Once upon a time not so long ago in a land not so far away, the Swiss franc was the strongest currency in the world. Outside of gold, it was the premier currency in which to seek a safe haven from periodic world monetary turmoil. It still is, but with a much reduced appeal with the advent of the euro.
Germany is Switzerland's major trading partner, and consequently maintained a narrow fluctuating trading band with the German mark, also a relatively strong paper with the Weimar experience still fresh in the minds of many Germans. With the mark being amalgamated into the euro and its sovereign monetary policy now determined by the ECB, the Swiss franc's value is now reflective of the far more socialist monetary policies of the other members in the ECB. It's a sorta mini-wealth transfer within Europe. If Britain has ever done anything right for its people it is to have refrained from joining the giant wealth transfer scheme inherent in the ECB. Norway and France are a couple of others getting cold feet about this whole regional government thing.
Understanding how the values of paper money play a role in world trade is essential to understanding our very own dilemma with China and their yuan, renminbi, or whatever we're referring to their two-tier system. Understanding these relationships conceptually is not difficult; wrapping your mind around the concept is only complicated by the rhetoric and political demagoguery emanating from governments, and their media allies.
Potentially, full convertibility of the yuan is what could be in store for the world. To get there the Chinese Communist regime must have an internal tax and individual wealth confiscatory infrastructure like we have. In short, for the yuan to compete with the other more "developed" countries' monies, their bearer debt notes must also, like the United States, be backed by the "full faith and credit" of their people. That phrase is a euphemism for "everything I have is yours, and I must accept paper money no matter its value". For right now the theft of their citizens' wealth outright is just not an efficient system that is measurable. China needs to show the world that they, too, have a wealth taxing scheme like the US installed to support the demands of the holders of their debt money.
For China to keep their currency pegged to the US$ within that eight yuan channel is costing the Chinese dearly, as more and more US$'s pour into their central bank coffers. Commodity increases in dollars means that the Chinese, too, must pay more. The higher the dollar mound "reserves" gets, the more the more the Chinese can goose their own issuance of their domestic currency. Our own Fed is exporting monetary inflation which could precipitate severe social unrest within China.
I theorized that we stood a likelihood of a monetary crisis unfolding this week. The US$ had been breaking down for a couple of weeks vis other currencies, notably the Japanese yen. China could be re-adjusting their reserves to be more representative of their other Asian and European trading partners - like the Swiss/German experience I explained above. If so, other central banks may, with little fanfare do the same.
I'm somewhat reticent to buying into the hoopla about central banks buying gold. True, there's a lot of noise, public pronouncements, gold pundits, and "experts" telling me it's so. If they are buying, it hasn't been enough to make much of a difference, unless it's been off the books. Remember, gold is like a garland of garlic to a central banker. Before a worldwide central bank flight to gold occurs, I tend to think we'll see more commodity-for-gold contractual agreements play out. Or, oil-for-gold. Iran and South Africa came close to putting something together like that back in the 1970s.
In summary, if you were told by your government what you must sell your silver coins for even though you believed them to be worth more, what would you do? Even if you agreed, is there any assurance you'd be able to find a source and buy them back?
Those are the questions the oil industry is asking themselves right now. And, the whole world is watching.
As far as your silver coins, let's hope the oil industry doesn't select the same choice you would which would be to - - sell your coins overseas.
- - CV
-- Posted Thursday, 27 April 2006