Analyst's note: This is an extremely informative article. Our thanks to International Business Times and Peter Schiff. They provide significant and needed insight into the financial issues swirling around the American - China relationship. As you might imagine we once again see the damaging impacts of their central bank and our own "Federal Reserve" on both nations. Greed and the inflation imposed by both central banks is NOT a wonderful thing to watch in any culture. Will the Chinese yuan soon be linked to something objective -- like gold -- before the U.S. finally wises up? You'll want to read on to learn why 2014 may be an important year for both nations.
This article suggests this as a possibility. For additional insight, I recommend an internal site search here on the terms "Gold" and "Federal Reserve".
"The global economy has become so unbalanced that even government ministers who would normally have trouble explaining supply or demand clearly recognize that something has to give. To a very large extent the distortions are caused by China's long-standing policy of pegging its currency, the yuan, to the U.S. dollar. But as China's economy gains strength, and the American economy weakens, the cost and difficulty of maintaining the peg become ever greater, and eventually outweigh the benefits that the policy supposedly delivers to China. In the first few weeks of 2011 fresh evidence has arisen that shows just how difficult it has become for Beijing.
[....] In order to maintain the peg, China must continually buy dollars on the open market. But the weaker the dollar gets, the more dollars China must buy. And with the U.S. Federal Reserve pulling out all the stops to create inflation and push down the dollar, Beijing's task becomes nearly impossible. Last week, it was announced that China's foreign exchange reserves, the amount of foreign currency held at its central bank (mostly in U.S. dollars), increased by a record $199 billion in 4th quarter 2010, to reach $2.85 trillion. These reserves currently account for a staggering 49% of China's annual GDP (if the same proportional amount were held by the U.S., our measly $46 billion in reserves would have to increase 163 times to $7.5 trillion).
In order to buy these dollars, the Chinese central bank must print its own currency. In essence, China is adopting the Fed's expansionary monetary policy. In the U.S. the inflationary impact of such a strategy is mitigated by our ability to export paper dollars in exchange for inexpensive Chinese imports. Although prices are rising here, they are not rising nearly as much as they would if we had to spend all this newly printed money on domestically produced goods. The big problem for China is that, unlike the U.S., the newly printed yuan are not exported, but remain in China bidding up consumer prices. As a result, inflation is becoming China's dominant political issue.
It was recently announced that in November China's consumer price index rose 5.1% from the same time a year earlier, with food prices rising more than 10%. As unrest builds, the Chinese government has unleashed a series of policies to address the symptoms of the disease while ignoring its root cause.
[....] The real awakening will occur when China realizes that it has tethered its economy to an un-tethered currency. There are plenty of signs that many in the Chinese leadership are beginning to fully grasp the problem.
[....]the U.S. dollar, which became a substitute for gold as a result of the 1944 Breton Woods agreement, can no longer be serve as the anchor for world currencies. He further suggested that the yuan be linked to something objective. It sounds to me like he's talking about a certain yellow metal.
[....] For now the old guard in China still holds sway and the status quo remains intact. But new leaders are expected to be in place by 2014. When fresh hands take the wheel, we may finally see some meaningful change in the global monetary system."
