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A synopsis of an interview with Jim Rickards, New York Times bestselling author of The Death of Money and Currency Wars, by Ameera David at RT Boom Bust.
Jim is the Chief Global Strategist for West Shore Funds, former general counsel for Long Term Capital Management, and a consultant to the U.S. Intelligence community and the U.S. Department of Defense.
Topics:
China’s Addition to the SDR
China’s Economy and Capital Flight
Jim Rickards
November 20, 2015
CHINA’S ADDITION TO THE SDR
The standard IMF criteria for entrance into the basket of currencies making up the SDR (Special Drawing Rights), or world money, is that the currency is “freely usable”.
This implies a couple of things:
1. It is fairly open capital account.
2. There is fairly good ease in exchanging that currency for other hard currencies.
China has come a long way but they really haven’t met all the criteria.
So the decision by the IMF to add the Chinese yuan is partly an economic decision, but it is also partly a political decision.
There are a whole set of IMF reforms that have been bottled up in the US Congress. China is very frustrated, and the IMF is very frustrated and openly critical that Congress has not approved those reforms.
The IMF is a sort of keeping China happy since the reforms have not yet been passed.
China has opened their capital account and the yuan is more usable. It’s also picking up to over 3% of global payments, but the US dollar is still north of 70% of global payments and 60% of reserves.
China’s not there yet in terms of meeting the SDR criteria, but they’re getting some slack from the IMF – partly rightly so and partly for political reasons.
CHINA IN THE SDR
China joining the SDR definitely adds the prestige element to the yuan.
The SDR is a very exclusive club – there are only four currencies in the world that are part of the SDR, and China would become the fifth.
Financial panics happen approximately every seven or eight years, or so. There was Mexico in ’94, Russia in ’98, and the worldwide crisis in 2008, for example.
When the next one hits it will be bigger than the last one, and bigger than the Central Banks.
The Central Banks are tapped out. They printed trillions and they haven’t reversed that and normalized their balance sheets. The only source of liquidity is going to be the SDR. The IMF can print the SDR and re-liquify the world.
China wants to be at that party and the IMF want them to be at that party. They’re going to need China’s approval to do that. China is actually the biggest buyer of SDRs.
If you give SDRs to Hungary, for instance, what is Hungary going to do with them? Nothing. They need US dollars or euros or another currency.
There’s a swap desk inside the IMF where you can swap SDRs for other currencies. So who’s on the other side of the trade? The answer is China because they’re the biggest buyer of SDRs.
China is acquiring SDRs, so you’re going to need China to make the SDR re-liquification work, and China’s not going to play unless they’re in this club.
YUAN
The other vector in this is that the Chinese yuan wants to go down. That’s the natural state of the world right now. The People’s Bank of China is propping it up and holding it to a higher level.
Donald Trump is saying that China is undervaluing their currency, but they’re in fact overvaluing the yuan and the yuan wants to go lower.
When you put the yuan into the SDR there are a lot of investors who will be revaluing their portflio and they’re going to be buying yuan assets.
So if the yuan wants to go down that’s when you want to give it a lift, because big institutions with pension funds are going to be looking for yuan assets.
Those are some important effects of the yuan joining the basket of currencies in the SDR.
CHINA’S OVERALL ECONOMY
China is a mess.
We saw their property bubble burst. Their stock market bubble burst. They also have a credit bubble that hasn’t quite burst yet.
Their debt-to-GDP ratio is not that far behind Japan, and is actually worse, much worse, than the United States.
The People’s Bank of China has printed more money than the Federal Reserve, and that’s a major statement because the Fed set the bar pretty high.
China has a big enough rainy day fund to prop things up, but they started with $4 trillion earlier this year in their fund to prop up the banks and their economy, and that’s come down by over $500 billion in a matter of six months or so.
$4 trillion sounds like a big number until everyone heads for the exits… and then it’s never enough.
That’s the history of a reserve crisis.
CAPITAL FLIGHT OUT OF CHINA
There’s enormous capital flight coming out of China.
China is going to have to devalue the yuan in order to prop up their economy. So if you’re holding yuan assets and you see the devaluation coming, then you want to get out now at today’s exchange rate before they devalue it.
So that’s part of what’s driving this capital flow. If you go to Sydney, Vancouver, Paris, or Instanbul, they say, “The Chinese are buying all the condos.”
It’s also happening in New York, Rome, London… everywhere. There’s just a lot of capital coming out of China.
