Sunday, 1 November 2015

Mega Trends...Storms..

Mega storms and trends...

We are surely and remorselessly being sucked into more terrifying climate change induced freak weather events. First time ever a regular storm Patricia metamorphosed itself to such a monster within 24 hours breaking all records in the Western Hemisphere. Yes like veritable frogs we are living in our comfort zones of judging the future based upon the past. The events in the past few years bear a grim testimony to our likely future. So far 2015 has been the hottest ever year month by month in recorded history. Flooding events in all continents have hit new highs. Arctic melting is accelerating. Sea levels rise is compounding. CO2 emissions mounting with peak levels still about 15 years away.

Even though we know that human actions and lifestyle is squarely responsible for this catastrophe waiting to happen, most of us are  hardened sceptics living in denial mode. Also big industry and the wheels of capitalism will not slow down and restructure society to avoid the coming climate collapse. The entire edifice of capitalistic society is based upon continuous improvements and newer and better technology models of cars, consumer durables, homes, armaments, digital devices.....these have to to be sold through hyper competition as there is excess capacity in all spheres. In the process we all are trapped in our ever rising so called standards of living and keeping up with the joneses. So there is no way we can cry a halt to the inexorable turning of the wheels of doom. 

The third mega trend is that of economic fragility which has been plaguing most of the world especially the advanced economies. Greece was the canary in the mine. Most of Europe is mired in perilous stagnation, rising unemployment...US is the biggest debtor country and ironically still the largest consuming society. It's in the interest of others like China and larger emerging economies to keep the albatross US afloat. The bubble is getting larger every month. With great difficulty the US congress just about manages to agree to ever increasing caps of fiscal debt which has crossed $18 tr. If we add the corporate and individual debt of Americans, the figure is around a truly staggering $60 tr, which is 330% of US gdp. The corresponding ratio for China is a mind boggling 280%. The entire world is awash on an ocean of debt. As I have mentioned elsewhere till debt does us apart! New paradigms of economics have arisen with negative interest rates! Imploding economies and black holes....

The next mega trend is the macabre violence, terror and conflict zones all over the world. All the continents excepting Australia have pockets of conflict zones which are expanding their sphere of influence. During the past half century or so the strife has been increasing. Now with hitech weaponry the war zones have become bloody with refugees and migrants who are seeking peaceful havens like currently flowing into Europe. The big powers like US and Russia are also involved in many of these wars ostensibly to broker peace or back one of the sides in the name of justice. This has spawned several terror groups which want to take revenge for atrocities suffered by their people. In a multi polar world with US as the big brother there are so many permutation and combinations of war camps. Apart from this, violence is creeping into our everyday lives with proliferation of guns and weak or no gun control laws. At the unsettling extreme trigger happy school kids in US toting guns. Also psychotic individuals especially in advanced nations who have perpetuated mass killings. Then the certain possibility of terror groups and rogue nations possessing dirty nukes. The future is indeed fraught with diabolical scenarios. 

The final mega trend is the robotesque future we are moving towards. Computers and their ilk are gaining a stranglehold on our lives. The rapid growth of digital technology during the past 25 years is truly chilling. Now a quarter of humanity has access to the Internet. Smart phone usage is spiralling out of control. Laptops and tablets have surpassed desktops. Nano chip technology is entering into cars, household durables, entertainment, surveillance, health care..... The cloud is gaining prominence. Humans are interconnected through multi devices and the social networks... The paradigms of governance, security, teaching, learning, sales, marketing, commerce, business, manufacturing, production, health care, entertainment, finance, banking, capital markets...are undergoing inconceivable changes...ushering a digital highway to a future which only the digiterate will succeed... At this rate robots are gaining intelligence at geometric progression.... The day is not far off when the intelligence will surpass that of human..!

Future shock is now. Truly we are looking at the Kurzweillian exponential growth of artificial intelligence leading to a brave new world of robots and machine intelligence controlling humanity, climate change hurtling towards irreversible environmental degradation, neo economics where negative interests and burgeoning debt as the new norm, mounting violence with nuke crazy terrorists and tin pot dictators...The sci-fi, cli-fi movies we are seeing are harbingers of the new age. Mankind is truly caught up between Scylla and Charybdis. The final game changer could be inexorable climate change which could lead to the sixth mass extinction. The pace of climate change as seen over the past couple of years could be the tipping point leading to exponential changes. Hence the staid climate models which have been relied upon may not be good predictors for the future. Yes. Climate change is going to be a major factor which will dictate the future of humanity over the next 35 years. 

Sunday, 16 August 2015

Why strategies for carbon reduction will not succeed? 2 little 2 late...

