Will China Back The Yuan With Gold?

Abraxas said:
There is a potentially massive seismic shift about to occur in the financial world, it looks possible that China will announce that the Yuan will be backed by gold.
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Ridiculous.

Abraxas said:
If this happens the US will find out what it means to no longer be the reserve currency of the world.
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And what's going to replace it? Definitely not going to be the Yuan, seeing as how it's not convertible.

Abraxas said:
Debts as massive as those held by the US are never paid and are usually dealt with by a massive devaluation, which is starting to happen now.
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As massive as what? This?

Debt-to-GDP-ratio-as-percentage-of-GDP.jpg


The level of government in debt in the US compared to our income is not really all that atypical for a developed nation. As well, it's important to note that the dollar floats, so properly it "depreciates" with market forces, it doesn't "devalue". A devaluation is a declaration by the government in a country with a fixed currency regime that the value of the currency is to be reduced.

Abraxas said:
China is not stupid and will not sit around and see their mountain of $1.5 trillion in U.S. debt dwindle, so don't be surprised if they announce it officially this year.
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China buys US debt in the form of inflation protected bonds (TIPS), so there's not any danger that they'd lose out should the value of the dollar depreciate. I also don't see what one has to do with the other. The Yuan is not currently backed in US debt, it's not like choosing to back it with gold would somehow push out US debt purchases. It's also not like China buys US debt just for the lulz, they do it to raise the price of the dollar, making the Yuan comparatively cheaper. As the current government seems to be moving away from the old cheap labor model, they will likely reduce their purchases of US debt in the future, letting the Yuan appreciate. But it doesn't have anything to do with the confused shit you just barfed out.
 
cawacko said:
Now I am far from an expert on this subject but I do understand a cheaper dollar lowers the effective price of American exports (which is what you stated) which is great in the short term. But other countries see that and want to devalue their currency and the term I've heard used is we engage in "competitive devaluations". So while we may get a short-term bump, which of course politicians currently in office love, it only exacerbates our overall debt problems. So are we in a currency war now? I've heard it said we are although I'm not smart enough to say yes or no myself but from what I've read I think an argument can be made we are.
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With who? There are several countries that are pursuing a policy of lowering the value of their currency right now - in particular, Japan. But there are others that are doing the opposite, for their own reasons - in particular, China. It's not always good to lower the value of the currency. As for the US, if the market decides that the value of the dollar needs to drop because it's no longer being used as a reserve currency, I would hardly think it fair for other countries with currencies that were never overvalued at all to retaliate.
 
Superfreak said:
ROFLMAO... we have 'suffered' in trade by being the reserve currency? LMAO.
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Being the reserve currency has certain benefits, it also has certain drawbacks. One of the drawbacks is that the currency becomes overvalued, which makes the countries exports more expensive and therefore less competitive. Benefits would be cheaper imports and lower interest rates on debt.
 
Superfreak said:
China wants the US dollar stronger relative to the yuan, not weaker. It wants the US to continue buying cheap goods from China. It wants the value of the debt it holds to maintain as much value as possible.
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That's kind of an old school view. The government has actually let the Yuan go up a great deal in recent years. It doesn't want to continue simply being a source of a cheap labor. Cheap labor is a great strategy for a desperately poor nation to rise a few rungs, but China's risen far enough that there aren't really much more gains to be made in that area. If it continues sticking to cheap labor, it'll get stuck in the middle income trap, and stagnate.

Superfreak said:
They also want the ability to manipulate their currency (just as we do)... they are not going to tie their currency to a commodity.
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I disagree with your equivocation between the dollar and the Yuan. The Yuan has a fixed exchange rate, is not convertible, and there are significant capital controls in place (you can't have a fixed exchange rate without capital controls, that's the trilemma). In contrast, the dollar floats, whatever our attempts to "manipulate" it, the market ultimately decides the value at the end of the day.

Tying the currency to a commodity also doesn't necessarily limit your ability to manipulate it - just fix the value of the commodity. We had ample experience with this during Breton-Woods, where the major currencies of the world were all theoretically backed by gold, but ownership of gold (outside of the small amounts used in ornamentation) was banned and the price of gold was set by law. Your correct that there's no way the Chinese government would give up that much of its ability to control it's currency - these people really do not know the Chinese Communist party. If they backed it with gold, they'd go the Breton-Woods route and control gold. There's no way they'd just leave it up to the gold markets, especially considering how gold has a tendency to bubble unpredictably anytime inflation whispers are heard.
 
aeprga said:
No worries. I don't really have strong opinions on the matter other than to say that most of the commentary about dollar devaluation is hysteria based and completely unmoored from reality.
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People who say we're planning to devalue the dollar are confused, there's not any mechanism in place for the US to devalue the dollar by fiat. We'd have to implement a fixed exchange rate system like China, complete with the capital controls that such a system more or less requires to persist in the long run

Just to be clear, if the dollar drops in value due because it's position as the reserve currency becomes shaky, that's not a "devaluation". That's just supply and demand - if demand for the dollar drops, so does the price. You can sort of cheapen the value of your currency through monetary expansion, as well, but that necessarily comes with domestic inflation, so it's not like you can go crazy with it. You have to consider the overall situation, else you could easily wipe away all your gains from a lower exchange rate value in domestic economic instability, increased prices, and decreased incomes. This also is not technically "devaluation" either, it's basic supply and demand as well - the supply of the dollar goes up, so the price goes down (although, it's important to note that domestic inflation/deflation and the value of the dollar on the exchange rates don't necessarily have to correlate - that's one misconception a lot of people hold).

