dollars started to be worth less and less against the country’s assets.

So who gets hurt, and who benefits when a nation prints money. Simply, those who benefit are those who owe money, and those who are hurt are those who have money, or who have loaned money. For instance, lets say I have 10 Dollars in the bank, and those ten Dollars could buy 10 widgets. The government decides it needs to print twice the number of Dollars than it had already printed. Now, since the number of Dollars over all have doubled, my Dollars purchasing power has been cut in half in value. My 10 Dollars will now only buy 5 widgets. My savings were cut in half, by the governments policy. So effectively, the government has taxed my savings 50% by printing Dollars, without any input from me.

But what if, when my 10 Dollars would buy 10 widgets, I loaned my money to a friend who promised to pay me back my 10 Dollars, plus 1 extra Dollar for interest. But when he paid me back, he paid me back in Dollars that could only buy 5 Widgets. He would be paying me back the 11 Dollars, but those Dollars would only buy 5 1/2 widgets. So by the government’s action, instead of gaining 10%, I actually lost 45%.

It would be at this point that the countries and individuals who had money, and money to loan, would cry out to have money fixed at a certain value. This is the cry we hear today for a one world currency. The rich folks want their money in the bank to keep its value. They want the money they loaned out, to be paid back at its full value.

But the nations who borrow money, and who have debt, would never dream of such a restriction, at least as long as they control the money supply. This is why the US can be 18 Trillion Dollars in debt, and not appear too concerned. The money supply (the total number of Dollars the US has printed) is about 34 Trillion. Their debt is 18 Trillion. If they inflate the money supply by 50%, (by printing 17 Trillion Dollars) their debt is nearly covered. What’s the big deal?

This is precisely why China (and other folks with money) wants to end the US dominance in the world’s money supply. China can loan money to the US, and the US can pay them back in inflated Dollars. And there is really nothing that can be done about it, but float gunboats to get back your real value.

So the only practical way China can force the US to accept the use of another currency, is to refuse to take Dollars. This is what China is trying to do through these various banking endeavors. China has tried to divest herself from Dollars, and to use a different currency than the Dollar for all business transactions, and to encourage others to do the same.

In response to this, the US has strengthened the Dollar against all foreign currencies. This was possible for two reasons. First, and most importantly, all nations (including China) are living beyond their means, have debt, and are therefore inflating their money supply to address that debt. And secondly, the tremendous oil and gas boom in the US, has made it possible for the US to stop inflating their money supply, at least temporarily.

This has been a huge event. No nation that has started what the economists call "quantitative easing" which is simply printing money out of thin air, has ever been able to stop. But the US has stopped, at least temporarily, and it has thrown other currencies into shock, as their currencies collapse against the Dollar.

Why is this important? The people (and nations) with saved money, are always looking for a way to safely invest their money. Europe (except for Germany and Britain) is currently so bad for investors, that banks charge you for keeping money in their banks (negative interest) and bonds also are issued with negative worth, meaning they tell you in advance that if you invest in them, they will pay you back less than you loaned them. And with the various European financial documents collapsing, there is a risk that you will not be paid back at all. The same is true of Russia. The same is true of China.

So against that backdrop, the US comes in and strengthens the Dollar, and holds it tight, even making noises about raising interest from the near zero rate (.25%) they are currently at, to perhaps even as high as 2%. The result of this is that the investor class from all over the world, are buying and holding Dollars, or Dollar related financial instruments in even greater numbers. This has the effect of strengthening the Dollar, in spite of the best efforts by China and Russia to weaken or even destroy it.

So what does this mean? In 2014, before the US began to strengthen the Dollar, the value of the Dollar against the Euro, was $1.00 to 1.40 Euros. Today it is $ 1.00 to 1.05 Euros. So if you had 1000 Euros in 2014, you could have converted it to $1,400 Dollars, and loaned it to an American. Today, it would only cost him $1,005 Dollars to pay you back your 1,000 Euros. The loss of your purchasing power to the Euro against the Dollar is close to 25%.

Obviously, such a gain in a world where 2% growth in GDP is considered good, is unbelievable. The Russian Ruble has declined from 32 Rubles to 62 Rubles. And the Chinese Yuan has gone from 6.0 to 6.4 Yuans, which isn’t nearly so bad as the other currencies, but still quite significant. And against the British Pound the Dollar has gone from .68 Pounds per Dollar to .58 Pounds per Dollar.

