China’s New Global Institutions

[Jlaw]

Come on, you can fool others but never Vietnam. Have you forgotten that we were Chinese for 1,000 years? You can't hide anything as we both are too close in culture and custom.

You do not understand American banking system, don't bother replying back to me. Here go check this and learn something.

 

[somsak]

Ready for another essay?

I apologize for not giving you the proper credit for the offshoring/corporate profits discussion.

I think we have radically different ways of viewing the world, much like opposing religious beliefs. I'm a "gold atheist," I see no value in gold other than some minor industrial uses. I don't value gold per se, I value gold for what it can do. And it can't do much. You, or at least the "gold bugs," see gold as intrinsically valuable, because... well, just because.

I can't dissuade you from your "gold religion," and you won't convert me, so that's why we've hit an impasse.

As far as you finding my previous comment irrelevant to the US/gold standard discussion, let me try and connect the dots for you to show why the US literally could not afford to buy gold to maintain the gold standard.

Trade Deficit
Note the sharp deterioration in the US trade deficit starting in the 1960s.

Budget Deficit
Note the start of accelerating budget deficits starting around 1970 (thanks to LBJ's Great Society social spending programs, aggravating the drain of the Vietnam War):

So if I can recharacterize your summary:
You: Why did the US leave the gold standard?
Me: We couldn't afford it any longer.
You: But you still have such large reserves!
Me: Those reserves are irrelevant to our reserve currency status, so we don't need the gold standard. Why incur the costs of a gold standard if we don't need it?
You: Irrelevant to our discussion about why the US left the gold standard.
Me: ???

Value of Fiat Currency
One more point about the strength of a currency. The strength of a currency derives from a complex set of factors, including interest rates, projected GDP growth, attractiveness of other currencies, and on a generic and somewhat redundant level, raw demand for the currency (e.g. through the current account). This chart is old, but shows the story of the dollar post-Bretton Woods quite well:

It's easy enough to see what happened. Stagflation of the 1970s made the dollar weaken considerably, as the US economy was in a malaise. Paul Volcker's high interest rates broke the back of inflation in the 1980s, and also made the dollar very attractive to yield-seeking investors. Then as interest rates declined, so did interest in the dollar, until the productivity revolution and economic boom of the 1990s made the dollar attractive again. Then after the dot-com crash and the rise of the emerging markets, the dollar declined once more. Ironically, the chart was created just before the financial crisis, but if it extended a bit more, you would see the dollar strengthen again as the whole world was plunged into recession during the financial crisis.

None of this can be explained by gold holdings. Gold is simply irrelevant when it comes to the strength of a currency.

There are other reasons why the gold standard is terrible, like the fact that the modern, deep, liquid, sophisticated financial system we have today would be destroyed if we returned to the gold standard, but as I said before, I'm not the best person to detail these arguments, and my posts are long enough as it is without writing a full-blown essay about it.

Conclusion
Again, it's unclear to me why you believe my previous comment was irrelevant, but I must be missing a key piece of your argument. All I can see is that we don't use the gold standard, and the world works. No significant country (or any country?) uses the gold standard. The main proponent of a gold standard in the US, Ron Paul, has never adequately explained why the Long Depression and Great Depression are superior outcomes to the recessions we've had since the end of Bretton Woods. If you have a good explanation, or can point to a good modern-day example of the gold standard yielding superior outcomes, I would be happy to read it.

Finally, I want to address your final paragraph: it is not the Chinese government that is buying gold, but rather Chinese citizens. I can't explain that behavior with certainty, but I can speculate that it's because Chinese citizens don't trust their own currency, and since the capital account is closed in China, they can't accumulate foreign reserves privately. Instead, they accumulate the next best thing, gold. Trust is the cornerstone of value in the foreign exchange market: do you trust that a government will pay its stated interest rates, or will it default? Do you trust the country will grow fast enough to sustain its debt load, or will it default? Do you trust the country will have the foreign currency reserves to pay you (if the debt is denominated in foreign currency), or will it default?

Gold engenders a certain trust among a small, semi-religious group of believers. But most of the population is like me, "gold atheists," and don't trust the value of gold. That's why the gold standard will not return.

Correct me if I'm wrong.

We are talking about U.S. financial to weak to buy gold
- 1) U.S don't need to buy. U.S has gold reserve the size of which 2nd to none.
- 2) Since U.S do Nickson close of Gold windows around 1980, so all your graph that answer whether US is financial capable to trade gold with (foreign country dollar must be seen before 1980).
- 3) From 2) Through in 1980, US deficit is higher, but that does not mean that it cannot be reversed. The correct way to solve this is to export more and import less. This is no different than personal finance. You expenditure > your income, what you need to do is to save your expenditure and create more income.
- 4) The result of 1980 gold shutdown clearly shows in your 2 graphs. The weakness you mentioned happened --AFTER-- US decide to close gold windows. However, this trade deficit is not real deficit because it does not calculate the export of foreign countries whose manufacturers are actually American companies.
- Conclusion: Given 1, US has ability to redeem gold for US dollars. 2,3 only shows that US is reluctant to solve the trade deficit directly, and that US want to hoards gold. Inference: gold is valuable.

Problems that came with Fiat Currency

Current U.S bank saving interest rate is almost 0. (My update was 2 yrs ago). This discourage people to do saving. Therefore, when more plants move out shores there are more people who cannot pay the mortgage. Since the saving is discouraged, when they lost their jobs, they are likely to be broke within 3 months time. This flood the housing markets with bank seized house. The system could still working ok if there were no bail out. When banks short of money, they should sell these assets in very low price in order to get money fast and return these money to their loaners. But because US government bail them out, they are quite happy with newly printed money. Therefore, they refuse to lower the seized house price. This create the irony that houses are vacant, yet homeless people sleep on streets. All of these problems are because the devine ability to print more dollars.

The Fiat Currency is not only USD, but also CHY, and THB, and other Asian currencies. However, in those later 2s they are backed by US dollars. Therefore the inflation created by USD is going to create inflation into these economies. All of these financial system is based on USD, where the money supply (the total money in the system) is getting larger exponentially over time. Therefore, the price of things are also going to go up exponentially over time. If inflation is 10%, the price of everything will double every 8 years. For the next 32 years, the price will be 2x2x2x2 = 16 times large than current price. Therefore 10% inflation is hyper inflation. This kind of system actually good for those playing stock market, and those who borrow money to invest. Therefore the legitimacy of USD depends so much on how to control inflation. This is also true if Yuan, or Yen is going to be Fiat reserve currency.

I hope you now see why the inflation is man made. Therefore, the cure of inflation is to use the currency God made.