Who Was Pegged to Whom?

Monday, August 17, 2015

China's recent devaluation of the yuan has financial analyst Peter Schiff concerned about our the fate of our fiat currency. Indeed, he sees the move as born of concern that its currency being coupled to the dollar was placing China at an economic disadvantage, and hurting Chinese trade. Indeed, he sees the global dollar rally as a bubble and this move as an indicator of how and why that bubble might burst:

... [W]hen the dollar starts to fall in earnest, China may not be there to catch it. This will also mean that the biggest foreign buyer of Treasury bonds will likely be sitting on its hands when deteriorating U.S. finances force the Treasury to begin issuing trillions of new bonds annually. So when the U.S. needs China's help the most, it will be unwilling to provide it.

In the absence of a Chinese backstop that the U.S. has for too long taken for granted, when the dollar resumes its decline, the fall will be much more pronounced. This will also generate significant upward pressure on both U.S. consumer prices and interest rates that was absent five years ago, when Chinese buying provided a huge cushion to the U.S. economy. In fact, data indicates that China is already paring the amount of Treasuries held in reserve. That means a full blown dollar crisis may not have been averted, but merely postponed, with the dire warnings of U.S. hyperinflation potentially coming true after all. [bold added]
I have been wondering why we haven't yet experienced much more dramatic inflation due to the Fed's recent orgy of money printing. I hope Schiff is wrong, but feel more like I have been warned.

-- CAV


Today: Corrected capitalization errors.


Vigilis said...

Gus, an ingredient Schiff neglects is the still low velocity of money in the U.S. and other nations. It has hardly rebounded yet and wage inflation remains below healthy historical levels.

Peter Schiff is no dummy, he knows, but is ignoring or not sharing the velocity of money and low wage inflation factors. Like other Wall Street types he probably fears taking a bath in his hyped precious metal investments.

There is another overlooked factor: although the Federal Reserve has theoretically "printed" beaucoup dollars, it has yet to issue as many as the Schiffs would have us think. Why?--- Because the velocity of money has not yet required such issuance. Theoretically, the unissued debt is non-interest bearing and by rights (as in taxpayer rights) can be vaporized at any time. Obviously our government representatives are loath to tell us this because they like to keep us thinking in a box, their good ol' confiscatory tax box.

Also, were the dollar to become hyperinflated before Obama is out of office, his party will be deflated for a long, long time afterward, and his "glorious" legacy would be ruined.

Only the U.S. still has the organization and military strength to fully protect its currency. China, even with its accumulated stockpiles of gold is still a centrally planned economy, and obviously up against the wall,

Gus Van Horn said...


Thanks for mentioning the lack of movement of all this new money, something I thought of briefly, but obviously didn't mention in my article.

There are doubtless other cards in our centrally-planned economic edifice I and Schiff, and dare I say anyone, will fail to account for when attempting to forecast a day of reckoning for the dollar, if it is to come.

Whatever Schiff's errors, the primary value of his article, that of reminding us how precarious fiat currency is, remains.


Realist Theorist said...

The problem I have with Schiff is that rather than argue "all fiat is bad" he tends to portray the U.S. as the worst offender. China's currency is no less fiat than the U.S., so -- taking the underlying theory as granted for the time-being -- one should hypothesize that a reversal of currency positions will result in a reversal of 'real economy' position: with jobs increasing (relatively) in the U.S., compared with China, with a boom beginning in the U.S., with revenues coming from the U.S. dollars that China starts to use to buy U.S. goods as the trade-balance changes from what it has been for years. Not saying that's going to happen, but somehow to Schiff China is better now, and will be better when positions reverse as well.

How can China reduce its holdings of U.S. dollars? What is the actual real-life process? There can only do one thing: exchange USD for something else. This could be goods or real assets or some alternative financial asset. If these come from some non-U.S. country, the dollar balance shifts from one country to another.

So, to cause a reduction that does not simply flow to another country, the USD have to be used to buy U.S. goods or U.S. assets (say real-estate) or some U.S. financial asset (say stocks).

Gus Van Horn said...


Thanks for weighing in.