The FED, IMF, China and the Wold Bank 

Going along with the Comparative Disadvantage theory that I have previously posted here we also have currency manipulation going on to help support that deceit.  The main player, and the one with the most to gain, in this game, is China; however they would not be able to play this game if it weren’t for the social welfare policies that America and Europe have been following since the end of WW II.  As the war was coming to an end the Allies held a conference in Benton Woods New Hampshire to establish the monetary system that would be used in the world after the war had ended.  By this time, July 1944, the Allies knew the end was near for the Axis powers and that there would need to be a way to manage the rebuilding.

The United States as the driving economic and military force for the allies and as the one country that was still intact was the only one capable of supplying the currency for rebuilding. The currency would be the U.S. dollar backed by gold. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar and the ability of the International Monetary Fund (IMF) to bridge temporary imbalances of payments between the members.

From then on the dollar was therefore the Reserve Currency of world commerce and virtually all goods traded internationally were priced in dollars.  Then on August 15, 1971 President Nixon took the United States off the gold standard because of complications between the gold standard and the United States being the reserve currency and at that point the Dollar’s value was solely a determinant of the United States government.

Although that system worked reasonably well for a while there was a hole in the system that was used first by the Japanese and then more currently the Chinese.  For various technical reasons there was a way to manipulate the exchange rate between currencies to give a country a trade advantage with the United States.  Japan being a small country was only able to use this method for a short time and it was mostly played out by the late ‘80s.  However that manipulation was what allowed several Japanese companies to become the dominant players’ in a number of the world’s consumer markets.

The Chinese after Mao was gone and the U.S.S.R. (Russia) fell realized that since central planning didn’t work they were going to have to do something or the U.S.S.R.’s fait would soon be theirs.  I think they saw how the Japanese conducted their trade with the United States and they set up a similar system to be used by them.  This system, in time, allowed them to run up a huge trade deficient with the United States as described in the previous section.  Also in that section we saw how our politicians allowed that to get out of hand creating the situation we are now in.

The United States was not alone in the imbalances of government spending Europe was also a player only in a different manner.  Europe banded together forming the European Union (EU) in November 1993 probably has a result of the breakup of the USSR in December 1991 thereby eliminating them as a security military threat.  The Europeans thought that by forming this Union they could become an economic power house.  However that was not to be as they twenty years later.

Between 1995 and January 1999 the majority of the countries in the EU adopted the Euro as their official currency.  Why this was done I don’t know since every economist knows that you can’t have one currency and multiple fiscal policies being conducted by the member states.  Could the 50 American states each have their own state national bank that could set internal, to the United States, policies — well the answer is no the Dollar could not stand that for long and the Euro didn’t either.

Some countries like Greece went on a spending binge but they were not alone Spain, Portugal, Ireland to name just a few all conducted themselves recklessly and ended up forcing their internal banks to buy sovereign debt from them as well as other member states.  The monies generated were given to the various citizens groups such as the Unions and various social welfare benefits programs.  By the mid 00’s many of these former impendent countries had run up sovereign debt well in excess of their Gross National Product (GDP).

After the financial collapse in the fall of 2008 and the weak recovery in the next few years the problem with the EU debt became worse mainly, but not limited to, Greece as they got closer and closer to default.  Various austerity programs were tried but as of this writing no real solution has yet been found. Worse the Greek citizens’ not liking the austerity have begun to strike and riot in protest.  The EU is trying desperately to solve the Greek problem but since the Greeks are only the worst of the lot the EU governors may not be able to succeed.  The past reckless spending on social programs is exacting to great a cost.

Foolishly we elected many naive politicians in United States over the past 20 years and they embarked on a program to transform the American system into the European system, because we were told that our system was broken.  However the fact is that the European system is not working as advertised; or they would not be having all the problems that they have. This is of no consequence to these intellectuals’ politicians and they are going full steam ahead with their program for internal changes here.  The result of these new programs has been massive deficit spending averaging about $1.6 trillion per year for the last 40 months and by the end of the government FY, September 20, 2012, total federal deficit for the full 4 years will probably top $6.4 trillion.  We are averaging about $133.3 billion per month of deficit.

