Monthly Archives: November 2015

Why do governments always debase their currencies?

Over the past few years, the U.S. dollar has soared against nearly every other currency. That has crushed the prices of many commodities– and the companies and countries that produce them.

Now, there are signs this trend is tiring, and reasons to believe a reversal is approaching.

For example, sentiment toward many commodities is as negative as it has ever been. Resource companies are trading at their cheapest valuations in years– or even decades, in some cases.

But this is not the trend I want to talk about today.

Instead, I want to remind you that an even bigger– and potentially much more important– long-term trend is quietly continuing “behind the scenes”…

We are referring to the ongoing debasement of major currencies around the world … and the U.S. dollar, in particular.

So why do governments always debase their currencies? It doesn’t make sense … at first. After all, debasing your currency robs people of their savings and takes away the value of their wages …

The most important reason governments always debase their currency: It allows debt to be repaid cheaply. Governments always want to spend far more than they can raise through taxes. Sooner or later, these debts must be paid off. And the No. 1 way governments choose to pay down their debts is simply by printing money to do it.

Likewise, using paper money ie currency — which is constantly expanding– allows governments to “socialize” financial risks, while allowing certain favoured groups (like banks) to reap windfall gains. For example, by guaranteeing depositors’ savings, the FDIC allows banks to use massive amounts of leverage. There’s no way any major U.S. bank would have survived 2008-2009 if the federal government hadn’t guaranteed the money depositors held in U.S. banks. And the only way the FDIC could make good on its promise to pay was with a printing press …

Here’s what you have to understand … All of the world’s most powerful countries are broke. The European Union has government debts that are roughly equal to its entire gross domestic product (GDP)… likewise, in the U.S. In Japan, government debts are a massive 225 % of GDP. These countries have no choice but to debase their currencies.

Because of the recent rally in the dollar, many Americans might assume this is no longer a concern for us. But that isn’t the case. In reality, the recent “strength” in the dollar is not exactly what it seems …

After all, whenever we talk about the “price” of anything, we’re referring to a ratio. We’re comparing the value of whatever item we’re talking about with the value of something else. For Americans, that “something else” is usually the U.S. dollar.

In the currency markets, when we say the dollar is rallying, what we’re really saying is the U.S. Dollar Index is rising against a weighted basket of foreign currencies, most of which is made up of the euro (which accounts for nearly 60 % of the basket), the Japanese yen, and the British pound sterling.

In simpler terms, much of the recent strength in the dollar is a sign that the economies of Europe and Japan have been in even worse shape than the U.S. But over the long term, the value of the dollar– along with the other major currencies– is still trending down.

How can you tell? By pricing (comparing) them to the one “currency” that can’t be devalued.
Consider that over the last 10 years, the price of gold has increased, in U.S. dollar terms, by more than 200 %. In yen, gold has risen more (by almost 250 %), and likewise in euros. Even in the supposedly reliable Swiss franc, gold prices have increased by 134 %.

price of gold

What most people don’t understand is that the real value of gold hasn’t changed at all. Gold is an economic constant. For thousands of years, an ounce of gold has purchased the equivalent of a fine men’s suit. It still does.

Gold’s real value doesn’t change because all of the gold that has ever been mined is still in existence. Additional mining barely increases the total supply of gold. That’s what makes gold such a unique form of money: Its value never changes.

What’s changing is the value of these paper currencies. They’re being massively debased.

Our government’s massive debts virtually guarantee this trend will continue. Despite any short-term rallies versus other currencies, the long-term trend for the U.S. dollar (and other major currencies) is down. Or as Porter put it, “For paper money, the race to zero has begun.”.

And that’s not just our opinion. History is crystal clear on the matter. Every paper currency has failed.

While we hope this isn’t news to you– and if you’ve been with us for long, it shouldn’t be– this fact has long been forgotten by most folks here in the U.S.

Most Americans will be completely unprepared for the collapse of the paper-money system … but that’s not the case everywhere.

Eastern countries– most notably China and India– have a much better understanding of the real value of gold.

China, in particular, has been quietly taking out “insurance” against the U.S. dollar and other major currencies.

The latest data from Chinese news service Xinhua show the country’s gold consumption rose nearly 8 % over the past year. This means China imported more than 800 metric tons of gold during the first nine months of the year. In addition, the country’s domestic gold production rose 1.5 % over the past year to 357 metric tons.

