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"Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world" - Henry Kissinger

and yet...

"Sooner or later everyone sits down to a banquet of consequences" – Robert Louis Stevenson

China is playing a very long game

In response to an FT Big Read by James Kynge and Josh Noble on 9th December 2014, entitled 'China: Turning away from the dollar'

China is playing a very long game which shouldn't surprise anyone. 

At the end of WW2, the US stood alone as the steward of global finance. It had a booming industrial base that had not been ravaged by war, and it had most of the gold reserves from the old world which it had received as payment for supplying the war effort. At Bretton Woods, the US resisted Lord Keynes idea for 'The Bancor', and the dollar was set up as the world's reserve currency, backed by gold at $35 an ounce - with everyone else linked to gold by being pegged to the dollar - the gold exchange standard was born. 

In 1971 President Nixon closed the gold window after the years of 'guns and butter' (the Vietnam War and the Great Society) had drained international confidence in the dollar which was no longer considered to be 'as good as gold'. President De Gaulle is cited as the guy who finished it off by demanding gold for his dollar reserves. Shortly thereafter Mr Nixon sent Mr Kissinger to do the deal with Saudi Arabia that gave birth to the petrodollar - you promise to sell your oil in dollars, we promise to protect your soverignty and the rule of the house of Saud.

Fast forward four decades and we have a Federal Reserve that has increased its balance sheet from circa $500 billion to circa $4.5 trillion in six years, and its national debt from $10.26 trillion when President Obama took office to $18 trillion as of last week. We also have a totally different middle eastern landscape and a rapidly changing energy market. The petrodollar is not the hegemon it was, and increasingly it is backed by, to quote Professor Krugman in a comment I think he will come to regret, 'men with guns'.

In that context it is no surprise that China is diversifying it's reserves, building the infrastructure for the renminbi and amassing huge quantities of gold which will stand behind it. China is not fooled by the notion of the 'barbarous relic' so beloved of western central banks, who like to talk it down in order to stop it signalling the health of the house of paper that is fiat currency. They acquire it because it cannot be printed, cannot be hacked, requires no counterparty, and is trusted as a measure of value everywhere - for those very reasons.

So, as I said China is playing a very long game which shouldn't surprise anyone. What surprises me is that so few people in the west 'get it'. We act as if it will always be like it is now because that's all we can remember. There have been three major changes in the global currency landscape over the past hundred years. We may have forgotten, the Chinese have not. We are in the birthing process of the fourth, and I suspect China is very clear about that, in a quiet sort of way.

You can't avoid consequences for ever

Recipe for QE - AKA Mario's Marvellous Mash for Münchau...mmmm