The Yuan: Stealing from Piers to pay 保罗

So, indeed the Yuan was made into a reserve currency and the link-by-failure is already being established. It is interesting, though, that the bulk of the value transfer involved is coming from the Euro, not the Dollar or Yen. Linked by the IMF formally or not, though, if either the Euro or the Yuan fail over the mid-term the other will as well. The Chinese and Eurozone economies are intimately linked already, but were linked more by success than failure until now. That the failure of either is a very real possibility is too terrifying for the financial press to discuss, I think, and it is a political landmine public figures are trying very hard to avoid mentioning. It even seems that the made-up nature of Chinese government economic estimates isn’t even in the news much these days. You would think that little detail might enter into the discussion about adding a new currency to the IMF’s reserve currency group.

There is no longer a strong relationship among basic aspects of value assignment, legal ownership, practical control (that is, “real ownership”), vested business interest in terms of the performance value of concerns, and available goods and services in either the Eurozone or Chinese markets. While there are no recipes for economic success, there are several recipes for disaster (ask an economist about this — their responses tend to be as enlightening and humorous as they are depressing on reflection). A lack of correlation between various forms of utility values and assigned values is one of the disaster recipes. There is no easy way to fix this other than a kinetic re-establishment of property rights, and that means there is nothing left to do in the current situation than hope that when they do fail, they fail cleanly. But historically there is no such thing as a clean failure (in theory, of course, all sorts of lovely solutions exist).

Dropping an anvil on the overloaded camel’s back in the Eurozone or China would be rather easy at the moment, as both economies are in precarious situations. In fact, inducing a major market collapse would be so easy right now that failure is almost certain to come as the result of a deliberate action from an external player than by mere circumstance. The more players who realize this is true the more likely such an action becomes: why let a failure happen to you when you can be the one making it happen if the event is inevitable?

In describing the European and Chinese economic situations a financial analyst friend of mine used the phrase “poised to fail” (along with a lot of depressed-looking facepalming). When someone says that to a geopolitical analyst, though, ears perk up. There is always opportunity to be found in crisis, and sometimes when crisis is inevitable the best play is to be the cause of it yourself, because then you are the only one truly prepared. Consider the economic fallout of Russia’s invasion of Georgia in August 2008. A similar performance is absolutely not out of the question, nor is having some “terrorists” conveniently demonstrate the peaceful nature of some religion all over a ship in the Strait of Malacca at a perfectly horrible moment.

2007-2010 SPY chart

Rhetoric forces us to pretend that the August invasion of Georgia did not trigger a reassessment of risk in Eastern European carry trade loans, and instead believe that the already liquidated American subprime loans acted as a magical “contagion” that unfairly crushed the Eurozone. As if the European economies were not profoundly overleveraged and primed to implode.

There really isn’t anything to do about what is going on with the Yuan, really. This course was set about 20 years ago (yes, all the way back in 1995 — after the Cold War, after the first post-Tienanmen Square Five Year Plan was in action; as China started on its “Money is Good” -> “Expansion Above All” -> “Don’t Stop the Train” -> “WTO Rules? Screw the rules, I have money!” chain of policies). The general trend will continue, as none of the players seems to have any inkling of how to change the rules of the game — and the trend is of the end of a decades-long political and financial cycle. The way these stories end is never happy.

1984-2015 Money Base chart

Anyone who thinks that events since 2008 have been business as usual and that geopolitics plays no part in this because “its just a market hiccup” is deluded.


Every end is a new beginning, and that’s what is really worth focusing on. That may sound like small comfort (and it is), but if you already know things are going to get worse before they get better, then at least you won’t find yourself sleeping in a bed of broken dreams. It is too soon to tell which way this Jenga tower is going to topple, but we are nearing the end of this round of the game.

One thought on “The Yuan: Stealing from Piers to pay 保罗

  1. Rodney Wade

    Re: ” There is always opportunity to be found in crisis, and sometimes when crisis is inevitable the best play is to be the cause of it yourself, because then you are the only one truly prepared.”

    Yup. It was either Keegan or V.D. Hanson who said that, given two opposed forces, the one which attacks first wins. (that’s my version, from memory, so accept with caution!))


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