In total, China has added about 1,171 metric tons of gold this year alone. That’s more than the Swiss government has in its vaults … and this year’s total represents nearly 70 % of the country’s “official” gold holdings.

Clearly, China has been accumulating much more gold than it has been reporting.

But it’s not just the government. Ordinary folks in these countries are still buying gold, too.

According to a new report from the World Gold Council, China and India alone now account for nearly 45 % of global gold demand.

If you haven’t done so already, we urge you to consider putting a portion of your wealth in physical, “hold-in-your-hand” gold (and silver) bullion soon.

With gold prices trading for less than $1,100 today, this is one of the best buying opportunities in the past five years.

How much to buy is a personal decision, but our analysts generally recommend 10 % -20 % of your portfolio for most folks. Whether you accumulate your position over time or buy a large portion all at once is up to you. But we recommend taking at least a small stake soon …

As we mentioned earlier, there are signs a bottom in gold and other resource markets could be just around the corner. Gold may not stay at these prices for long.

More important, China could soon make an announcement that ends the bear market in gold in an instant. If this is right, we could see the price of gold jump 50 % or more virtually overnight.

It sounds incredible, but it’s not only possible, it’s more likely than you might believe. China is going to extraordinary lengths to buy as much gold as possible. In fact, China has likely already surpassed the United States and now controls the largest gold stockpile of any country on Earth. When this is officially announced, it could send gold prices soaring literally overnight.

Reprint from GrowthStockWire

New World Reserve Currency – Chinese Yuan

American Dollar versus Chinese Yuan

Westerners Should “Be Very Afraid” of Friday’s Chinese Yuan-IMF Decision

By MONEY MORNING STAFF REPORTSMoney Morning • November 17, 2015

The Chinese yuan was just awarded reserve currency status. This was the precise event former Wall Street banker Evander Smart warned of in September:

“If you live in the West, and this goes down, be afraid, be very afraid,”.

“The world is starting to prepare for life without the dollar and westerners should, too!”

On Friday, the International Monetary Fund (IMF) recommended the yuan, also known as the renminbi, to be included in its $280 billion basket of currency reserves known as Special Drawing Rights (SDR). The Chinese yuan-IMF decision places the currency alongside the U.S. dollar, the Japanese yen, the British pound, and the euro.

Inclusion becomes official at the end of the month on Nov. 30, according to French news service AFP.

As an SDR world reserve currency, the Chinese yuan is now legitimized as a serious competitor to the U.S. dollar.

Here’s what you need to know…

Chinese Yuan-IMF Decision: Times Are Changing for the Dollar

The U.S. dollar’s favoured status as a world reserve currency has long churned up demand – as a global benchmark, other countries use the USD for international trade. The effect has propped up the dollar.

But increasingly there’s another global currency option for trade – the yuan.

“Times have changed, and the shoe is on the other foot. America – land of perpetual warfare – is swimming in $18 trillion in national debt,” Smart wrote. “The U.S. owes almost $3 trillion to just Japan and China alone as it prints about $696 million per day. According to the IMF or the world’s loan shark, China has even passed the U.S. as the world’s largest economy.”

Smart continues, “Over the last several years, many countries, especially in East Asia, have stopped using the U.S. dollar for trading purposes. These are called ‘bilateral trade agreements,’ and they’re becoming as popular as cat videos on YouTube.”

He notes that more and more, countries are instead opting for the Chinese yuan…

“Countries are trading so much yuan that it has become the second most used currency in the world, passing the euro in 2013 whereas ten years ago, it wasn’t even considered tradable.”

The yuan’s up-and-coming status was further legitimized by the IMF’s decision on Friday. The move places U.S. currency under increased threat.

“What does this mean for the U.S. and dollar values?” Smart posed. “Nothing good; we are witnessing China dumping almost $100 billion in U.S. Treasuries, financial centres like Toronto, London, and New York dealing directly in Chinese yuan, and China opening their own financial support organizations like the BRICS Development Banks and the AIIB (Asian Infrastructure Investment Bank) to work around the IMF and World Bank.”

Smart notes the rest of the world, eager to wean off the dollar, will think favourably of the Chinese yuan-IMF decision.

“The world sees the handwriting on the wall. China is the economic future, and you’re either on board or you are on the Titanic with the U.S… The smart money is moving out of the U.S. dollar, which has been slowly happening over the last decade.”

osborne