Financial topics

[Reality Check]

That leaves gold and while the Chinese would have been willing to spend that $300 billion per year on gold (or whatever was left of that $300 billion that they didn't spend on other things, but accumulated as reserves) the volume of gold sales worldwide are not enough to accumulate that volume of gold by purchasing it on the free market. The only way to buy that volume of gold is to find a horde that someone is willing to sell.

You forgot silver. If I was China I would buy up huge amounts of silver too.

The market can accommodate any demand by adjusting the price. If China had wanted to purchase $300 billion per year the last 4 years they could have done so, but the price of gold would be higher then and now.

Excellent point.

If you are a major manufacturing country with vast amounts of paper money from countries whose paper money has historically been highly valued, such as the United States and European countries, you would have no problem what so ever buying a Trillion dollars worth of precious, semi-precious and bulk commodities that could be delivered to your country. Even if the terms were payment upon delivery.

As you point out the price would go up on these quantities, and these terms, but for the right price, you could change your paper money into tangible assets stored in your country. Assuming deliver occurred before war broke out.

[Reality Check]

Excellent point. I had not thought about that during these recent discussions. I would wonder how Europe would respond in the case of the Euro denominated debt that the Chinese own.

Very good question.

Would probably depend on how Europe would respond to a war between China and the U.S.

If they sat it out, it would likely be a neutral currency.

On the other hand, how China believes Europe will behave, probably has more impact on China's current strategic investment strategy ( assuming they are considering war as a worse case scenario when developing their strategic investment plans ).

[Higgenbotham]

The market can accommodate any demand by adjusting the price. If China had wanted to purchase $300 billion per year the last 4 years they could have done so, but the price of gold would be higher then and now.

Excellent point.

If you are a major manufacturing country with vast amounts of paper money from countries whose paper money has historically been highly valued, such as the United States and European countries, you would have no problem what so ever buying a Trillion dollars worth of precious, semi-precious and bulk commodities that could be delivered to your country. Even if the terms were payment upon delivery.

As you point out the price would go up on these quantities, and these terms, but for the right price, you could change your paper money into tangible assets stored in your country. Assuming delivery occurred before war broke out.

All of the above ground gold is estimated to be worth about $8 trillion at today's price. About $4 trillion of that is probably in a form that is either ready for shipment as bank reserves or could be made ready for shipment in short order. It would be my estimate that if China were to buy about $1 trillion worth of gold on the open market over 1-4 years, the price of gold would roughly triple, which would mean they would get about 4% of the world's above ground gold for $1 trillion. Yes, it could be done, looking at it purely from an economic standpoint.

Here is some recent information on above ground gold estimates:
http://www.investmenteurope.net/investm ... ock-report

And I'll have to add RC's statement again for emphasis: "Assuming delivery occurred before war broke out." I'm not going to try to defend my stance by claiming an attempt by China "to bully the market" in order to make such a purchase would for sure immediately lead to war, but it has to be considered. On the other hand, finding a willing seller with a hoard of gold to sell at current market price likely would not.

Item 3 at the bottom.
http://cables.mrkva.eu/cable.php?id=204405

[John]

Déjà Vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real
Estate and Urban Land Economics

Howard E. Thompson

University of Wisconsin - Madison - School of Business

April 18, 2012

HKIMR Working Paper No.10/2012

Abstract:

The panic of 1857 is revisited with the benefit of hindsight provided
by the panic of 2007-08, where a number of parallels are identified
between the two panics. We present new evidence on causes of the
failure of the financial institution that triggered the panic of 1857
and conduct a detailed analysis of railroad financial and accounting
practices. New financial innovations are also studied — the railroad
farm mortgage and farm mortgage-backed security — which had
similarities to the modern sub-prime mortgage loan and MBS. Neglected
risks and Knightian uncertainty appear to be fundamental reasons why
investors continued to participate in a boom market that was also
extremely fragile.

Number of Pages in PDF File: 56 working papers series

http://papers.ssrn.com/sol3/papers.cfm? ... id=2042316

[aedens]

http://reformed-theology.org/html/books ... e_12-1.htm

Since World War II we have seen the Korean War and the Vietnamese War — meaningless, meandering no-win wars costly in dollars and lives, with no other major purpose but to generate multibillion-dollar armaments contracts. Just add a few more to date. It was once said you should never talk about the place you work but only the people in it. I find the irony of youth will never change. As Joshua once said I will only serve. Draw your own context today. I find stand by to be a meaningfull fact. Total War is a separate economic fact in the face of evil. With sixteen million shades of gray a relatively normal person can see why we are buried in debt from evil idiots.

http://reformed-theology.org/html/books ... ndix_d.htm

[Higgenbotham]

...
That leaves gold and while the Chinese would have been willing to spend that $300 billion per year on gold (or whatever was left of that $300 billion that they didn't spend on other things, but accumulated as reserves) the volume of gold sales worldwide are not enough to accumulate that volume of gold by purchasing it on the free market. The only way to buy that volume of gold is to find a horde that someone is willing to sell.
...

