Source: DailyReckoning, by Jim Rickards
The biggest financial story in the world today is not Fed policy or emerging-market debt. The biggest story is the global dollar shortage.
The reason the dollar shortage is the main event is that it affects all of the others. If dollars are in short supply, China can’t control its currency, emerging markets can’t roll over their debts and the Fed cannot pursue its plans to tighten monetary conditions without making the situation worse.
The global dollar shortage is the 800-pound gorilla in the boardroom of the international monetary elites.
Many observers are surprised to hear there’s a dollar shortage. After all, didn’t the Fed print almost $4 trillion to bail out the system after 2008? Yes, but while the Fed was printing $4 trillion, the world was creating $100 trillion in new debt.
When those debt holders want their money back, $4 trillion is not enough to finance $100 trillion, unless new debt replaces the old. We may be getting close to the end of the new debt cycle. That’s what causes a global liquidity crisis.
Where’s the evidence for the global dollar shortage?
China is a good example. The two greatest threats facing capital markets today are the global dollar shortage and the looming insolvency of China. These two threats are intimately related and are pointing to a global liquidity crisis far worse than the one that occurred in 2008.
Lifetime wealth can be made or lost playing this crisis correctly. Despite the magnitude of this threat, the analysis is as easy as 1-2-3. That expression neatly describes the crack-up coming in China. Simply think of 1-2-3 in trillions and you’ll see why.
$3 trillion is the approximate amount of hard currency reserves held by China today. $2 trillion is the amount of those reserves that are either illiquid investments in private funds, or needed by China to bail-out their banking system. $1 trillion is the amount left over to defend the currency. Three minus two equals one. Easy.
Why does China have to defend its currency at all? Because they are trying to satisfy both the United States and the International Monetary Fund (IMF) that their currency, the yuan (CNY) is a reliable store of value and not a disappearing act like the Turkish lira or the Mexican peso.
The U.S. has complained for years that the yuan is deliberately undervalued to promote Chinese exports. Donald Trump recently told The Wall Street Journal that the dollar was “too strong,” and “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
Trump also said the yuan is “dropping like a rock,” and recent strength in the yuan is orchestrated by China, “because they don’t want us to get angry.”
The truth is that the yuan was kept artificially low from 2007 to 2010. The purpose was to promote Chinese exports at the expense of U.S. jobs. But, beginning in 2011, the dollar weakened significantly and the yuan rallied from about 8-to-1 dollar to almost 6-to-1. This strong yuan phase is now over.