October 21, 2014
I walked in the door this morning to my apartment in Santiago, happy to be back in Chile after a week away.
(One of the things that I really love about this place is the weather. The weather forecast in the entire central region of Chile is typically just a string of yellow circles. Yet it’s not so hot that you need air conditioning. I love it.)
But my mood was quickly spoiled when my maid handed me an envelope.
“It looks official,” she said, staring at me to gauge my reaction. She was right. The sender was the United States Department of Treasury.
Clearly my first thought was wondering why the US government was sending me anything, especially to my apartment in Santiago. My second thought was utter astonishment that the US Postal Service had managed to get it here!
I ripped it open and found… a check. Made out to me. It was my tax refund.
As an aside, I’ll tell you that living overseas has a lot of huge benefits. One of them is that your taxes are almost always going to be lower.
If you’re American, you can earn up to $99,200 in foreign income, tax free. This amount goes up every year (not that there’s any inflation).
If you’re married, you and your spouse can BOTH claim the foreign earned income exclusion, meaning you can earn nearly $200,000 as a couple, tax free.
And when you include the additional deduction you can receive on foreign housing, your total tax benefit living overseas can easily be upwards of $250,000 or more.
Just imagine being able to put an additional $250,000 in your pocket each year, instead of giving that money to a bankrupt government to finance drones, bombs, and body scanners. (More on this in another letter…)
In my case, I have income from other sources, including certain investment income that still gets taxed. And just to be on the safe side, I ALWAYS overpay my taxes, so our friends at the IRS send me a refund each year.
This is the first year in ages that I remember receiving a physical check; I must have forgotten to fill out the direct deposit section of the 1040.
And while checks seem like vestigial relics of a financial era long gone, it’s not a big problem to deal with down here. Chileans really like checks, and it turns out that a number of Chilean banks we deal with are more than happy to immediately clear foreign checks from the US.
Then I glanced back at the envelope. It said, “Forgery or endorsements on Treasury checks is a Federal crime. Maximum penalty is a $10,000 fine and ten years in imprisonment.”
Wow. In the Land of the Free, you can’t even deposit a tax refund check without being threatened with fines and imprisonment. It’s unreal.
We’ve talked about this before. Even the most basic, innocuous tasks now involve threats and intimidation.
If you apply for a passport on form DS-11, the government threatens you with “fine and/or imprisonment under U.S. law including the provisions of 18 U.S.C. 1001, 18 U.S. C. 1542, and/or 18 U.S.C. 162.”
Applying for a social security replacement card threatens you with “penalty of perjury”.
Applying for a driver’s license in my home state of Texas threatens me with “five years in prison and/or a $250,000 fine.”
And of course, the instruction book for IRS form 1040 includes an entire section threatening anyone about to file his/her taxes with civil, criminal, and administrative penalties.
There’s very little you can do in the Land of the Free that doesn’t involve the threat of fines and imprisonment anymore, including simply depositing a check.
They’ve criminalized almost every aspect of existence. EVERYTHING—how your children are educated, the purchasing power of your savings, the privacy of your email, what you can/cannot put in your body– is regulated by the state.
Any deviation from the standards that they establish is criminalized. And they shove these threats in our faces at every opportunity.
The idea of a government for the people, by the people, of the people… has long been lost. They don’t even pretend to serve the people anymore… it’s just threats and intimidation.
This is not how a free society is supposed to operate. And as we explored in yesterday’s podcast, it’s a sign of the top.
We have reached peak government. Like any bubble, this one is about to burst.
For every crisis that strikes, the government springs up to “save” us.
Introducing new bureaucratic agencies or an “Ebola Tsar” as Obama has just done, they are constantly adding to the already over-bloated expanse of government today.
But when a real danger happens, they completely fail. Repeatedly.
The reality is, we don’t need the government to save us from anything. All the tools and technology that are necessary for society to function without government are there.
I invite you to listen to this week’s podcast, where I discuss some of the tools that are immediately available to you as you take back your freedom.
October 17, 2014
New York, USA
At present, US dollar accounts for roughly 61% of the world’s foreign exchange reserves.
It’s still a safe bet for most, not because the currency is actually strong, but because so many others are already so reliant on it.
Between those with reserves in and pegs to the US dollar, many countries have given their allegiance, and now have a vested interest in the health of the currency.
Due to this common interest, a sort of unofficial, involuntary alliance has been formed between them all.
Together, they’re all playing along, pretending that everything is fine. If the dollar collapses, they’re all screwed, so they’ve got to get each other’s backs.
From the throne of the world’s reserve currency, the Federal Reserve, with the power to print the US dollar, feels dangerously omnipotent.
They can get away with just about anything. For now.
The central bankers get to print dollars and spend them at current prices, before the stuff hits the wider market and diminishes its overall value.
And for the time being they don’t really face any consequences. The whole world just absorbs it. Other countries really have no other choice.
But they’re getting tired of putting up with this abuse, and the unrest is growing. New alliances are being made, this time to dethrone the dollar.
Just this week yet another currency swap agreement was made between the Chinese and Russian central banks. This time for 150 billion renminbi.
Trade volume between China and Russia will reach $100 billion (600 billion renminbi) next year, and is expected to reach $200 billion in 2020. This latest currency swap agreement will greatly reduce the need for dollars in their transactions.
Currently, 75% of trade between the two countries is settled in dollars. When they signed the agreement for the bilateral currency swap, Russian deputy Prime Ministers said this will “encourage companies from the two countries to settle trade in local currencies and avoid the use of a third country’s currency.”
Who do you think that was aimed at?
Threatened by the growing strength of China and Russia, the US is actively working to vilify the two. Between the headlines of war, both cyber and military, the government is unsubtly trying to bring back the days of yellow peril and the red scare.
However, it can’t use the same tactics on its longstanding ally—Europe.
Even the European Central Bank has started discussions on the possibility of including the renminbi as one of its reserve currencies.
On Tuesday the UK also became the first country besides China to issue a sovereign bond in renminbi.
This coincided with the issuing of 180 million renminbi of corporate bonds by China’s ICBC in South Korea. Another first. South Korea is firmly on the renminbi train as renminbi deposits in the country jumped 55-times in just one year.
It’s very clear where the trend is going. All these news items are pieces of the same puzzle. The US dollar’s throne is shaking as it’s losing its importance and status as the preeminent currency in the world. Renminbi is on the way up.
The whole existing order of a single ruling currency is currently being challenged.
A new financial era is coming.
October 16, 2014
New York, USA
For a casual observer of the US economy (most “experts”), you could say that things look pretty good. Unemployment is at its lowest rate in six years. Earnings of S&P 500 companies are higher than ever, while their debt is lower than it’s been in the last 24 years.