In contrast, China's currency scheme was "devaluation" in a true sense - the government simply declared that the Yuan would have a certain value (significantly lower than the market would decide), and put measures in place to ensure that it was traded at that value. This allowed them to sort of have their cake and eat it too - they got to lower the Yuan's exchange rate and cheapen their exports without having to convince the world to have less demand for the Yuan or introduce domestic inflation. But it's not like this is free either - the draconian capital controls required to maintain the system hinder China's economic competitiveness. That's why developed economies generally don't do it, and that's why China's moving away from it as well.
 
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Superfreak said:
ahh... missed this post... a devaluation of our currency would actually help our debt problem, but it would hurt those living off of income and it would devalue assets for those that saved. Bottom line, it would reward those that outspent earnings (including the govt) and it would punish those that saved.
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Not really - again, most treasury bonds are inflation protected, so inflation doesn't make the debt any easier to pay off. Also, inflation doesn't devalue assets. That's why prices go up, the value of the currency has decreased in comparison to goods - if the value of assets (in terms of dollars) were "devalued" instead, that would be deflation. If both were devalued, that would be nonsense, it'd cancel out and nothing would happen. Only cash savings would be directly affected - stocks and such may be affected indirectly, in the sense that too much inflation can have a detrimental effect on the market. And it's generally unwise to keep large amounts of savings directly in cash anyway, cash is practically guaranteed to lose value over time. At the very least you could be keeping your savings in the form of, say, inflation protected treasury bonds, or gold if you're paranoid. As well, a lot of debt in the modern world (most credit cards, for instance) isn't fixed, the debtor can basically change the rate at their whim, and they're damn sure going to do so in case of inflation. Maybe student loans would be made less onerous, and I'm not going to shed any tears there.

Just as a bit of pedantry, devaluation /= inflation =/ depreciation. Inflation is when domestic prices go up. Depreciation is when the exchange rate of a floating currency falls due to market pressure. Inflation will tend to bring depreciation as well, but there's not a 1:1 correlation (for one thing, the domestic value of a currency tends to be propped up by the fact that it's usually the only accepted way to pay taxes, and it's also not really effected by things like foreign reserves that matter a lot when it comes to the foreign exchange rate). As for devaluation, again, that's when a government with a fixed exchange rate system decides to lower the exchange rate by fiat.
 
Abraxas said:
You need to keep up!

http://www.china.org.cn/business/2014-01/12/content_31162602.htm
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Hmm, I'd heard talk of the Yuan gaining convertibility, but mostly from rumors in business news. This is the first time I've heard something directly from the state. Regardless, it has a way to go. Even if they make it convertible and let it float, it'll take time for the markets to build up trust in it. The dollar will have some stick, just based on the fact that it's been a relatively trustworthy hard currency for a couple of centuries, while the Yuan would've only just jettisoned its currency controls and price manipulation (and could very well get it back, if the right faction gets in power - a lot of business leaders are already pissed about the government letting off of it's undervaluing).
 
Superfreak said:
I don't care if you are a fan or not. It is precisely what a deliberate devaluation would do.
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Keeping all your savings directly in cash is not what I'd call responsible. Regardless, I mislike like this attempt to throw class warfare and morality into the mix. Injecting liquidity into the market can bring inflation, but it can also help out with unemployment, and get money circulating once again. The rich have most of their wealth saved in assets that inflation won't wash away, and the poor have much of their debts with variable rates that would be raised in case of inflation anyway (or in payday loan type deals with such ridiculously high rates that no reasonable amount of inflation could hope to make a dent anyway). I doubt it would have much effect on wealth distribution one way or the other. There was never any promise on the part of the central bank to keep the value of the dollar perfectly stable no matter the cost. That's just one of its goals, and it sometimes has to give a little in that area in order to meet others, such as ensuring economic stability, and reducing unemployment. Currency was never meant to be hoarded anyway, it's meant to be traded - you keep enough on hand to meet your day to day needs, and convert the rest to some more stable investment. A little inflation helps ensure that it's used as intended, penalizing the overly cautious.
 
