Tag Archives: Fear

China: Yuan Will Be a Reserve Currency, Come What May

EDIT: Indeed, it has been made a reserve currency, or at least it looks like announcements have already been made to pave the way.

The IMF is considering adding the Yuan to the group of reserve currencies. That would put it alongside the U.S. Dollar, the Japanese Yen, the English Pound, and the Euro in terms of “officially perceived” stash-your-value-here viability. As far as actual criteria for inclusion go, the Canadian Dollar, Australian Dollar, and very likely the Russian Ruble are probably actually closer to being genuine reserve currency material than the Chinese Yuan.

But… politics.

China is much closer to a total financial collapse and internal civil disruption* than recovery and stability in its current form. Long-term, of course, China will still be right where it is and the people there will still be Chinese (but there will eventually be far fewer of them, at least for a few generations). A Chinese collapse right now would be a major disaster for everyone. The commodity markets are depressed more than they have been for several decades (in relative terms, actually, I’m not sure that we actually have a post-WWII precedent for what is happening), energy is cheap, credit is massively overleveraged, and yet people aren’t buying enough stuff to keep the wheels spinning.

What does that have to do with the Yuan becoming a reserve currency? It does three things:

  • Gives China access to an external aggregate value device to prop up the yuan if necessary (links their economy to everyone else’s by failure, similar to the way subsidies can do this within a national economy). This effect is actually more a hoped-for psychological effect on the market than a tangible superpower China is being granted by the rays of a yellow sun.
  • Makes the Yuan a necessary holding for anyone trying to carry a balanced basket of reserve currencies (temporarily spikes demand for the Yuan).
  • Promotes an impression of stability in the Yuan (well-founded or not).

Why would the West agree to this? (And I say “the West” because, let’s face it, Washington and London are pretty much the ones who will be deciding.) Because if China were to fail right now it would be a severe annoyance for the U.S. and a complete disaster for Europe and Russia. Nobody really knows what the fallout of that would be, but it wouldn’t be pretty.

The Yuan will be made a reserve currency, whether it makes sense or not, and whether it actually fits in the reserve currency club by the standards and rules the IMF itself has laid out. These are scary times and nobody has any good levers to pull to “fix the economy” so national governments and central banks are pulling at straws because there is simply nothing left to try. All the control rods have been yanked out and tossed already, or shoved in and locked tightly; all the red buttons have been mashed; all the hyperbolic rhetorical devices have been so over-used at this point that the only thing that might actually influence market participants is a frank exposition about the truth rather than more “we’ll do whatever it takes!” and other gung-ho, “it’ll work this time” and “this is the lastest of the last rounds of QE, and this time it will really be the most effectivest of effective measures… I promise!” blather.

[* China is due for two painful corrections which will likely occur together, as they are linked. The first is a political correction; China’s geography does not lend itself to a central command economy. The second is a property-claims correction; when basic goods cannot be had at any price it means the entire system is so out of whack due to government interventions that only a hard reset can fix things. This will likely take the form of a civil war, but who knows. It could be gradual decline toward state failure followed by a logical and non-violent nation-wide roundtable discussion, or even a bloodless revolution coupled with a voluntary capitulation of material holdings by the power elites. But seriously, this has never happened in history and there is no reason to expect China’s inevitable transitions to occur independently of one another, or for either to be non-violent.]

East Europe: Why Historical Fears of War are Well Founded

I received an email full of anti-Obama sentiment the other day. It was an indirect re-hashing of a commonly echoed sentiment most concisely summed up as

The American Republic will endure, until politicians realize they can bribe the people with their own money.

The above sentiment has been variously attributed to Benjamin Franklin, Alexander Fraser Tyler, Alexis de Toqueville and P.J. O’Rourke. I have no clue which one is correct, but that each has fascinating and well thought out things to say is evident if you read some of the things on each of their quote pages.

That the message (pasted below) came from a Czech says a lot.

Czech, Poland, Slovakia, Romania, Hungary, the Baltics…, East Europe that lies on the line between the North Sea and the Black Sea — these are the places that always see the worst of trans-European war. This is such a significant and well defined trend in history that there is a name for the place: The Intermarum.