Nonetheless, rather than getting excited for good economic times, the big commercial banks are all battening down the hatches. They’re preparing for bad times ahead.
I often stress the importance of being prepared, so in theory, that should be a great sign.
But then, you look at what they are “defensively” investing in, and you see that what they consider as prudence is simply insanity.
What banks are stockpiling these days are US government bonds, and they’re not doing this casually, they’re going nuts for them.
In just the last month alone American banks increased their holdings of US treasuries by $54 billion, to a record $1.99 trillion.
Citigroup, for example, held $103.8 billion worth of bonds at the end of June, up 19% from the end of last year.
This is like preparing for an earthquake by running out and buying whole new sets of porcelain dishes and glass vases.
All it’s going to do is make things more dangerous, and even if you somehow make it through the disaster, you have a million more shards to clean up.
With government bonds you are guaranteed to lose both in the short-term and the long-term. Bonds keep you consistently behind inflation (even the deceptively named TIPS—Treasury Inflation Protected Securities), so the value of your savings is slowly being chipped away.
But that’s nothing compared to the long-term threats of the US government not being able to repay the loans.
Facing $127 trillion in unfunded liabilities – which is nearly double 2012’s total global output – and with no inclination to reduce those numbers at all, at this point disaster for the US is entirely unavoidable.
Never before in history has a government stretched itself so thin and accumulated anywhere close to this amount of debt.
So when the day comes, it won’t be a minor rumble. It will be completely off the Richter scale.
These facts about the US government are in no way secret. Every bank out there knows it, yet they keep piling in.
Why do they keep buying bonds that they know the government will never be good for?
Even though people know in their guts that the government has no earthly possibility to ever repay its debt, on paper it’s a no risk investment.
The US government’s sovereign debt has an AA+ rating after all. They might not make money off it, but no fund manager and investment banker is going to get fired for investing in “risk-free” US government debt.
Under the rather arbitrary Bank of International Settlements Basel capital adequacy rules government debt rated at least AA continues to carry a “zero risk” weighting. Meaning that banks do not need to set aside capital against it.
Beyond that, regulations imposed after the last crash to reduce risk require banks to hold $100 billion in liquid assets, which of course includes bonds. Thus, they are not only encouraged, but actually forced to buy government bonds.
With a combined position of nearly $2 trillion in US government debt, against which they hold little or no capital buffer, US banks are now EXTREMELY vulnerable to a bond market sell-off.
In the aftermath of the meltdown of 2008, banks were made to pay multi-billion dollar fines for having “knowingly sold toxic mortgages to investors”. Will politicians and central bankers ever be held responsible for not only “knowingly selling” their toxic debt to investors, but actually forcing it on the banks?
The global economy shivered when the consequences of lending to subprime homebuyers came to fruition. Just imagine how it will quake when the US government – the largest subprime borrower in history – eventually defaults (or hyperinflates) its debt away.
There’s nowhere in the world the tremors won’t be felt.
More on how you can protect your savings from this folly next time.
October 15, 2014
En route to New York
“John Galt is Prometheus who changed his mind. After centuries of being torn by vultures in payment for having brought to men the fire of the gods, he broke his chains—and he withdrew his fire—until the day when men withdraw their vultures.”
Sick of the overbearing regulation, taxation, and entitlement mentality in society—in the book Atlas Shrugged, John Galt went to one entrepreneur after another to convince them that they just didn’t need to put up with it anymore.
They didn’t need to keep propping up a system that was trying to destroy them. Where’s the point in continuing to feed a parasitic system?
So one by one, these innovators and producers simply closed up shop, deciding to just “shrug” and abandon what they were providing thanklessly to the looters.
Today many companies are doing the same. They may not be abandoning their businesses altogether, but they are moving them out of the hands of the parasites by moving their tax bases abroad.
In Ayn Rand’s book, the Economic Planning Bureau dealt with this by legislating that no businesses could leave: “[a]ll the manufacturing establishments of the country, of any size and nature, were forbidden to move from their present locations, except when granted a special permission to do so.”
In real life today, we have a string of policies being proposed to similarly discourage companies from leaving, or failing that, to try to claw as much money as possible from them first.
First, take the H.R. 5278: No Federal Contracts for Corporate Deserters Act, which bars federal contracts for American companies that have gone overseas for tax purposes.
Then take the H.R. 5549: Pay What You Owe Before You Go Act, which seeks the seizure of unrepatriated corporate revenue.
Even the language used by these bill’s supporters is eerily similar to the novel, as politicians call for corporations to pay their “fair share” and bemoan that Americans have to “pick up the tax burden inverted companies shrug off.”
At the time, Rand might have thought that she was writing about an extreme, fictional society. But it seems that the Land of the Free is eager to exceed even her worst expectations.
When she wrote about the “Economic Emergency Law”, which forbade any discrimination “for any reason whatever against any person in any matter involving his livelihood”, she was likely thinking about criteria such as race, gender, and age.
She might have even considered they would try to prevent employers from making judgments based on a person’s ability, though I’m sure she would not have even imagined what politicians have actually come up with in the US.
Try the S. 1972/ H.R. 3972: Fair Employment Opportunity Act that proposed to prohibit discrimination according to a person’s history of unemployment.
Or even worse, the S. 1837: Equal Employment for All Act that would have prohibited employers from even looking at prospective employee’s credit ratings.
The literary similarities don’t just stop with corporations either. Compare the fictional Project Soybean, designed to “recondition” people’s dietary habits to the actual H.R. 4904: Vegetables Are Really Important Eating Tools for You (VARIETY).
Tell me, which one sounds more ludicrous to you?
With each new piece of legislation being proposed in the Land of the Free, Atlas Shrugged seems to be ever more prophetic.
While even the most terrifying elements of the book are coming true, so are the reactions.
People and companies are leaving, refusing the put up with the looting of their efforts any longer.
Despite politicians’ desperate attempts to stop it, Atlas is already shrugging.
October 15, 2014
En route to New York
One of our SMC members just received a package from HSBC giving him and his wife a deadline to comply with FATCA—US’ global tax law.
As Canadians they’d long felt bad for Americans having to deal with the overbearing burden of FATCA. Never did they think it would affect them.
But suddenly they had just four weeks to prove that they were not US taxpayers, all because at one point they had purchased a service that gave them a US phone number.
And now they, as Canadian citizens and residents, have to submit a fully completed W8BEN IRS form, along with a government issued photo ID and a detailed letter of explanation to make it very clear that they were not in fact Americans.
