Shorting the Greenback
What’s got your attention this morning?
The news that Trump has more tariffs in store for China?
That German Chancellor Angela Merkel announced she would quit as leader in 2021 when her term expires?
Perhaps you’re reading the news closer to home.
Did you see that Aussie banks are pulling their institutional desks out of the UK and trying to set up shop in places like Amsterdam?
As ominous as this news sounds, it’s more an ease of banking strategy rather than a doomy signal for the UK and the ‘Brexit’.
The reason major Aussie banks like NAB, CBA and WBC are moving some offices out of the UK is because of ‘passport’ banking. That is, if you operate in the EU, you only need one banking licence to cross borders for business.
While we’re on the subject of Australian-based news, Bloomberg is telling punters that Aussie bank earnings will be the worst in a decade.
Higher international bank rates and the fact that we are so broke we can’t afford to buy houses anymore means banks simply aren’t making as much money as they used to.
Then, we have investment firm Moody’s telling us that mortgage delinquencies – a fancy term for people who are more than 90 days behind in their repayments – are going to ‘rise moderately’ into 2019.
It’s all rather gloomy, isn’t it?
There are times when the news is your best friend. After all, the more informed you are, the better investing decisions you can make.
However, it’s what you don’t see in the news that’s the real problem.
Right now, we are being bombarded with timely information, but the news isn’t getting to the nitty-gritty of the incredible monetary shift happening.
And that’s the shrinking supply of US dollars in the financial system.
I mean, on the surface, that sounds like a good idea though, doesn’t it?
Many people find themselves frustrated by the dominance of the greenback. A few less floating around the world sounds like a plan.
Except, that’s not the case.
No greenbacks, big problems
You see, the US dollar is the linchpin of this fiat money system we operate in.
All commodities express their value in US dollars. Most major currencies have their ‘strength’ compared to the US dollar.
But here’s the thing.
Because the US dollar is the epicentre of the financial world, America can run up enormous deficits because they know there is still a demand for US dollars.
Central banks and governments around the world buy US Treasury bonds as part of their foreign reserves to protect themselves in a crisis.
And the more US bonds they buy, the more ‘money’ the Federal Reserve can print.
Essentially supporting the value of the US dollar. In turn, the US government can keep running up their trillions of dollars in government debt, believing that everyone will always want US dollars.
It’s been this way for almost forty years.
But, there is a very real chance that this cycle is about to come to an abrupt halt.
That there will be less demand for US dollars.
If that happens, the supply of greenbacks will shrink. Or as Jim calls it below, there’ll be a ‘shortage’ of US dollars.
Given that there is no other dominant currency to replace the US dollar, a drop in greenbacks is an enormous problem.
And this is nowhere in the news today. No one is talking about what happens if the rug is whipped out from under the financial system.
Jim Rickards and I collaborated on a report explaining this very problem back in May this year.
So, while you’ve spent the morning running from headline to headline, there’s a much bigger story brewing behind the scenes.
The reason why you heard it here first? No one else was looking.
The Micro Gold Fortunes Summit begins
Before I wrap this morning up, I want you to know one more thing.
The shrinking of US dollars in the system will ultimately create one winner: gold.
The slow destruction of the US dollar value AND demand could drive the price higher. Dare I say it, the gold price could even spike to EIGHT times its current value today.
But it’s not just the death of the US dollar driving this. Right now, there are several predictable events moving the gold price.
And now, it’s over to Jim.
Debt Bomb Ready to Explode
Jim Rickards, Strategist
The great Chinese growth slowdown has been proceeding in stages for the past two years.
The reason is simple. Much of China’s “growth” (about 25% of the total) has consisted of wasted infrastructure investment in ghost cities and white elephant transportation infrastructure.
That investment was financed with debt that now cannot be repaid.
This was fine for creating short-term jobs and providing business to cement, glass and steel vendors, but it was not a sustainable model since the infrastructure either was not used at all or did not generate sufficient revenue.
China’s future success depends on high-value-added technology and increased consumption. But shifting to intellectual property and the consumer means slowing down on infrastructure, which will slow the economy.
In turn, that means exposing the bad debt for what it is, which risks a financial and liquidity crisis. China started to do this last year, but quickly turned tail when the economy slowed.
Shorting the Greenback
Now, the economy has slowed so much that markets are collapsing.
But doesn’t China have over US$1 trillion of reserves to prop up its financial system?
On paper, that’s true. But in reality, China is ‘short’ US dollars.
The Chinese may have US$1.4 trillion of US Treasury securities in its reserve position, but they need those assets possibly to bail out their banking system or defend the yuan.
Meanwhile, the Chinese banking sector, which in many ways is an extension of the state, owes US$318 billion in US dollar-denominated deposits of commercial paper.
From a bank’s perspective, borrowing in US dollars is going short US dollars because you need US dollar assets to back up those liabilities if the original lenders want their money back.
For the most part, the banks don’t have those assets because they converted the US dollar to yuan to prop up local real estate Ponzis and local corporations.
There’s not much left over to bail out the corporate, individual and real estate sectors.
Tick Tick Tick
This is all part of a global ‘US dollar shortage’ attributable to Fed tightening, both in the forms of higher rates but also a reduction in base money.
A dollar shortage seems implausible in a world where the Fed printed US$4.4 trillion. But while the Fed was printing, the world borrowed over US$70 trillion (on top of prior loans), so the US dollar shortage is real. The math is inescapable.
So, the Chinese debt bomb that has been a long time in the making is finally getting ready to explode.
The economy is slowing, debt is exploding and the trade war with Trump has hurt China’s exports needed to earn dollars to pay the debts.
The defaults are beginning to pile up. Several large corporations and regional governments have defaulted recently.
China’s leaders have panicked at the slowdown and have started the credit flow again with lower interest rates, higher bank leverage and more debt-financed, government-directed infrastructure spending.
Of course, this solution is strictly temporary.
All it does is postpone the day of reckoning and make the debt crisis worse when it does arrive.
With every passing day, a Chinese financial collapse draws closer. The rest of the world will not escape the consequences.
When the crisis strikes in full force, possibly in 2019, the rest of the world will not be spared.
All the best,