“Follow the Money”; a novel about the new depression; Part Two

Since many commentators are suggesting China will recover the most – and the earliest – what about making Hu Jintao, the president, the hero of our Great Crash epic? In some ways it would be appropriate, as it was Chinese savings and Chinese industriousness that propped up much of the American financial bubble for the past ten years. Perhaps longer. However, the Chinese exports to the US, and the huge trade deficit provided a significant contribution toward the crash. Were they on the good side, or the bad? The Americans would not have become financially insolvent if the rest of the world had not indulged them.

Perhaps having the world’s reserve currency since the Second World War has been a deadly trap, that the supposedly smart people in Washington and Wall Street fell into like rubes at a carnival. Because every trading nation in the world had to buy US dollars in order to pay for export and import business the US dollar was made to seem more resistant to setbacks than it really is. That’s still the situation even today when panicked foreigners are buying US Treasury bonds as an attempt to find financial security. Nothing is everlasting, and the more financial operators extend their faith in the fiat dollar the more they invite its failure. (Fiat dollar refers to a currency that has no item of value, like gold, to back it.)

Hu Jintao, the Chinese President, at the recent G-20 promoted the idea of using IMF Special Drawing Rights, or something based on them, as the world’s new reserve currency – to take the pressure off the US dollar. This would enable the US to institute fiscal policies that address its own particular problems – future inflation as well as chronic unemployment – without further upsetting the global economy. Does this qualify him as our future hero who will save the world from economic collapse?

Let’s look at another part of the picture first. Over the last six years, China has increased its holdings of gold by 75%. Does this look like a commitment to help the US over its monetary crisis?

From “The Daily Reckoning” April 29th 2009:

<China has increased their gold holdings 75% in the last six years. They recently announced that the gold holdings have been transferred from the State Administration of Foreign Exchange (SAFE) books to the People’s Bank of China. PBOC. Our intrepid correspondent, Byron King explains what this really means: “China is monetizing its gold!

“This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But in keeping with a nation where youngsters get their Sun Tzu with their mother’s milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not “monetary,” then it was just another non-monetary investment commodity like iron ore or copper or petroleum.

“But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves.

“This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset. Gold has not been a factor in global trade and currency exchange since the late 1960s. But there’s a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It’s because the U.S. dollar has been so badly mismanaged over the decades. No, you won’t read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It’s happening.>

Add to that an item in today’s ( April 29th) Der Spiegel:

<Germany’s foreign intelligence agency, the Bundesnachrichtendienst (BND), has decided to address the issue (of changing world order).

In mid-April, BND President Ernst Uhrlau presented German President Horst Köhler with his analysis of the repercussions of the current situation. During the meeting at Berlin’s Bellevue Palace, the president’s official residence, the two men discussed a “metamorphosis in geopolitics” and the future political make-up of a world that will never be the same again.

The core message for the German government is that Europe and the United States will come under growing political pressure, and will face growing competition from China. Beijing will be one of the likely beneficiaries of future shifts on the political map.

Uhrlau believes that there are three possible scenarios. The first scenario, the most optimistic of the three, assumes that the current economic stimulus programs will work, leading to a rapid shift in trends in the stock and credit markets, and that confidence will return and the economy will pick up speed soon.

Under this scenario, the United States will remain the dominant superpower, but it will emerge from the crisis economically weakened and with less available capital to fund its military activities. The People’s Republic of China would benefit from this development as the strongest exporting nation.

The Chinese will benefit even more if scenario two, which the BND calls the “China scenario,” becomes reality. It describes what will happen if the billions from the West’s economic stimulus programs end up primarily in Asian countries.

The foreign capital would reinvigorate Asian domestic markets, allowing Beijing to invest even more heavily in advanced technology and take over the prime assets of Western industry, thereby accelerating its modernization process.

This, in turn, would speed up China’s process of catching up with the West. For Beijing, the crisis would serve as the catalyst for a development that has already been underway for several years. “China would develop even more strongly into a superpower in Asia and a reference point for countries like the Arab Gulf states and other raw materials producers,” says Uhrlau. “The United States, on the other hand, could forfeit some of its dominant status.”

India would also grow in the slipstream of the Chinese, though not as dynamically. The BND believes that under this scenario, competitors to central institutions like the IMF would take shape, such as an Asian Monetary Fund.>

( PS. You don’t want to know the third scenario.)

Well…seen enough? If you are Chinese or even a citizen of almost every country in the world – except America – this might qualify Hu Jintao as a worthy hero of our proposed novel about saving the world from the current depression. Since I’m assuming most of my readers are American, I have to carry on to find a protagonist they might find more palatable in my next posting.

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