It used to be that foreigners were vying to become US citizens, but today they’re begging not to be confused as one.
In aiming to make itself the warden of the world, the US government has become very comfortable with reaching beyond its borders.
Historically, the pursuit of global dominance involved taking over others’ territories with guns blazing. Today, there’s more finesse, but the intentions are the same.
FATCA, the new Manifest Destiny, is probably the most arrogant piece of legislation ever enacted, at least in modern times.
Assuming that the entire world should be subject to its own arcane and excessive tax legislation, FATCA requires foreign banks to sabotage their relationships with their clients and breach their own privacy standards to comply with the US government’s will.
This overreaching piece of legislation demands that they reveal the information of US citizens with accounts over $50,000.
Otherwise the banks will be frozen out of the US banking system and slapped with a 30% withholding tax—effectively killing their business.
Those that resist can even face criminal charges.
Which is what happened in 2009, when the IRS accused Swiss bank UBS of aiding tax evasion, imposing on it a $780 million fine. The fines have been piling up and increasing ever since, with Credit Suisse having to pony up $2.6 billion this year.
Thus, everyone is complying. They can’t afford not to.
With the Swiss banking system in particular in the crosshairs of US authorities, the Department of Justice “offered” a deal to Swiss banks to avoid prosecution before the end of last year, and over 100 Swiss banks rushed to take it before the December 31st deadline.
However, the actual terms of this deal didn’t come out until now. It turns out that, from its position of dominance, the US government is demanding “total cooperation” from Swiss banks.
This means an open, one-way flow of information of American account numbers, balances, names, addresses and identification numbers. In addition, they must reveal all cross-border activities and close the accounts of any Americans said to be evading taxes.
Doing otherwise, the banks are breaching the deal and thus immediately face prosecution.
This is the economic equivalent of a military occupation.
Between compliance documentation, and facing massive fines and potential criminal charges, it’s no mystery as to why foreign financial institutions are going out of their way to avoid US customers.
And increasingly they’re looking for alternatives to the whole system as well. If you’re a foreign bank that gets reminded constantly of the potential penalties, breaches and charges that you could face simply for doing business, it’s only prudent that you hedge your bets and look to minimize your exposure to the US dollar and the US banking system.
It really just isn’t worth it anymore.
The US thus just continues to shoot itself in the foot.
October 15, 2014
En route to New York
A strong community of other entrepreneurs and mentors makes all the difference for a young startup.
Through a community, and through mentors in particular, you can gain access to their networks. This might be just what it takes to turn your fledgling idea into a reality.
For those looking for a place to launch their startup with a solid community for support, Nairobi, Kenya, is nearly unmatched.
Here, the sense of community is simply remarkable. Successful Kenyan entrepreneurs are exceptionally passionate and willing to mentor the next generation of entrepreneurs.
As a result, there is a constant stream of events in Nairobi geared toward entrepreneurs or budding business leaders. Everywhere from students to top-level business leaders, the desire for personal and business development is fierce.
International and domestic capital and mentorship programs abound, as there is great interest in funding businesses that could potentially transform the whole continent. Mobile technology, agriculture, and infrastructure are some of the main focuses.
Seeing the country’s strong growth and potential, many individual Kenyans who have been raised and educated in top universities in the UK and US are now coming home, bringing knowledge, experience, capital, and global networks back with them.
Add to that the fact that Nairobi is one of the headquarters of the UN, and it’s clear why the city is home to such a vibrant international community. One with a lot of money at that.
Co-working spaces and startup incubators like 88MPH, Fablab, and iHub in Nairobi provide great communities for entrepreneurs who come from across the country and the world seeking to break into the massive, fledgling African market. They are working hard to establish Nairobi as the major tech hub of the region.
In 3 years of operation, 88MPH has invested nearly $2 million in startups, with a number of the businesses that have gone through their incubation programs already seeing wide use across the country.
One example being MDUNDO, a sort of Kenyan version of iTunes, which has been adapted to suit the predominance of mobile rather than computer browsing in the country.
As the country’s market is less developed, basic services like this can really take the country by storm.
This is no more apparent than the case of M-PESA, a mobile phone based money transfer and microfinance service. Launched in 2007, the service has already revolutionized business and every day transactions in the country.
Everybody and their grandmother uses it on a daily basis, and you can pay from anything from your groceries to your taxi instantly by mobile.
Though things are modernizing quickly, living in Nairobi can still have its challenges. Done right, however, and you can live particularly well. Very nice accommodation can be easily a quarter of what you can find in New York or California, and with fantastic, temperate weather all year long, you just can’t complain.
For the entrepreneur with a sense of adventure not only in business but in life, the proximity of Nairobi to incredible safaris and beautiful beaches just can’t be beat.
As the country is on a clear upward trajectory, the potential is absolutely huge. We’re not talking a few thousand downloads of your app, but changing the lives of millions across the continent.
In Kenya, you can truly dream big.
October 14, 2014
Buenos Aires, Argentina
In the pantheon of utter political stupidity in our time, the competition is pretty fierce to see who ranks #1.
But I have to imagine that, even with so many rivals, Argentina’s Cristina Fernandez de Kirchner makes a pretty compelling argument to be the champion.
And though the productive class of Argentina is no stranger to being vilified by a populist government whose grasp on power rests on praising the dignity of poverty, Cristina has managed to take things to an entirely new level.
Exhibit A: Argentina’s new ‘supply law’, or Ley de Abastecimiento, due to take effect in December next year.
Under this new law, the government will have the honorable burden of defending consumers from greedy producers.
Companies are now prohibited from setting their prices too high, generating too much profit, or producing too little.
And unlike the country’s astronomically high taxes (which at least have defined numbers and penalties), the new supply law doesn’t even say what is meant by too high, too many, or too little.
It simply reinforces the government’s unchecked power to arbitrarily audit, fine, shut down, and expropriate production of private companies.
Argentina’s government has already been maintaining “voluntary” price controls on over 400 consumer products for the past year, all in the name of combating the inflation that they themselves created.
And as any high school economics student can tell you, price controls create… SHORTAGES. Duh.
Needless to say, local production of these staple consumer products has dropped as a result of price controls. And given the pitiful state of the peso, they’re too expensive to import.
And anyone who can actually get their hands on these products—sugar, cooking oil, canned fruits, cleaning products, etc. often strolls across the land borders into Paraguay and Brazil where they are sold at competitive market prices.
Argentina’s new law of clamping down supply-side control echoes Venezuela’s 2011 “Fair Price and Cost Law”, which instead of reigning in inflation has reduced the Bolivarian state to the continent’s preeminent example of failure
Throngs of Venezuelans now line up around the block for days to buy single-ply toilet paper at a “fair” price. Argentina is not far behind.