This is an excellent example of how the ever changing, every increasing, ever dynamic nature of the Trade Surplus numbers make the opposite point.

In 2012 the Trade Surplus China will enjoy as a result of bi-lateral trade between the U.S. and China is on track to exceed $300 Billion.

But this number has been strongly, and steadily, growing since 2001, except for a one time dip in 2009, that was more than made up for by a trade surplus in 2010 that was greater than in 2008.

2001: 84 Billion
2003: 124 Billion
2005: 202 Billion
2008: 268 Billion
2010: 273 Billion
2011: 293 Billion
2012: >300 Billion

As shown above, Surpluses were much smaller in the period 2001 through 2005, yet that is when China made the choice to buy U.S. Treasury Bonds rather than something else.

Thinking back to the time period from 2001 to 2003, the Chinese were in real expansion mode. They were looking for outside money to come into China. A lot of US based businesses made direct investment into Chinese businesses. The Chinese were hiring US citizens to move to China and help develop businesses. They moved some of their shares onto outside exchanges where non Chinese could buy into Chinese companies for the first time. I was watching a channel called Bloomberg Asia that reported directly out of China. The American news media didn't report hardly any of this and public was virtually unaware of it.

All of this expansion required an increase in money supply and therefore bank reserves and you're correct that there was no evidence of interest (that I saw anyway) on the part of the Chinese from 2001 to 2003 to do anything except use US Treasuries as reserves to print Renimbi against, at a fixed exchange rate of something like 8.28 to 1. During the early part of this time period, in 2001 as I recall, the European Central Banks were still selling hundreds of tons of gold. It was not the Chinese who bought it based on anything I can remember. Through 2003, gold ownership was still illegal in China.

I saw things begin to change in 2004. The Chinese legalized gold ownership, made gold available for sale at Chinese banks, and urged their citizens to save in gold. This was not too long after the US invaded Iraq and started to run larger deficits.

[Higgenbotham]

As far as the Chinese plan or intent, I believe it we could ask the Chinese authorities what they were thinking during that time period from 2001 to 2003 they would have said they were obtaining US expertise to develop their industries and bring them into the modern age. That required an increase in the money supply. The US dollar was the reserve currency and as they understood the rules of the game the reserve currency was supposed to be used to back the local currency. I doubt it was anything much more sophisticated than that at that time. It (the accumulation of US Treasuries) was a byproduct of their development and expansion plans.

Around 2004, the boom in China began to get the attention of the news media and the public. Suddenly things began to get less cozy because the US was almost one year out of the recession but the manufacturing jobs weren't coming back like they did in 1984. There were stories coming out about how the Chinese had been contracted to manufacture products, stolen the designs, and were making the exact same products with no regard for the patent rights on them. Calls began to mount for the Chinese to float their currency because it was felt the fixed peg of 8.28 to 1 was keeping the renminbi artificially low and this was being done on purpose by the Chinese to give them manufacturing advantage. It was the US who wanted the Chinese to float the renminbi. The Chinese didn't want to do it, but they did it to pacify US anger and to sort of continue the game. That would be my version of it based on what I read and saw.

Rather, China’s accumulation of reserves is a by-product of the government’s exchange rate policy. It used to buy large quantities of U.S. dollar assets because it had to maintain reserves of the currency to which the renminbi was pegged (although Beijing has allowed the renminbi to fluctuate around a basket of currencies since 2005).

http://thediplomat.com/pacific-money/20 ... -reserves/

[Reality Check]

All of the above ground gold is estimated to be worth about $8 trillion at today's price. About $4 trillion of that is probably in a form that is either ready for shipment as bank reserves or could be made ready for shipment in short order. It would be my estimate that if China were to buy about $1 trillion worth of gold on the open market over 1-4 years, the price of gold would roughly triple, which would mean they would get about 4% of the world's above ground gold for $1 trillion. Yes, it could be done, looking at it purely from an economic standpoint.

Neither Vince nor I were limiting such purchases to just Gold. Vince mentioned Silver. Other precious and semi-precious metals and gems could also be purchased.

If China was attempting to accomplish multiple goals by such mass purchases prior to war, their goals might also include:

1. Laying in many years worth of many strategic materials, including copper, aluminum, titanium, rubber, iron, oil, lubricants of all types, industrial diamonds, just to name a few.

