Thursday, April 16, 2009
I am speaking metaphorically, so far, but China, which owns much of our national debt, has been buying lots of copper lately, according to the Telegraph:
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."None of this is really news, but what really killed me was what I read later on.
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said. [bold added]
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis. [bold added]The logic leading up to this, culminating in the mention of the ease of storage for metals reminded me of past, wiser words from none other than Alan Greenspan, who would later betray those very words as one of the chief architects of the financial crisis.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. Where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible.And yet, China has not chosen gold, nor has it announced a metal standard for its currency, but I have commented on why a government would stop short of this already, and using the older, self-lobotomized Greenspan as a source, to boot.
Perhaps the grandest irony in all of this is that what we will likely see in response to this story is that readers -- and pundits of all stripes -- will be transfixed in awe at the cleverness of the Chinese, rather than considering their own situation and concluding that their own best interests would be served best by real, metal-backed money. Why not call for our own government to do what the Chinese ought to be doing, but aren't? This concrete-bound perspective, limited as it is by the failure to draw principled conclusions from this lesson, is a direct result of pragmatism, the intellectual plague of our age.
If there is one good thing about this financial crisis, it is that it is exposing the inherent broken-ness of fiat money almost as thoroughly as any comparative set of photographs of East and West Berlin could show the dismal failure of socialism two decades ago. That is well and good, but if the lesson is to stick better than the one about socialism, which China has backed off from in recent years and the United States is preparing to try whole hog, more people are going to have to start thinking in terms of principles. We are not off to a very good start at all here in the West, so far.
Today: Added a short clarification.