This isn’t even about the country being “leftist” or “socialist”.
What has destroyed the country is not the high taxes or government waste (although that certainly doesn’t help). Argentina shoots itself in the foot by passing laws that call into question legal certainty and basic property rights.
All of this exacerbates unquantifiable country risk and the inability for businesses and individuals to plan ahead—in any environment.
If you think Argentina is an aberration, think again.
Just as Argentina used to be one of the richest places in the world and Buenos Aires competed with New York for the brightest and most talented minds on the planet, many Western countries are going down the same road.
They create absurd and confiscatory tax systems and regulations. They condemn companies who have a fiduciary responsibility to their shareholders – not governments – and follow THEIR OWN LAWS to legally minimize their tax obligations.
The seize, steal, kill and regulate every aspect of our private and economic lives. And they even have to resort to such comical measures as in Europe where they now count illegal activities such as spending on drugs and prostitutes as part of the GDP to maintain the illusion of economic growth.
All this uncertainty pushes people and businesses out the door. No one wants to deal with long-term stability issues when the next debt-ceiling debacle is always just around the corner, and when you have to look out for any number of three-letter agencies to reprimand you for doing business.
Argentina is a sign of things to come. Are you willing to wait for when your government decides that your profits are too high?
October 13, 2014
A man in a uniform dashes up to you with a badge pinned to his chest and says “that man over there is a thief! Quick, help me get him!” What do you do?
You would probably run and tackle the guy down, right?
To get to the rational part of your brain that tells you to hold on, since you don’t even know if the man in a uniform is actually a cop, or if the alleged thief actually did anything wrong, you have to first overcome a whole life of indoctrination telling you that when someone in a uniform tells you to do something, you do it.
Some are able to reach that rational part of their brains, but most are not.
Experiment after experiment has shown us the level of blind obedience that people have to anyone in a uniform—replacing any morality or common sense they might have had in order to comply.
Here in this video you can see some of the terrifying and silly things people do when instructed to do so by someone in a uniform. Mind you this isn’t even necessarily a person of authority, it’s merely someone dressed as one.
That’s what’s scary. Because people will willingly hurt other people for no other reason than the fact that someone appears to be an authority figure.
This kind of obedience is no accident. It starts off as an intentional process from childhood.
In school you were taught to sit down, shut up, and do whatever your teacher said.
The lesson from day number one was to take orders without thinking about them.
If you grew up in the United States, you likely started your day off with your hand over your heart proclaiming your fealty to your nation—whatever that was—and the piece of tri-colored cloth by which it was represented.
Before you could understand what any of the words in the Pledge of Allegiance meant, you knew them by heart.
That was exactly the point.
Which is why on October 12, 1892 the Pledge of Allegiance was made compulsory for all students in public schools.
Aiming to instill patriotism and obedience in children early on, Francis Bellamy, the socialist minister who penned the Pledge, made sure to keep it brief and with good cadence so it would be easily memorized.
Children across the nation recite it every morning:
“I pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.”
Even into adulthood, once you could begin to understand the meaning of the words you were saying, there was to be no room for debate.
“Liberty and justice for all”? Who could possibly claim to object to that? Which is exactly what Bellamy wanted.
But in reality, how many people even as adults actually think about what those words mean.
The original Pledge was accompanied by ‘the Bellamy salute’, which was dropped during WWII because the Nazis started using it (they copied the United States’ tactics to instill national pride and obedience).
The Nazi salute and the indoctrination of children? Yep, that was the US’s idea first.
Thus, the same blind obedience given to those in uniforms is also given to actions commanded under the name of the American flag.
Just the same, this can lead some to forget all morality and common sense to willingly harm other human beings, whether they be across the planet or within the country itself.
With enough indoctrination, all it takes is a piece of cloth and a few words.
October 13, 2014
[Editor’s note: Tim Price is a London-based wealth manager and editor of Price Value International.]
“When sorrows come,” wrote Shakespeare, “they come not single spies, but in battalions.”
True. And Jeremy Warner for the Daily Telegraph identifies ten such sorrows in his ‘ten biggest threats to the global economy’:
1) Geopolitical risk;
2) The threat of oil and gas price spikes;
3) A hard landing in China;
4) Normalization of monetary policy in the Anglo-Saxon economies;
5) Euro zone deflation;
6) ‘Secular stagnation’;
7) The size of the debt overhang;
8) Complacent markets;
9) House price bubbles;
10) Ageing populations.
We’ll start with point #7: the size of the debt overhang.
Since this was never addressed in the immediate aftermath of the Global Financial Crisis, it’s hardly a surprise to see the poison of debt continue to drip onto all things financial.
ALL German government paper out to three years, for example, now offers a negative yield. Investors must pay rent to the German government in order to buy its debt.
This has implications. And much of the rest of Warner’s ‘threats’ are inextricably linked to this debt overhang.
Point #8: Complacent markets? Check. (Though stocks have lost a lot of their nerve…)
Point #9: House price bubbles? Check. Since the monetary policy response to having too much debt in the system has been to slash rates and keep them at multi-century lows, it’s hardly a surprise to see property prices in a bubble. Again.
Point #5: Euro zone deflation? Check. This is less of a threat to solvent consumers, but deadly for indebted governments.
Point #4: Pending normalization of monetary policy in the UK and US? Check.
This threatens the integrity of the credit markets. And it’s worth asking whether central banks could possibly afford to let interest rates rise and risk bankrupting their governments.
We saw one particularly eye-catching chart last week, via Grant Williams, comparing the leverage ratios of major US financial institutions over recent years (shown below).
The Fed’s leverage ratio (total assets to capital) now stands at just under 80x. That compares with Lehman Brothers’ leverage ratio, just before it went bankrupt, of just under 30x.
Sometimes a picture really does paint a thousand words.
And this, again, brings us back to the defining problem of our time: too much debt in the system.
In a recent interview with Jim Grant, Sprott Global questioned the famed interest rate observer about the likely outlook for bonds. Grant responds:
“I’m not sure what a bear market would look like, but I think that it would be characterized at first by a lot of people rushing through a very narrow gate. ”
Grant was also asked if it was possible for the Fed to lose control of the bond market:
“Absolutely, it could. The Fed does not control events for the most part. Events certainly will end up controlling the Fed. To answer your question – yeah. I think the Fed can and will lose control of the bond market.”
As we have written on innumerable prior occasions, we wholeheartedly agree. What will drive pretty much all asset markets over the near, medium and longer term is almost entirely down to how credit markets behave.