Abraxas said:
The reasons why China is buying up gold were disclosed by Wikileaks. So when was the last time you could demand gold for your dollars? If you could do that then China would be demanding that the US stuff their Treasury bonds up their rear ends and give them the equivalent in gold.

http://www.zerohedge.com/news/wikileaks-discloses-reasons-behind-chinas-shadow-gold-buying-spree
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No one's preventing them from selling the bonds and buying gold with the money. Why should the US be their merchant? The reason they don't do that, anyway, is because it'd be retarded, gold prices are collapsing as years of inflation hysteria turn to not.
 
More tomfoolery?

No offense tommy, but you should probably stick to the laundry, and the memoir!

I think world finance is a little above the pay grade of a washer woman!
 
Tyrion the Imp said:
No one's preventing them from selling the bonds and buying gold with the money. Why should the US be their merchant? The reason they don't do that, anyway, is because it'd be retarded, gold prices are collapsing as years of inflation hysteria turn to not.
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Gold prices are not collapsing they are rising again, not least because China is buying up stocks. As to your assertion that China owns Treasury Inflation Protected Securities, I don't buy that as they are primarily intended for domestic investors not governments. Not that inflation is the primary concern anyway, I am sure that the Chinese are far more worried about the depreciation/devaluation of their dollar denominated bonds.

http://www.goldprice.org/

[url]http://www.ibtimes.co.uk/gold-prices-rise-further-amid-china-data-yellen-speech-1435652

[/URL]
 
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Tyrion the Imp said:
Hmm, I'd heard talk of the Yuan gaining convertibility, but mostly from rumors in business news. This is the first time I've heard something directly from the state. Regardless, it has a way to go. Even if they make it convertible and let it float, it'll take time for the markets to build up trust in it. The dollar will have some stick, just based on the fact that it's been a relatively trustworthy hard currency for a couple of centuries, while the Yuan would've only just jettisoned its currency controls and price manipulation (and could very well get it back, if the right faction gets in power - a lot of business leaders are already pissed about the government letting off of it's undervaluing).
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I believe that the Chinese are intending to create a common currency zone with certain countries in Africa, Asia and maybe even South America. A bit like the old Sterling Area.

http://en.wikipedia.org/wiki/Sterling_Area
 
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Tyrion the Imp said:
Being the reserve currency has certain benefits, it also has certain drawbacks. One of the drawbacks is that the currency becomes overvalued, which makes the countries exports more expensive and therefore less competitive. Benefits would be cheaper imports and lower interest rates on debt.
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I would argue that we are not even close to being overvalued. In addition, we are a net importing nation. As long as that is the case, we should continue to keep the dollar strong, not weak. The only reason the politicians want a weaker dollar is because of the massive amounts of debt they have raised.

Also... your chart is incorrect. Debt to GDP is near 100% now.

http://research.stlouisfed.org/fred2/series/GFDEGDQ188S
 
Tyrion the Imp said:
Not really - again, most treasury bonds are inflation protected, so inflation doesn't make the debt any easier to pay off. Also, inflation doesn't devalue assets. That's why prices go up, the value of the currency has decreased in comparison to goods - if the value of assets (in terms of dollars) were "devalued" instead, that would be deflation. If both were devalued, that would be nonsense, it'd cancel out and nothing would happen. Only cash savings would be directly affected - stocks and such may be affected indirectly, in the sense that too much inflation can have a detrimental effect on the market. And it's generally unwise to keep large amounts of savings directly in cash anyway, cash is practically guaranteed to lose value over time. At the very least you could be keeping your savings in the form of, say, inflation protected treasury bonds, or gold if you're paranoid. As well, a lot of debt in the modern world (most credit cards, for instance) isn't fixed, the debtor can basically change the rate at their whim, and they're damn sure going to do so in case of inflation. Maybe student loans would be made less onerous, and I'm not going to shed any tears there.

Just as a bit of pedantry, devaluation /= inflation =/ depreciation. Inflation is when domestic prices go up. Depreciation is when the exchange rate of a floating currency falls due to market pressure. Inflation will tend to bring depreciation as well, but there's not a 1:1 correlation (for one thing, the domestic value of a currency tends to be propped up by the fact that it's usually the only accepted way to pay taxes, and it's also not really effected by things like foreign reserves that matter a lot when it comes to the foreign exchange rate). As for devaluation, again, that's when a government with a fixed exchange rate system decides to lower the exchange rate by fiat.
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Where are you getting your data that most treasury bonds are inflation protected?
 
Superfreak said:
I would argue that we are not even close to being overvalued. In addition, we are a net importing nation. As long as that is the case, we should continue to keep the dollar strong, not weak. The only reason the politicians want a weaker dollar is because of the massive amounts of debt they have raised.

Also... your chart is incorrect. Debt to GDP is near 100% now.

http://research.stlouisfed.org/fred2/series/GFDEGDQ188S
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His chart is not incorrect. It's just a different chart.
 
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