Any effort to force the US into another currency has at least for the time being, failed miserably. Will the efforts to break the Dollar continue? Sure. But are they likely to succeed? That is very doubtful. The motivation for Gog to come down against Tarshish on the mountains of Israel, is "Art thou come to take a spoil? hast thou gathered thy company to take a prey? to carry away silver and gold, to take away cattle and goods, to take a great spoil?" Such language indicates to me that Tarshish is far and away out performing Gog and it’s associates financially, at the time of the end, to the point where God determines military action is necessary. The socialist (unclean frog spirit) cry is that the people that have money, only have it because they stole it from the poor people. (Makes as much sense as anything else in socialism.) The advance of Gog onto the mountains of Israel is to get their money back.

 

 

 

JimPhillips

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UK's decision to join the AIIB has opened the flood gates against US interests.  Australia has now joined, and most of Europe has, or is saying they will, as well.  The only states standing firm with the US now, are Japan and Israel (who will undoubtedly remain firm) and Canada and South Korea, and who knows where they will go.  Certainly their short term interests are better served by joining the AIIB.  If AIIB fails, however, long term interests could be very painful. 

This will ultimately be a huge test of wills.  The long term intent of the bank is to break the dollar and destroy the US economy.  Gold companies have already begun advertising to Americans to buy gold, directly due to the formation of the AIIB and its now likelihood of success.  Get out of Dollars while you can, they say, as the world is out to break the Dollar. 

Meanwhile, the US Fed is continuing their plans to raise interest rate from .25%, when they went to in 2008 during the financial downturn, to 2%.  The rate increase is expected to come in June.  It will be fun for us to watch this summer.  If the US Fed can raise interest rates, it means they are defeating the world's economies.  If they cannot, it means they are struggling against the world's economies.  If the Dollar drops, and they can't raise interest rates, it means they are losing against the world's economies.

This is a test for Tarshish.  If the US is Tarshish, then a few young lions have just stepped out of line, and are actively working against the Merchant Lion.  How will they be brought back into position?  If the US is not Tarshish, then this could be the catalyst to break the back of America.  Because if this effort to break the Dollar is successful, it will greatly limit the power and strength of the US to do much of anything. 

JimPhillips

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Here is an interesting article which claims 30% of EU notes trade at negative interest rate.  That is, they agree to loan money to EU states, and are paid back less than they loaned.  From Negative interest rates put world on course for biggest mass default in history   Why do people do this?  Because they have to put their money somewhere, and nothing (including banks) seems particularly safe, so they bet on the healthiest nations, thinking they may survive the mess, and while they won't get all their money back, at least they will get some of it back.

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Here’s an astonishing statistic; more than 30pc of all government debt in the eurozone – around €2 trillion of securities in total – is trading on a negative interest rate.

With the advent of European Central Bank quantitative easing, what began four months ago when 10-year Swiss yields turned negative for the first time has snowballed into a veritable avalanche of negative rates across European government bond markets. In the hunt for apparently “safe assets”, investors have thrown caution to the wind, and collectively determined to pay governments for the privilege of lending to them.

On a country by country basis, the statistics are even more startling. According to investment bank Jefferies, some 70pc of all German bunds now trade on a negative yield. In France, it's 50pc, and even in Spain, which was widely thought insolvent only a few years ago, it's 17pc

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One by one, all the major central banks have joined the money printing party. First it was the US Federal Reserve. Then came the Bank of England and later the Bank of Japan. Just lately, it’s the European Central Bank. Now even the People’s Bank of China is considering the “unconventional” monetary support of bond buying. Anything to keep the show on the road. It’s what Chris Watling of the consultancy Longview Economics has termed the “philosophy of demand at any cost”. A crisis caused by too much debt has been fought with even more of the stuff.


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Both Keynsian and monetary economics seem to be in some kind of end game. What comes next is anyone’s guess.