The fundamentals (again, take one look at the chart) are utterly shocking, as are the implications.
And let us not confuse the prognosis by arguing over the diagnosis.
As Professor Antal Fekete writes in his Monetary Economics 101: The real bills doctrine of Adam Smith–
“Hyperinflation and hyper-deflation are just two different forms of the same phenomenon: credit collapse. Arguing which of the two forms will dominate is futile: it blurs the focus of inquiry and frustrates efforts to avoid disaster.”
Tim Price’s monthly Price Value International investment service is designed to provide safe investment advice and education, as well as actionable recommendations as to where investors can deploy their capital without taking an unnecessary amount of risk in an environment of corrupt central bank and government policies.
October 10, 2014
I just got off a two-hour conference call with the board of directors of our agricultural investment company.
I’m fortunate that our board is comprised of some incredibly smart people, including a senior executive at one of the largest sovereign wealth funds in the world, another investment banking executive, private wealth manager, etc.
These are very intelligent people who understand both finance and agriculture.
Our conversation this morning turned to exchange rates, and we discussed the future of the US dollar.
Bear in mind that we all hold a rather dim view of the dollar’s long-term fundamentals. That is, after all, why we pooled funds to trade paper currency for high quality productive farmland.
But over the coming months, our consensus was that the US dollar is in a favorable position when ranked against other major fiat currencies. I’ll explain why:
There are only a handful of currencies in the world that can handle huge institutional inflows and outflows.
A fund manager moving $100 billion, for example, can’t park that money in the Costa Rican colon, or the Tanzanian shilling.
It would be impossible. That amount of money would practically swallow the entire money supply and wreck havoc on the local economy.
The only currencies right now that are globally liquid and can really handle such massive flows are the US dollar, the euro, and the yen.
The yen is the worst off; the Japanese government is in absolutely abysmal condition spending upwards of 25% of its central government tax revenue just to pay interest on the debt. And the situation gets worse by the day.
In Europe, many interest rates are now in negative territory. If you purchase a short-term German government bond, for example, you have to PAY THEM for the privilege of loaning them your money. It’s nuts.
By comparison, even though the US government’s financial position is absolutely atrocious, the dollar is the least ugly of the three.
To wit, institutional investors have been selling yen and euros in favor of US dollar assets. And we’ve seen this play out via the steady strengthening of the USD exchange rate for those currencies.
The euro, for example, was at $1.39 just five months ago. It hit $1.25 last week—a 10% drop in just five months.
This is a result of institutional money flows. The dollar is being viewed, despite its deep, fundamental problems, as the safe haven currency. And institutions are buying.
Now, while this outlook will likely persist over the coming months, the long-term outlook for the dollar remains clear. And China’s renminbi is a big part of that.
The international use of the renminbi rises with each passing month.
Institutions, central banks, large corporations, and even governments are beginning to use the renminbi more and more. They’re holding it as an official reserve, and they’re even cutting oil deals in renminbi.
We’re seeing commodities contracts traded, priced, and settled in renminbi. And renminbi trading hubs are being rapidly established in Western financial centers, notably London and Zurich.
Plus, the Chinese government is gradually loosening the renminbi’s restrictions, allowing convertibility on a global scale. Bottom line, they WANT the renminbi to be a global currency.
This will provide a critical fourth option for institutional capital flows.
And while China is saturated with challenges on multiple fronts, the renminbi’s fundamentals are far more attractive when stacked against the dollar, euro, and yen.
Over the coming years, we can expect more and more institutional capital flows into the renminbi.
But for now, at least until another looming US government shutdown spooks investors, we can expect the dollar to reign.
It’s a sad statement of the global financial system when a country that has accumulated more debt than any other nation in the history of the world appears to be the ‘least bad’ choice.
That said, there are options.
The Hong Kong dollar is currently pegged to the US dollar at a rate of 7.80 HKD per US dollar and trades within a very narrow band.
This means that if the US dollar maintains its strength, or if it appreciates further, the Hong Kong dollar will strengthen along with it.
But if the US dollar were to devalue sharply… or experience a sudden, terminal decline, the Hong Kong Monetary Authority could de-peg the Hong Kong dollar.
In this way, your downside risk is protected, yet you maintain your upside potential in case the dollar improves further. And you practically eliminate exchange rate fluctuation in the meantime.
Of the available options, the Hong Kong dollar is a strong choice to consider.
October 9, 2014
The Bank of Korea — South Korea’s central bank — released data that says South Korean domestic deposits have reached 16.19 billion Chinese renminbi in July this year, which is a 55-fold increase from the same period last year when renminbi deposits accounted for only 290 million.
According to data from South Korean banks, the proportion of foreign currency deposits held in renminbi was 0.4% at the end of 2012. That number reached 13.7% at the end of last year, while at the end of July this year the renminbi accounted for 25.9% of all foreign currency deposits in South Korea.
That’s an incredible, exponential increase.
Since Korean interest rates continue to be low and follow closely those of most Western countries, Koreans realize that if they continue to hold their money in bank accounts denominated in won, their savings are steadily and surreptitiously being diminished by inflation that’s higher then their paltry returns.
With a lack of good investment opportunities in a zero-interest rate environment and with frothy equity markets, Koreans are at least diversifying their currency exposure, with domestic capital rapidly flowing into renminbi deposits that yield much higher at around 3.25% per year.
Coupled with the continued strength of the renminbi, the attractiveness of diversifying their capital in foreign currencies, and the renminbi in particular, is clearly a firm trend among Koreans.
This is a well known scenario. Just as Europeans from countries with weaker currencies and economic prospects used to safeguard their savings by holding them in Deutschmarks and Swiss franks, we see the same trend happening today.
Individuals, companies and even governments are diversifying their currency exposure — mostly on the account of the US dollar. Renminbi denominated bonds are now being issued by businesses all over the world– heck, even McDonald’s issued a renminbi bond.
And now the UK will become the first country in the world other than China to issue renminbi denominated government debt. In fact, just this morning the UK Treasury announced that it hired Bank of China, HSBC and Standard Chartered to arrange the sale, with the bond issuance likely happening next Monday.
This follows last week’s announcement from the People’s Bank of China that renminbi and euro are now directly tradable, without the need to use the US dollar as a conduit.
The signs are clearly all there. Everyone realizes that the present system is on its way out and are taking appropriate measures. The Germans, the French, the Brits, the Canadians, the Koreans…
Don’t you think it’s time to step up and do something about it too?