China has an unstable financial structure, massive capital flight, and the economy is slowing, so at best they’re going to have an enormous deceleration of overall growth, and at worse they could have a credit or financial panic.
CHINA’S INCLUSION IN THE SDR
The US dollar, the euro, the British pound and the Japanese yen are the other currencies in the SDR basket of currencies.
The SDR is still small as a percentage of global reserves and global payments, but it’s growing and it’s certainly looking more and more attractive.
The SDR is not backed by anything.
There isn’t a basket of hard currencies that’s backing the SDR.
The SDR is fiat money — just like the US dollar and the euro. The Fed prints dollars, the European Central Bank prints euros… and the IMF prints SDRs — they come out of thin air.
The significance of the basket is that it’s how you calculate the value of an SDR in the other currencies.
What is it worth?
Today it’s about $1.40 in US dollars but it fluctuates just like any other currency.
You use the basket to figure out the value so you can trade them and know how many dollars, for example, that you’re getting.
China’s inclusion in the basket will be significant. The last time the IMF changed the basket was in 1999, when they substituted the German mark and French franc for the euro. Before that change you have to go all the way back to 1977.
So it’s a big deal.
Jim Rickards can be found on Twitter and at James Rickards Project.
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From the Cariboo Gold Rush Trail
Gold is $1,077.20 US per ounce.
China’s found gold at the bottom of the sea — an estimated $16.4 billion worth. That will go a little ways to building up their reserves. Perhaps gold is one of the reasons China is claiming ownership of the waves in the South China Sea and there’s tension in the East China Sea.
I’m living in the tiny town of Seton Portage, along the Cariboo Gold Rush Trail. Last week I attended a First Nations Smudging with cedar for balance. It was a beautiful ceremony with a drum circle.
Please keep a look out at Jim Rickard’s website http://www.jamesrickardsproject.com for my new gold and glass jewelry.
I’m sending the samples out tonight and they’ll be available for sale soon. I’m wearing my first piece — a necklace called the “Golden Rod” — handblown and lampworked boro silicate scientific grade hard glass, filled with 1.0 gram of coarse raw gold flakes and dust, directly from the rivers of the Canadian Cariboo Gold Rush Trail. The gold is sourced directly from miners in the British Columbia gold rush area. The pieces come with either sterling silver or 14K gold findings and chains.
I’ll be on Vancouver Island tomorrow, singing Leonard Cohen’s “Hallelujah” at my father’s funeral in the afternoon. I’ll close my eyes while I’m singing.
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Not Much of a Holiday
words and music Elaine Diane Taylor
© 2015 Intelligentsia Media, Inc. All rights reserved.
SOCAN/ASCAP
Single available on iTunes
The Greek bank holiday and long lines to get a few euros for the day. Debt deals behind closed doors. The media telling us what opinions to have. China building islands in the South China Sea and claiming all the international waves. More dealing to come. More standing in line for those who owe. Who owes? There’s a long line of nations in debt and this is far from done.
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Preparing for the Fall live boutique album is available on iTunes — featuring Wag the Dog, Black Swan Dive, American Pie and Gods of the Copybook Headings.
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Coins and Crowns
words and music Elaine Diane Taylor
© Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Coins and Crowns available on iTunes
Single featured in Episode 1 of Mike Maloney’s documentary series Hidden Secrets of Money.
When a nation leaves the gold standard and sound money, and borrows to go to war, then hunger goes up, hope goes down, anger goes up, then it all goes down.
The Gods of the Copybook Headings
words by Rudyard Kipling and music by Elaine Diane Taylor
©2014 Intelligentsia Media Inc.
SOCAN/ASCAP
from the album Preparing for the Fall available on iTunes
The copybooks of the early 1900s gave us all the wisdom we need. The sayings that were copied are the truths, the gods, of our world. All the empires who followed the gods of the marketplace instead have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The lyrics are by Rudyard Kipling. One of my gurus.
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Coins and Crowns available on iTunes
See the bankers wave their Wall Street wands and conjure piles of paper green. Naked short selling is like betting that your neighbour’s house will burn down. But in this scenario it happens to burn down. If the bankers win then we lose the whole world as we know it. I wrote this in 2009, with a lyric “A little grease (Greece) is floating out to sea, and little pigs (Portugal, Italy, Greece and Spain) are bobbing up and down, they’ll send a storm and we’ll see, when the tide goes out who’s naked on the beach“, and it’s coming on now. The world is changing as we know it.
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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.
Elaine Diane Taylor 