JimPhillips

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So, one month after US allies join AIIB, where are we? China will report the lowest first quarter growth since 2009, probably below 7%, and always keep in mind, that China’s figures are government figures, unchecked by any independent agency. Economists view China’s figures as indicating trends, not in having any functional value. Several independent US economists view China as overstating their economy by a minimum of 10% across the board. (This is one of the US objections to the AIIB bank. If China is the score keeper, then there is no score keeper.)

In 2009, China followed their economic downturn by exporting foreign labor, and instituting a giant stimulus package. This created a huge national debt for China. From the Economist:

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"EVER since China’s gargantuan stimulus of 2009, which was unleashed to repel the global financial crisis, there have been concerns about how the debts incurred during that spending binge would be repaid. The finance ministry took a big step this week to address the overhang, introducing a programme to restructure the liabilities of local governments, the most indebted of China’s public institutions. China still has a long way to go to fix its finances. But after years of first denial and then dithering, it has at least started the clean-up operation."

The article goes on to say that the "cleanup" will be government loaning communities money to pay back loans the government had not authorized in the first place. And the article points out that while this is simply "kicking the can down the road" (something western economies are very familiar with) it places the community debt, in the realm of national debt, which is already huge.

 

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Finally, what about all of China’s other debts? These, alas, will remain a major concern. The cabinet previously ruled that only a portion of off-balance-sheet local liabilities would be treated as full-fledged government debt. The swap programme demarcates that which the public purse will cover from that which it will not. Wei Yao of Societe Generale, a French bank, reckons that local debts have reached as high as 30 trillion yuan. A 3 trillion yuan swap leaves the rest more exposed to default risks.

Moreover, the biggest debtors in China in recent years have been corporate bosses, not local officials. The debts of non-financial companies reached 125% of GDP by the middle of last year, up from 72% in 2007, according to McKinsey, the consultancy. These are well outside the remit of the refinancing programme. China’s debt mountain looks a little safer thanks to the swap, but it is still large and menacing.

 

China’s nationally stated debt, due to the 2009 stimulus has grown from about 7 Trillion in 2007, to over 28 Trillion by 2014. The National Debt Clock (hosted by National Debt Clock.Org, an independent economist estimate, so these figures vary from nationally stated figures slightly) shows China with a GDP of 8.2 Trillion, and a debt of 32.4 Trillion. While the US shows an economy of 17.4 Trillion, with a debt of 18.2 Trillion.

But it is not just China who will have a disappointing first quarter. The US is also projected to have a down quarter, with growth just at 1%. The EU is projected to have a growth of just .6%. The UK grew by just .3%, and Russia is projected to have its economy shrink by -.7%.

Now, in the month since the US allies joined the AIIB, the US has lost very slightly against some foreign currency. Its dropped from 1 to 1.05 Euros to 1 to .92. Against the yuan, the dollar has dropped from 1 to 6.4 to 1 to 6.2. Against the Rupple it has dropped from 1 to 62 to 1 to 52.9. And Against the pound it has gone from 1 to .58 to 1 to .65. That is the biggest drop, and eliminates all of the dollar gain in 2015.

So while the US position has remained strong against all foreign currency, it has slipped almost half of its 2015 gains against most of the world, since the formation of the AIIB. Further, the idea of charging interest on loans, which as we mentioned before, has not happened since 2008, which the US Fed thought to begin in June, has now been pushed back to Fall. This is due to a poor showing for the US in the first quarter of 2015, (along with the rest of the world[wink] and an expected strengthening of the US economy in the third quarter of 2015.

Now, not all of the change can be said to be due to the AIIB. Some of the weakening of the US dollar has been intentional, due to the devastation it was creating in Europe, and the weakening of US manufacturing due to increase value of US goods.

Now, the crowd of economists who were projecting that the AIIB would immediately bring down the dollar (and when I say "bring down" they were/are projecting an action similar to Weimar’s Germany and the complete destruction of the Deutschmark) have backed off their projection for the destruction of the dollar by this summer. Now they are being much more nebulous, just promising that it is still coming.  (For the record, I think they are wrong.  The dollar will not crash at all.)

Perhaps the most notable thing this past month, has been Israel’s petition to join AIIB. This is a testimony to how bad US/Israeli relations have fallen under Obama.

The second most notable thing is that Japan has not joined the AIIB, and indeed has doubled down as being solidly behind the US. Japan has now surpassed China as the largest holder of US debt.

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