Earlier in the 20th century, there was a consensus among climate experts the 350 ppm co2 emissions would be the upper limit beyond which green house gasses would lead to significant climate changes.This level was breached by 1980. Then the next target was pegged at 400 ppm, with liberal fallback to 450 ppm depending upon the differential impact on climate pattern in different places. Based upon these end goals, varying carbon emission reduction targets have been assigned to all countries.  
According to the Presidential Climate Action Report, “In order to stabilize CO2 concentrations at about 450 ppm by 2050, global emissions would have to decline by about 60% by 2050. Industrialized countries greenhouse gas emissions would have to decline by about 80% by 2050”. The thumb-rule applied is the each year a 2 ppm co2e is acceptable. Recently in march 2015, the 400 ppm milestone mark was breached. This has sent the climate activists and environmentalists into worried huddles. At this rate by 2050, the co2e levels would probably reach 470 ppm, which would be in the red flag territory. Already climate change and extreme events are increasing exponentially. The list of extreme events during the past two years beggars all imagination spread across all continents.
The unusual freak occurrences are the severe storms which battering the US east coast, unprecedented hurricanes and twisters, flooding, earthquakes, soaring temperatures, plummeting temperatures, melting glaciers, rising sea levels, sinking cities. Climate refugees have trying to gain toehold in developed economies. Most of these refugee are from Africa which is reeling from extreme weather and dwindling agricultural production which has provided a fecund ground for breeding fundamentalists and terror.  These climate events also have to be viewed against a background of weakening global economy. Most of Europe is mired in deep debt. Except Germany and a few more economically strong economies like in Scandinavia and relatively UK, the others are just too weak to implement strong green measures or even absorb climate refugees.  
We are too deep into our hyper energy intensive lifestyles. Everyone is talking of a transition process where gradually fossil fuels will be, Apart from the high cost of reducing carbon emissions and adopting other green measures, there are a host of factors which are impeding a wholesale rewind of the high energy intensive lifestyle moat which humankind has built around themselves in the blind pursuit of  so called highly developed and technological societies which now are stifling their very creators ie humans.
All pointers are towards a sixth mass extinction.No strategy for replacing by greener sources like solar with no finite time frame. No one is talking of:
  1. Voluntary reduction of energy use and energy guzzling gadgets.
  2. Reducing and eliminating fossil fuel based energy in say five years or so.
  3. Walking to work and fulfilling all chores, thus reducing production of cars, and instead only permitting green public transport.
  4. Staying in small eco friendly self sufficient green communes, thus changing the very structure and design of cities away from high energy intensive high rises ones These monsters are soak-pits which consume copious amounts of energy for lifts, air conditioning, pumps...
  5. Not wearing suits in summer which hikes up AC costs. This list can go on ad infinitum.
The intrinsic problem or crux of the matter is that the growth of these monstrous multi hydra so called icons of human development forms the very foundation of capitalism. The continuous development of new products, some based upon minor incremental improvements, is the principle of competition which demands companies have to continuously innovate in order the survive the hyper competition. With technology changing so fast in these nanosecond times, product life cycles are shortening. And humankind is forever being tempted to buy the latest gadgets and models. Inspite of all the advancement and better quality of life, humans are always craving for more. Retail therapy is the best way 90% of upper middle class and above realise their instant nirvana.
What i am trying to drive at is we are too deeply entrenched in all the goodies capitalism offers us. Any attempt to stop, reduce or ration the goodies would be unacceptable to the populace. They would rise in revolt. The need for these goodies is too deeply ingrained like the addiction of heroin. Hence the problem of reducing co2 emissions is not as simple as only curbing fossil fuel. There are just too many vested interests and lobbies in the coal industry. There are enough reserves of coal and crude to last out perhaps another 100 years. Hence from the supply side, it is too alluring a proposition to make profits for another three generations even though margins are declining both due to over supply and the fact that best quality crude and coal, generally the low hanging fruit, has already been exploited. Too add to this grim supply side scenario US has has commercially exploiting shale gas which is fraught with its own nemesis ie the fracking method leads to earthquakes...which in some US states has compounded 1000 fold! To literally... add oil to fire... speaking tongue in cheek...US has recently repealed a 40 year old ban they had on exporting oil...hence the supply side solutions are not easy to effectively implement.
Apart from the doublespeak on supply side, there a hilarious double chaos on the demand side. On one hand, rampant urbanisation has lead to chocking roads and highways which are further being clogged by ever increasing population of cars which are the toys of doom of the human race. Now all the best car companies are manufacturing in india and china to meet the bottomless appetite for cars by the rising nouveau riche. Even though several eco friendly cars have come out, but the overwhelming suicidal demand is still for the petrol and diesel versions. On the other hand, ironically city planners and administrators encourage mass rapid transit systems. Even though high proportion of commuters use the public transport systems, many of which in the developed countries are technologically advanced hybrid vehicles, still the march of cars is unabated. Cars have symbolically become the mascot of advanced humans, even though are hastening increase of co2 ppm levels to dangerous levels.