The situation today looks a lot like one big game of musical chairs. Investors and “hot money” desperately looking for yield in a zero interest rate environment are pushing prices of practically all assets sky high and diversifying into markets and currencies with brighter prospects.
Make sure that you’re not the one left stranded when the music stops.
October 8, 2014
In 1863, the United States of America was in the midst of a devastating civil war.
Thousands of people had just lost their lives at Gettysburg, and Sherman was preparing for his march to the sea, laying waste to Atlanta in the process.
New York City was embroiled in the most violent riots in its history.
The southern economy was in shambles with the prices of staple food items skyrocketing, and citizens of the Union were stuck paying income taxes for the first time ever.
Much of the country had still not recovered from the Panic of 1857. And just when it seemed that things couldn’t be any more chaotic, the President would be assassinated soon.
All in all, it seemed that the whole world was on fire. This was United States in the 1860s.
And had you been born at this time amid so much chaos, death, and pessimism, most people would have thought your future prospects would be pretty dim.
But that’s not what happened. Instead, that would have been an incredible time to be born.
Rather than floundering in its rubble, the United States became the wealthiest and most powerful country in the world in the fifty years that followed.
Indeed, the latter part of the 19th century was an extraordinary time to be alive.
Economic freedom abounded in the US. There was no insane government regulation. No income tax. No gun-toting agents ready to kick in your door, shut down your lemonade stand, tell you what to put in your body, or arrest you for collecting rainwater.
Personal responsibility was valued. Everyone accepted that there was danger in the world. And it wasn’t up to the government to ‘protect’ people from every last one of them.
Yet despite so much ‘danger’, this was one of the greatest periods of wealth creation in history, simply because people were free to make things happen.
People were free to enter, compete, and make choices in the market. Their freedom and property rights were protected by a clear rule of law.
However, just 50-years later, this positive trajectory was cut short with the establishment of the Federal Reserve.
It was a remarkable turn of events.
In 1863 the Emancipation Proclamation freed the slaves. Five decades later the Federal Reserve Act placed an entire population under the control of a banking cartel.
The 100 years that followed through today have simply been about tightening the chains and leading the country down a path of gradual decline.
At first, the decline was subtle. The US remained prosperous and relatively free throughout the twentieth century.
According to the newest Frasier Institute’s Economic Freedom of the World Index (released yesterday), the US ranked as one of the world’s freest economies from 1980 through 2000.
Since then the decline has hastened.
The US dramatically slipped to 9th in 2005 and its decline has continued ever since, to the point where the United States is now rated less economically free than Jordan.
This is no accident.
The mushroom cloud expansion of regulation has stifled small business and innovation.
Even more significantly, property rights and respect for rule of law that once defined the country have eroded.
From an alarming increase in government seizure of private property under the guise of eminent domain, to blatant disregard for the property rights of bondholders during bailouts, the US has plunged to #36 in the world in respecting property rights.
The decline of economic freedom in the US has destroyed opportunities, growth, and wealth creation along with it.
Is this as bad as Argentina, Equatorial Guinea, or Venezuela? No. But it’s not about where you’re at. It’s about where you’re going. And the trajectory is clearly negative.
October 7, 2014
Now that European Union countries are required by law to keep tabs on illegal activities as part of their economic indicators, we decided to look at some select European countries more closely.
The new accounting rules mandated by the EU’s statistics office, Eurostat, include revenue from illegal activities related to drugs trafficking, prostitution and cigarette smuggling.
Of course, there’s no actual reliable data to measure these illegal activities, so it’s all guesswork. But hey, whatever floats your boat—or boosts your GDP.
For example, to figure out how prostitution contributed to the country’s economy, Spain’s national statistics agency counted the number of “known prostitutes” working in the country and consulted sex clubs to calculate how much they earned.
Known prostitutes? Do they have a Facebook group?
And how about if these “known prostitutes” move around the borderless Schengen area? Their contribution to GDP is probably counted several times then.
So, using these scientific methods Spain’s statistics agency announced that illicit activities accounted for 0.87% of GDP.
(Perhaps this is one of the reasons why a whopping 547,890 people left Spain last year, most of them to Latin America, according to the national statistics agency.)
This compares similarly to the UK where Britons, according to its own statistics agency, spent 12.3 billion pounds on drugs and prostitutes in 2013, or 0.79% of GDP.
That’s more than they spent on beer and wine, which only amounted to 11 billion pounds.
And you probably thought Britons were heavy drinkers. Turns out they enjoy hookers and blow even more.
On the more uptight and conservative spectrum of Europeans, Slovenian households spent 200 million euros last year on prostitutes and drugs, or 0.33% of Slovenia’s GDP.
Curiously enough, Slovenia’s Finance Minister just announced today that the country’s budget deficit will be 200 million euros higher than previously thought. Coincidence? I don’t think so.
On the more libertine extreme, in Germany estimates suggest that prostitution and drugs amounted to as much as $91 billion in 2013—or an incredible 2.5% of the total economy.
This is the sign of the times. Governments are so desperate to maintain the illusion of growth that they’re turning to desperate, comical measures.
Across the entire continent, Eurostat estimates that gross EU GDP is larger by 2.4% if all illegal activities (not just prostitution and drugs) are accounted for.
Funny thing, they also report that total real GDP growth in 2013 (the year they started counting illegal activities) was just 0.1%.
In other words, illegal activities are now the difference between economic growth and economic recession in Europe.
October 7, 2014
Chris Rose was dying from terminal heart disease. He didn’t have long, and before he passed, he wanted to make sure that his 18-month old son received his British passport.
When he went to pay the application fee at the British consulate in Hong Kong with cash, they told him, “Sorry we only take credit cards.”
The English teacher who had been living in Hong Kong for 20 years doesn’t have a credit card, and thus has no way of paying the passport fees for him and his son.
So they rejected him. They rejected a dying man from paying for his son’s passport with the very currency that they themselves issue. It’s obscene.
Facing intense bureaucracy and several months of waiting with no guarantee of success, he gave up on the hope that his infant son would be able to visit his grandparents back home.
It was only after the story was publicized in the local press in Hong Kong that the requirement to pay with a credit card was ‘waived on compassionate grounds.’
Think about how ridiculous this whole situation is for a moment.
First the government makes it mandatory that you have a passport in order to be able to move across arbitrary borders on the map that they have created.
Then they charge you money for the privilege of having a passport. In other words, if you want to leave the country, you have to pay up.
But then they won’t allow you to pay for it with the pieces of paper they force you to use as money.
Instead, they force you to use the government-regulated (and protected) banking industry, whether you want to or not.
Everywhere you look you can find examples like this of how politicians view people as government property to be exploited like cattle.