So we have both the Europeans and the Americans spending on give away programs like there is no tomorrow, and there probably isn’t, and the Chinese not liking this situation have embarked on a plan to take over the world financial system as a result.  This brings us to the description of what is going on now — under the table so to speak and this is the reason that the financial markets have been so erratic of late. Even though many in the financial markets do not see the big picture they do sense the undercurrent of instability and that causes the markets to move first one way and then another as rumors and facts point first one way and then another.

The result of what was just described is that there are three currency wars being waged as you read this. The European Union (EU) is fighting to prevent Greece from bringing down the EU (the latest deal is not enough). The second battle is being waged by the Federal Reserve (FED) in America to prevent a second recession.  The third is the war the Chinese are waging against both the EU and America over western devalued currencies. The signs can be seen in the movements in the commodities, stock, and the gold markets e.g. gold moving in the same direction as the Dow Jones Industrials (DJI) when they normally move opposite of each other.

The players in the game are the FED, the International Monetary Fund (IMF), the Bank of England (BOE), the European Central Bank (ECB), the Peoples Bank of China (PBC) and The Chinese State Administration of Foreign Exchange (SAFE).  Of course the political leaders in these countries are the puppet masters for these agencies. This list can be put into two groups the Western Countries, the WC, (America, England and the EU) and China.  The WC with their excessive entitlements spending and resulting debt needs to inflate their currencies to prevent collapse. China holds much of the WC debt and doesn’t want that. They seem to be in the driver’s seat but the vehicle is speeding down the road and the bridge just around the bend is out.

The Chinese think that they have found a way out of their dilemma; by manipulating their currency using the PBC and SAFE as their tools to achieve their goals. It works like this, when a Chinese company receives payment from the U.S. for goods supplied to a company there the dollar denominated payment goes first to the PBC and then from their it’s turned over to SAFE so SAFE ends up with the dollars. But the PBC gives the company that sold the material payment in Yuan in lieu of the dollars that were sent to them. However the Chinese not wanting to lose control make this a conversion at a fixed exchange rate set by the PBC.  The Chinese company gets paid and yet the Chinese government still has the dollars so in effect every dollar payment coming into China is doubled there; the company gets paid and the government holds the real money which it invests in the world outside China.

The wild card in this plan is that China does not allow many foreign made goods into their country because they need to create lots of jobs.  At least they have the creating jobs part right. So they buy things like gold mines, and other minerals and energy related mines and resources and — sovereign debt.  This is an economic system from the past but well discuss that later.

It’s now estimated that SAFE holds $3.2 trillion in foreign currency (almost half of that in U.S. Treasuries) and as previously stated China is worried about the WC countries resorting to inflation; as in the FED QE programs and the ECU write down of Greek debt. So they have gone, under the table, on a gold buying spree.  China probably has 2,000 tons of Gold now and is expected to take that to 5,000 tons in the next few years. Their plan is to make the Yuan a gold backed reserve currency. Unfortunately for both them and us the Chinese leadership being Marxist don’t understand the free markets and their real knowledge of world finance is limited and so this plan of theirs will backfire on them.

This currency battle can’t be hidden much longer. The trigger that brings this problem into the light could be a Greek full or partial default, a 2nd U.S. slowdown or recession, or the recent FED announcement that they plan to inflate the dollar by 33% over the next 20 years (2% a year).  Or it could be something else; the reason doesn’t really matter what matters are what actions, on the world stage, will be taken. If we aren’t prepared and make the right choices the results will likely be counter productive and those results will be very, very bad.

The problem we now have is that if the U.S. dollar fails the Chinese Yuan can’t replace it for two fundamental reasons. The first reason is that in any monetary system based on gold, A Gold Standard, the gold “must” be free to move between countries. The second reason is that in economics there is something called the Triffin dilemma which states that the country with the reserve currency, the U.S. right now, has to be a net importer of goods and services. By importing goods we supply dollars into the world market and this is how the world economy works. In essence we are exporting dollars and importing goods.

China will not let gold out of the country
China is a major exporter of goods

Therefore the Yuan can’t replace the dollar and the system that China is putting in is the very system that was in place in the eighteenth century prior to Adam Smiths Wealth of Nations being written — it was called the mercantile system.  This system tries to make all transaction favorable to one country and to horde gold at all costs.  Spain in its quest for gold created sever internal inflation that eventually destroyed their empire.  Smith proved conclusively with inductive logic that the mercantile system hurt trade and everyone was worse off and that it was one of the reasons that there were so many wars.

The pedal is to the medal, the bridge is out and it’s almost in sight.