2. Convert foreign paper money, and foreign currency denominated investment instruments, such as U.S. Treasury bonds, into tangible assets stored within China.

3. Make many strategic materials very scare and very expensive, in terms of the foreign currencies China is using to make such purchases.

4. Wreak havoc in the currency markets and the bond markets for those countries who are having their currencies and bonds dumped by China.

Of course the first three goals could also be achieved in a more measured fashion over a number of years prior to war.

[Reality Check]

Thinking back to the time period from 2001 to 2003, the Chinese were in real expansion mode. They were looking for outside money to come into China. A lot of US based businesses made direct investment into Chinese businesses. The Chinese were hiring US citizens to move to China and help develop businesses. They moved some of their shares onto outside exchanges where non Chinese could buy into Chinese companies for the first time. I was watching a channel called Bloomberg Asia that reported directly out of China. The American news media didn't report hardly any of this and public was virtually unaware of it.

All of this expansion required an increase in money supply and therefore bank reserves and you're correct that there was no evidence of interest (that I saw anyway) on the part of the Chinese from 2001 to 2003 to do anything except use US Treasuries as reserves to print Renimbi against, at a fixed exchange rate of something like 8.28 to 1. During the early part of this time period, in 2001 as I recall, the European Central Banks were still selling hundreds of tons of gold. It was not the Chinese who bought it based on anything I can remember. Through 2003, gold ownership was still illegal in China.

I saw things begin to change in 2004. The Chinese legalized gold ownership, made gold available for sale at Chinese banks, and urged their citizens to save in gold. This was not too long after the US invaded Iraq and started to run larger deficits.

As far as the Chinese plan or intent, I believe it we could ask the Chinese authorities what they were thinking during that time period from 2001 to 2003 they would have said they were obtaining US expertise to develop their industries and bring them into the modern age. That required an increase in the money supply. The US dollar was the reserve currency and as they understood the rules of the game the reserve currency was supposed to be used to back the local currency. I doubt it was anything much more sophisticated than that at that time. It (the accumulation of US Treasuries) was a byproduct of their development and expansion plans.

Around 2004, the boom in China began to get the attention of the news media and the public. Suddenly things began to get less cozy because the US was almost one year out of the recession but the manufacturing jobs weren't coming back like they did in 1984. There were stories coming out about how the Chinese had been contracted to manufacture products, stolen the designs, and were making the exact same products with no regard for the patent rights on them. Calls began to mount for the Chinese to float their currency because it was felt the fixed peg of 8.28 to 1 was keeping the renminbi artificially low and this was being done on purpose by the Chinese to give them manufacturing advantage. It was the US who wanted the Chinese to float the renminbi. The Chinese didn't want to do it, but they did it to pacify US anger and to sort of continue the game. That would be my version of it based on what I read and saw.

Good points.

I agree that China had choices about where they were investing smaller numbers of U.S. dollars during the period of 2001 to 2005 when they were buying billions more of additional of U.S. Treasuries.

I agree China had choices where they were investing even larger amounts of U.S. dollars during the period of 2005 to 2008 when they were also buying billions more of additional U.S. Treasuries, and,

I also agree China had choices where they were investing the largest amounts of U.S. dollars China ever had to invest during the period of late 2010, 2011 and 2012 when they chose not to buy significant amounts of additional U.S. Treasuries.

[Higgenbotham]

While some analysts predict that the Yuan will continue rising as soon as next month – and at least by a slight margin for 2010 – the modest pace of appreciation will ensure that China’s foreign exchange reserves continue to grow. They are currently estimated at $2.4 Trillion, and while their composition is largely a secret, analysts estimate that more than 2/3 is denominated in USD-denominated assets. Recently, there was a perception that China had begun to diversify its reserves out of Dollars, as US Treasury data indicated that its Treasury purchases had all but stopped. As it turned out, China had merely moved to conceal its purchases by conducting them through a UK Bank.

http://www.forexblog.org/2010/03/chines ... tinue.html

I recall reading several comments like this over the past 2 years. This is just one representative article I happened to find. Others said the Chinese were hiding purchases through offshore banks or funds. I didn't put much stock in these rumors at the time, but your comment today reminded me of these rumors and indicated why the Chinese might have some incentive to hide their purchases.

From the U.S. point of view most of the benefits of running a trade deficit with China have disappeared. The U.S. is now printing money to finance the purchase of Chinese goods, rather than borrowing the money we used to pay for Chinese goods, from the Chinese. What is the difference? If China was to start a war with the U.S. we could simply cancel repayment of the U.S. Treasury bonds registered to China as war reparations.