The Brazilian government imposes a tax of 6.38% on all purchases made by Brazilians with credit cards abroad.
This rate rose from the previous 2.38% in 2011 with a federal mandate in an effort to curb the rising trend of Brazilians traveling abroad to make purchases that are often cheaper than back home.
They don’t even try to hide the fact that they don’t want Brazilians to spend money outside of the country.
The message they are sending is quite clear: stay put and pay through the nose for inferior products produced by companies that have paid us off for a monopoly.
Of course, we’re starting to see protests around the world, proving that people are increasingly aware of being screwed by their governments.
But these protests are flawed.
Going out into the streets doesn’t change the system. And going to the voting booth only changes the players… not the game.
Every single election cycle people fill themselves with hope. They delude themselves into believing that everything will get better if they vote the right guy into office.
Of course, the right guy very quickly turns into the last guy. And nothing changes.
That’s because it’s the system itself that’s flawed. It’s not about any single individual.
This system awards a tiny elite with the power to kill. Steal. Wage war. Confiscate anyone’s property in their sole discretion. To tell people what they can/cannot put in their own bodies. To conjure trillions of currency units out of thin air.
But this current system can’t last.
It requires economic stability to self-sustain. And it’s already at the point where those in power have to resort to desperate tactics.
Their desperation has them coming up with ever-more creative ways to conjure economic growth. Plus they’re feeding on the tax revenues from entire generations that won’t even be born for decades.
This simply cannot sustain. Whether it happens today, tomorrow, 10 days from now, 5 years from now… is irrelevant. What’s important is the trend. It’s happening.
This is fundamentally good news. Yes, every shred of evidence suggests that the old system is on the way out. And that’s a bit scary. The unknown is always uncertain.
But what will come out on the other end will be better, brighter, and more free.
If you take a hunk of coal and put it under extreme pressure, you end up with a diamond.
Our entire civilization is being put under intense pressure. And what will come from this eventually is just as precious: a system where the individual has the power and freedom to choose. Where we are no longer viewed as government property.
In the meantime, it’s going to be a bumpy (and high-pressure) ride.
So for now, look at the objective data. Trust your senses about what’s happening. And don’t put all of your eggs in one basket.
October 6, 2014
[Editor’s Note: Tim Price, Director of Investment at PFP Wealth Management in the UK and frequent Sovereign Man contributor, is filling in for Simon today.]
For the benefit of anyone living under a rock these past weeks, Bill Gross, the so-called “Bond King” and manager of the world’s largest bond fund (PIMCO), jumped ship before he could be shoved overboard.
PIMCO’s owners, Allianz, must surely regret having allowed so much power to be centralized in the form of one single ‘star’ manager.
In a messy transfer in which nobody came out of well, Janus Capital announced that Bill Gross would be joining to run a start- up bond fund, before he had even announced his resignation from PIMCO (but then again Janus was a two-faced god).
This was deliriously tacky behavior from within a normally staid backwater of the financial markets.
Some financial media reported this as a ‘David vs Goliath’ story; in reality it is anything but.
The story can be more accurately summarized as ‘Bond fund manager leaves gigantic asset gatherer for other gigantic asset gatherer’ (Janus Capital’s $178 billion in client capital being hardly small potatoes).
This writer recalls the giddy marketing of a particularly new economy-oriented growth vehicle called the ‘Janus Twenty’ fund in the UK back in 2000.
Between March 2000 and September 2001, that particular growth vehicle lost 63% of its value. Faddish opportunism is clearly still alive and well.
We discussed this last week, highlighting this seeming anomaly that even as there has never been so much debt in the history of the world, it has also never been so expensive.
This puts the integrity of markets clearly at risk. And we have long sought alternatives that offer much lower credit and counterparty risk.
The time-honored alternative has been gold.
In fact, as the chart below shows, gold has tracked the expansion in US debt pretty handily (editor’s note: the correlation between the two is a strong +0.86).
You can see in 2011, the rise in the gold price became overextended relative to the rise in US debt. Then it decoupled and went in the opposite direction.
This is a similar trend to what occurred in the early 1980s. And if one expects that relationship to resume (we do), then gold looks anomalously cheap relative to the rising level of US debt.
A second rationale for holding gold takes into account the balance sheet expansion of central banks:
If one accepts that gold is not merely an industrial commodity but an alternative form of money, then it clearly makes sense to favor a money whose supply is growing at 1.5% per annum over monies whose supply is growing up to 20% per annum.
A third rationale for owning gold is best summed in perhaps the most damning statement to capture our modern financial tragedy.
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.”
This is from Jean-Claude Juncker, former Prime Minister of Luxembourg and current President-Elect of the European Commission.
It’s clear there is a vacuum where bold political action should reside. Elected leaders continue to kick the can down the road and ignore dangers to the system.
And in this vacuum, central bankers have stepped in to fill the void via bond yields that are below the rate of inflation.
They say that to a man with a hammer, everything looks like a nail.
To a central banker facing the prospect of outright deflation, the answer to everything is the printing of ex nihilo money and the manipulation of financial asset prices.
This makes it incredibly difficult to shake off the suspicion that navigating the bond markets over the coming months will require almost supernatural powers in second-guessing both central banks and one’s peers.
For what it’s worth this is a game we won’t even bother playing.
Our pursuit of the rational alternative – proper forms of money and compelling deep value in equity markets – continues. More to follow on this.
[Editor’s note: Stay tuned this week for more information about Tim’s new monthly investment service, Price Value International.]
October 3, 2014
Some of our team members at Sovereign Man are on the ground in Hong Kong and are witnessing first-hand the turmoil that’s been going on there for the past two weeks.
It all started on September 22 with grievances over the decision from the Chinese government in Beijing not to allow the people of Hong Kong to have free and fair elections in 2017.
Events reached a new stage over the previous weekend when the police used pepper-spray, batons and tear gas against unarmed and peaceful protesters standing up for freedom.
Today, protesters forced the government complex to shut down by setting up barricades around it, as a response to Hong Kong’s Chief Executive Leung Chun-ying’s refusal to step down.
What’s remarkable is how peaceful and courteous the whole thing is.
There are signs on closed roads and subway stations that apologize for the inconvenience caused. Protesters are collecting their own trash and are even recycling it—even though the government’s cleaning department is reportedly refusing to cooperate and collect it. They have well-organized centers in each of the occupied sites with essential supplies—from water to medical assistance.
Nobody is using this as an opportunity to be violent or cause trouble.
Most of the protesters are students and there’s a clear divide between the young and the old currently. Most young people are very enthusiastic and support the protests, while many older people think the young are being manipulated by third parties to push their own agendas.
