Wikileak: China Plots Against the Dollar Hegemony

When people think about inflation — increases in the money supply — they usually imagine that some group of career economists at the Fed and Treasury are churning numbers to determine just how much they can debase the currency without completely collapsing the economy. Even as they acknowledge that the monetary system is flawed, and the value of the dollar will continue to tank, they take some comfort in believing that some bureaucrat someplace is in control of the situation and can at least ensure some predictability in the rate of inflation.

What these people may not realize is that printing money is not the only way to increase the money supply. In fact a great deal of money already in existence is not currently reflected in the domestic economy because it is being held in reserve in foreign countries. If those countries ever decide to spend those dollars by exchanging them for some other reserve those dollars will come back into the domestic economy resulting in the same price inflation caused by printing money. Only this time no trusty American bureaucrat has a hand on the breaks. If a global economy’s worth of dollars ever floods back into the domestic economy you’ll see hyperinflation to the point that burning money will be a more efficient source of heat than buying firewood.

A 2009 U.S. State Department internal cable from the Embassy in Beijing recently released by Wikileaks illustrates my point perfectly. The cable describes China’s plan to undermine the U.S. Dollar hegemony by increasing China’s gold reserves.

From 2003 to 2008 China increased their gold reserves from 600 tonnes to 1054 tonnes by converting roughly $11 billion of USD reserves to gold. The average price of gold during that 5 year period was $677/oz. Renowned gold forecaster Julian D. W. Phillips has predicted that China intends to increase it’s reserves to 5000 tonnes by 2013. If gold stays the price it is today (yeah right), which is $1800/oz, that’s roughly $250 billion of USD reserves.

According to the leaked cable this increase in China’s gold reserves is intended to “kill two birds with one stone.” Firstly, it serves as a model for other countries to encourage reserving more gold, and therefore less USD. Second, it strengthens the Chinese currency, the Renminbi, so that it can begin to replace the declining USD as the world reserve currency. All of this spells bad news for the American economy.

The leaked cable also reveals something interesting about the price of gold in international markets. It reads, “The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency… Suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency.”

The Gold Anti-Trust Action Committee (GATA) has asserted for over a decade that the quantity of gold held by the world’s central banks was over reported to keep the price of gold artificially low. GATA’s research indicates that there is a gold cartel by which the U.S. Government suppresses the market price of gold through various intermediaries like Goldman Sachs and JP Morgan Chase.

 

The price of gold is a barometer, a canary in a coal mine, of global market health. In a free market gold prices should move inversely to interest rates and the value of government bonds. In other words you can’t control interest rates, and can’t sustain a fiat currency if you don’t prevent a real free market in precious metals. Ironically, suppressing the price of gold may simply be making it that much cheaper for foreign countries to dump their USD.

Davi Barker: In grade school Davi refused to recite the pledge of allegiance because he didn’t understand what it meant. He was ordered to do as he was told. In college he spent hours scouring through the congressional record trying to understand this strange machine. That’s where he discovered Dr. Ron Paul. In 2007 he joined the End The Fed movement and found a political home with the libertarians. The Declaration of Independence claims that the government derives its power “from the consent of the governed.” He does not consent.