Yuan and Gold Gain Strength as US Dollar, Empire Falls and China Rises

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“Can you really run a great empire on borrowed money?” asked Richard Russell recently. We can give you the answer here…or you can simply read the news headlines. Either way, the answer is the same: yes, for a while.

America has been the world’s leading imperial power for only three or four generations. It took over from the British in WWI. Since then, American military and commercial power has dominated the planet.

But the empire business, like any business, has its good points and its bad points. On the good side, you get to boss people around and feel important. On the bad side, it can be costly – especially if you don’t know what you are doing. And on the really bad side, it almost always ends in bankruptcy and military disaster.

We explain this phenomenon in our books, Empire of Debt (with Addison Wiggin)…and Mobs, Messiahs and Markets (with Lila Rajiva). Empires – like other grand public spectacles – make the news twice, we recall writing, coming and going. Most likely, the US empire is on the ‘going’ side of the news. That is the meaning of Mr. Xu Jian’s comment that the US currency is yesterday’s world money.

The empire business is fundamentally a protection racket. The imperial power provides political stability and military protection. In return, the tributary or vassal states pay. But that is the fly in America’s imperial ointment. No one pays. The United States invaded Iraq. Cynics say it did so to get Iraq’s oil. At least, that would have made sense from an imperial finance point of view. Nothing uses more oil than the pentagon. And nothing is more costly than garrisoning troops all over the world and fighting ‘insurgents’ you’ve stirred up.

How to pay the expenses? Typically, an imperial power either forces subject nations to render up some form of tribute – gold, slaves, wheat – or, in the more modern variety, it insists on certain favourable trading terms.

But America never got the hang of empire; it invades countries but forgets to steal the treasure. It is so impressed with its own claptrap – “making the world safe for democracy”…“fighting terrorists” – that it forgets it has to pay the bills.

In its most modern form, the US empire has one great advantage: the rest of the world looks to the dollar as a universal currency. Until now, the United States has been able to finance its imperial aspirations largely by paying in dollars, which other nations accepted at par. But no law says they have to continue to take them. And now, fashion models and foreign governments – including an up-and-coming rival, China – are beginning to raise questions. And now the US dollar is in the news – going, along with the empire.

That is why, too, our old friend Jim Rogers says he going too. He’s selling out of America and putting his money in China. He’s even taught his daughter to speak Mandarin…

Jim is a visionary. He’s looking ahead, towards the next big imperial cycle. China is in the news too of course…it’s making headlines coming while the US is making headlines going.

Maybe we should do what Jim is doing. Maybe we should move to China. Maybe we should put all our money in the yuan

Nah, we don’t know anything about the yuan. We’ll stick with gold.

But hasn’t gold gotten ahead of itself? Isn’t it ready for a correction?

Possibly. Many experts expect a big reversal in gold, even experts who think it will eventually go over US$1,000. They could be right.

But we don’t trade gold. We don’t even invest in it. We just buy it as a place to keep savings. We count our savings in ounces, not dollars.

Gold is like housing to us. We don’t buy houses as investments either. We buy houses we want to live in. We try to only buy ones that we want to live in for a long time. If their market prices go up or down, we don’t care. We have no intention of selling.

Likewise, we have no intention of selling gold. It is just a place to keep savings.

Where, then, do we invest? Ah, dear reader…you are asking tough questions today.

But what the heck, we will take you into our confidence. We don’t really believe in investing. That is, we don’t believe in the whole concept of getting something for nothing. Yes, we know people do it, but we’re not interested.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. I doubt if the Chinese economy is any better managed than the USA. You go there and take a good long look – tens of millions of half-completed houses, banks that have no idea of what is on their balance sheets, public officials who steal everything they can lay their hands upon, total chaos on the highways, thieves everywhere. I spent four years and 100,000km travelling in China and the marvel is that it works at all.

    Geologist Chuckie
    November 10, 2007
    Reply
  2. You dismiss me too lightly,
    I think so I am.
    I count up your numbers
    then post up this spam.
    And when you imply
    I don’t think so I’m not.
    I protest
    I’m the best
    I’m the spam robot.

    Philip Barton
    November 11, 2007
    Reply
  3. Not that I don’t think your sentiment is sound, but how can gold be a place to put your savings if you care not whether it goes up or down. Surely buying something which goes down means losing your savings, even if you don’t buy it because you think it will go up.

    Reply
  4. I agree with ‘Chuckie’. I live in China, and it’s wrong to say it’s better managed. The reason is that 1/4 of the worlds population are here. If Darwin was right, we’re going to be seeing a lot more of China in the future. It’s a mistake to put it down to sound economic management, and right to put it down to numbers and cheap labour. It is a miracle anything works here. Plus, I’m not sure how you’ll pput your money in China, it’s hard.

    Reply
  5. hello,

    the write up is quite insightful,i think jim rogers is right and the world should start looking to china as the new wrld economic power,but the chinese have to be careful, not to implode on themselves

    Reply

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