But most are just irritated because their businesses and traffic have been affected.
A lot of older people have also resigned themselves to accept that the eventual takeover of Hong Kong from Mainland Communists is inevitable—something the energetic young are clearly very opposed to.
In the last days there has been some turbulence caused by anti-protesters who oppose the student-led campaign. It’s rumored that thugs have been paid HK$800 (about USD$100) each to stir chaos and trouble by starting fights with protesters to give the police an excuse to use force against otherwise non-violent protesters.
The government is even using advanced propaganda tactics to sway the sentiment against the “rioting” students. Independent media outlets have revealed fake photoshopped images and reports of broken police cars and other alleged damages of rioting.
The government’s strategy is to largely wait for the protests to wane. And indeed by 8:30 pm local time today many occupied areas were cleared up.
Despite that, violent clashes between protesters and anti-protesters have intensified, however. The police, ironically, is not doing anything to restrain troublemakers. Instead, they’re using this as an excuse to arrest everyone and kick the protesters out.
On the ground it looks like the movement is ebbing. In Tsim Sha Tsui, one of the main shopping areas in Hong Kong, the police carried away an old man—the single remaining protester occupying the site.
The latest is that the protesters have canceled planned talks with the government, blaming authorities for failing to protect them from violent opposition attacks.
To be continued…
People around the world are now being sparked into action, sick and tired of limitations on their freedoms.
We have a number of members from our team with boots on the ground in Hong Kong, where people are politely, but fiercely protesting the state. They are not alone.
Globally, the system has to change. History shows us that this always happens.
World superpowers, the prevailing social contract and the monetary system––none of these can last indefinitely.
We are now living in a unique time in history where all three of these systems are on the way out.
October 2, 2014
In 1324, Mansa Musa, the tenth emperor of the Mali Empire, set off from Western Africa on his pilgrimage to Mecca.
This was no Spartan journey. He was accompanied on his way by a procession of 60,000 men and 12,000 slaves, each of whom carried up to four pounds in gold bars.
Musa is might just have been the richest person of all time, with an accumulated wealth estimated at $400 billion valued in today’s increasingly worthless dollars.
But it wasn’t just kings and emperors who held gold. Gold has been the most widely-used medium of exchange in world history… across all points of the globe.
Ibn Battuta was a 14th century traveler and explorer whose famous grand adventure spanned 75,000 miles over the course of 24 years, much like Marco Polo’s.
Everywhere he traveled– North Africa, Middle East, Central Asia, India, Southeast Asia, China – gold was either the dominant currency or an easily accepted medium of exchange.
This barbarous relic has stood the test of time across cultures around the world for millennia as a form of wealth.
Most people in the West have completely lost sight of this.
They view the value of gold through the lens of paper currency, i.e. an ounce of gold is ‘worth’ 1,215 US dollars.
This is a deeply flawed perspective.
Looking at the gold price moving up and down in US dollars is something like sitting in a rowboat on choppy waters believing that it’s the beach that’s moving up and down.
Einstein might say that it’s all relative, but only one has any real stability.
But perspectives can and do change.
There once was a time when most people believed that the entire universe revolved around the Earth.
This was a flawed (and arrogant) view, and it was eventually corrected.
Thinking that the global economy revolves around the US dollar is just as flawed and arrogant. And it will soon be discredited just the same.
History tells us that dominant monetary systems invariably have an expiration date.
From the Byzantine solidus to the British pound, this is especially true when a superpower enters into decline and plays destructive games with its currency.
Today’s system where an unelected central banking elite conjures trillions of dollars and euros out of thin air is no different. It has an expiration date too.
Change is never easy. People don’t like it, and will resist change even if their current situations are terrible. Inertia is the most powerful force in the universe after all.
Desirable or not, it’s happening. The US dollar’s days are numbered.
Now, gold, with its millennia-long history is making a comeback. We’re not just talking about it as a store of wealth or a speculation, but as a regular form of currency.
Moving us back in this direction, Singapore Exchange launched a new arrangement this week where institutional-sized gold contracts will settled not in cash, but in 1kg bars of gold.
This means that each of these contracts is intended to deliver and store gold in Singapore on behalf of large financial institutions, central banks, and even governments.
Sure, Singapore wants to advance itself as THE gold hub of Asia. We’ve been writing to our premium members about this for years
But more importantly, it’s quite telling that major insiders within the financial system itself are pursuing this contract.
They’re effectively setting up a new system, in Asia, to afford governments and central bankers the opportunity to trade in their US dollars for something real.
Just like yesterday’s post about the renminbi/euro convertibility, this is truly a canary in the coalmine moment for the future of the US dollar… as well as gold’s emerging role in the financial system of tomorrow.
October 1, 2014
The Chinese central bank, People’s Bank of China, issued a press release announcing the authorization of direct trading between the renminbi and the euro on the inter-bank foreign exchange market.
This is huge. The euro is the second most traded currency in the world, after the US dollar. The European Union is already China’s biggest trading partner and this is a major step in further increasing trade and investment ties with the EU as there is now a direct exchange rate between the two currencies, without the need to use the US dollar as the conduit.
The renminbi is quickly marching down the path of internationalization as the Chinese currency is now directly exchangeable with the US dollar, Australian dollar, New Zealand dollar, Japanese yen, British pound, Russian ruble, and Malaysian ringgit.
The use of renminbi in international trade settlement nearly tripled in value worldwide over the past two years according the The Society for Worldwide International Financial Telecommunications (SWIFT), and over one third of financial institutions around the world already use renminbi for payments to China and Hong Kong.
This is another sign of how the system is changing. And it’s a major one. As the following chart from Deutsche Bank clearly shows, the last two centuries or so of Western domination in the global economy is nothing but an anomaly on a long timeline of history.
China and the Indian subcontinent have always been the two major population centers of the world, as well as global economic powerhouses. Spectacular Chinese decline over the course of the 19th century was a result of an archaic state of the Chinese society, as well as its unwillingness to open up and adjust to the world that has clearly changed with the advent of the industrial revolution and the first major wave of globalization.
This resulted in the British Empire being propelled to the top spot as the world’s superpower. World Wars changed that and the United States became the undisputed top dog in the 20th century.
Now, this historical anomaly is being rectified and China is again reclaiming its spot in the world, with the Chinese currency following suit.
For anyone following this trend closely, this is a very exciting time to be alive. Major changes like this happen rarely; perhaps every hundred years or so. And these changes offer incredible opportunities for those attuned to them, and a tremendous amount of turmoil for those ignoring the trend.