A few years ago Czech, Hungary and Poland broke with European defense policy (a worthless concept unless an American general or President is doing the talking) and formed their own for-real military alliance called the Visegard Group. While European NATO members argue about who is going to pay for what during a projected training exercise the East Europeans are sending their tiny military forces out to the training range on their own. So the Intermarum has now organized itself into a tiny military alliance that isn’t about building bigger and nicer offices for itself in Belgium every year on American tax money. Compared to the last seven decades of abject military complacency and external domination this is quite a break from the status quo.

When France or Germany invades Russia or Russia invades anywhere in Europe, they march through Poland and Czech and have to deploy mountain troops to Slovakia, Czech and Hungary and at least fight a blocking action in Romania. These countries have no direct input on the reasons France or Germany and Russia might be at war, but they are the battlegrounds where the blood is actually spilt and fighting is heaviest. This is, of course, devastating since the combined might of two modern armies always clashes right there in Eastern Europe. The speedbumps always see the worst wear.

Americans forget this because we think of WWII as a fight that happened in France, Italy and Germany because that’s the part we took part in for less than a year. This generation of Americans is only aware of WWII as far as it has watched Saving Private RyanInglorious Bastards, and  Band of Brothers. Ask a random person to show you on a map where Normandy is or what “the Ardennes” means and you’ll see how far from reality most people’s cinema-driven imaginings are from reality. Asking them “why did America invade Europe in WWII” is even more comical/sad.

East Europe was pulverized in 1938 and remained a impact zone (literally — as in bullets, shells and bombs impacting it) for seven more years until 1945, at which point the Russian reaction to German invasion was a counter-invasion of Germany, which meant invading back across East Europe on its way to Germany. East Europe got screwed.  Twice. The place was completely devastated and much of it actually flattened.

After all that East Europe didn’t get straightened out for 60 more years because the Soviets needed East Europe as a buffer zone against the American military in Europe. They didn’t have any need to improve the area, of course, they just needed to hold it for use as a surrogate battlefield in the event of WWIII, because battlegrounds are horrible places and they would much prefer the horrors occur there than in Russia itself.

Considering how geography forces those historical realities on the Intermarum countries it is easy to see why the Euroskeptic, anti-collectivist, pro-American Constitutionalism part of Europe happens to be East Europe. They are very worried about an EU collapse and fragmentation which becomes more likely every day. This isn’t because they care whether the EU member states continue to tell sweet lies of hope and harmony to each other or not, but because European socialism has at this point so rotted out the EU financial position that its has had concrete effects on what is available in the market. That means the market across all of Europe is so unhealthy that it has started to affect things we normally don’t think as being part of economics.

There is a fuzzy line between a need for a market correction and a need for a war to (re)establish natural property assertion by violence (land, commodities, rights, people) to recover from an imbalanced market that has severed itself from reality through rhetoric — a trend which has its roots in government interference in the market to begin with. Violence is the only way to settle property and control issues between parties once financial devices and/or the assent of parties to accept what another party asserts is true have failed. It doesn’t matter whether “party” refers to a person, a clan, an organization or a state; when the market is interfered with it gets sick, eventually that disease infects the state and law fails, and then the only law is what is enforceable through direct action. That is a part of what has driven war from time immemorial.

There really isn’t any separation between politics, economics and war from a geopolitical perspective and the East Europeans are worried that the American system, which has enabled the European system to exist for the last two generations, is on its way toward a type of dysfunction which will require the Americans to withdraw their concrete forms of attention from European affairs due to lack of resources and/or political bandwidth. We would withhold our attention and resources the same way the vascular system withholds blood from the extremities when threatened or ill.

An American decline, the definite separation of French and German interest from the made-up concept of “the European interest” and the resurgence of Russia is alarming to the Czechs and especially the Poles for reasons that people not familiar with history, geopolitics and the logistics of war do not understand.

The original message (unattributed other than “from someone in the Czech Republic”):

The danger to America is not Barack Obama but a citizenry capable of entrusting a man like him with the Presidency. It will be far easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president. The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails America . Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince. The Republic can survive a Barack Obama, who is, after all, merely a fool. It is less likely to survive a multitude of fools such as those who made him their president.