Plus the automotive industry, which has powerful lobbies, still feels that more fuel efficient cars can still drive the car sales for at least another 25 years. Habits die hard. By and large people still yearn for fuel based cars over electric cars. To add to the mounting crisis now driverless cars are emerging. Even if we transition to hydrogen cars one day, though co2 emission is minimal and limited to production of hydrogen varying upon process, still we will need steel for the bodies and alloys for engines production processes of which are carbon intensive also. There is no respite from co2 emissions.
The demand side is too chock full of human comfort and luxuries which have become necessities and essentials such as monsters like air conditioning (emitting hydrofluorocarbons), heating, lifts, cooking gadgets.....yes indeed we are slaves to electricity. Except solar power, all the rest have harmful greenhouse gas impact. There is no way we can significantly reduce these emissions within the next 30 years. The post modern industrial structure will not allow it since it will deal a death blow to capitalism apart from our conditioned needs and wants.
There is no turning back the clock since we are too conditioned and deeply dependent upon our energy intensive lifestyles. What we are experiencing today in terms of:
1)  global warning,
2) extreme climate,
3) melting glaciers and poles,
4) rising sea levels,
5) unprecedented floods, storms, droughts,
6) drying rivers,
7) depleting aquifer levels the cumulative effect of so called called progress since the industrial era started about 300 years ago. The momentum created will be impossible to arrest by the slew of half baked measures we are adopting. The root causes are not being addressed or even articulated. Too much doublespeak… double-think.... schizoid..... head buried in the sand ostrich like behaviour. Cars air conditioning are bad while new factories are being set up all the time for the rapidly growing emerging markets.  
Where are the viable alternative lifestyle solutions and strategies which can wean away humans from this morass of energy intensive urban nightmare existence? The bright lurid neon lights of mega cities are drawing them like veritable moth.  There is an urgent need for more integrated solutions like New Grammar of Life ( Such solutions would seem so austere and horrifying to the celluloid sensibilities and shallow culture youth and others today living on an energy intensive digital plane, the entrenched lobbies will never let their control over the masses go. Too much is at stake. They are not at all bothered about the mid and long term impact of such profligate living. Its almost like a Sodom and Gomorrah redux.    
Apart from the above, there are many more environmental degradation issues:
  • Millions of tons of plastic under the oceans rendering mutations in fishes and endangering species
  • Disposal of nuclear waste and submarines is reaching nightmarish proportions...rivers and oceans have been converted into radiation zones, which over time are spreading and leaving in their wake dead fish and flora
  • Energy inefficient structures, buildings, cities guzzling copious energy
  • Global garbage disposal crisis. Capitalist throwaway societies will malls spewing forth goodies for forever greedy consumers, now online amazon adding more cartoons to be disposed.
  • High co2 emission industries like steel, metals, energy, transport...which are compounding exponentially...
Capitalism is in its death throes. Negative interest rates, debt spiraling out of control in country after country. But nobody is questioning the root causes. Its lurching from side to side...veering precariously towards nether-land. But the show must go on…. Continuous innovation...excess capacity...eternal sales and discounts...companies failing...mergers...and so on...the virtuous circle goes on....
In a crazy scenario like this there is no coherent policy for saving the planet from the ravages of changing climate. There is a babel of voices. Paris 2015 may achieve some contrived consensus...which may be too little too late...we are already attuned to the unthinkable changes...accepting them numbly as the new norm...there no other option....
The hypocrisy still goes on ...getting stronger all the time...thick is the new black...most in a opiated world...still repeating like parrots...that we should be able to contain global warming to under 2 deg C by turn of century, while the likely figure could cross 3 to 4 deg C.. The truth is always juggled around for convenience. The masses must not know the truth. Daily stories of fresh new highs / lows being reached at various places. Falling upon deaf ears.
Now at the rate at which climate is will be very difficult to delay the cataclysmic impact which is forecast by NGL to happen by 2050 to 60....35 to 45 years from now. need to work out alternative scenarios. Likely scenario:
  • No more glaciers and poles...sea levels up by 3/4 meters....many major coastal cities under water...climate refugees
  • Vast tracts of arid land in tropics...agriculture severely affected....famines...climate refugees and wars and slaves
  • change of all major seasons....severe precipitation all the time...flooding...more climate refugee
  • Most severe winter storms...snow 12-15 ft high...rendering more uninhabitable areas...again climate refugees...
  • Severe pollution...killing millions....dying cities...
  • Dry major rivers..port cities..cradles of civilization...becoming history and memories...
  • precipitation all the time...flooding...more climate refugee

Indeed a surreal clifi future at hand...thin blur between fact and fiction...another 35 years of humanity before it becomes a frightened weak species (whatever survives) dominated by robots and AI....yes the surreal contours of a future stranger than scifi and clifi is close at hand...civilization is entering its most tempestuous times....a surreal movie unfurling before us day after day...with dream like vividness......

Friday, 31 July 2015

NGL trends accelerating...

person standing in front of optical illusion wall
Photo: Steven Ramon on Unsplash

Almost a break of two months since last post. What can one say...there is so much to write and yet the futility of it all. The trends outlined in NGL are becoming more pronounced and probably accelerating. Some significant events / new light / research...
  • More findings on large cities like Washington, D.C. which is sinking. Other cities like Kolkata are built on such soft subsoil that they would sink precipitously if there was a 6.5 Richter earthquake. This is leading to a surmise that the actions of anthropocentric humans in building mega cities is like piling up thousands of tons of concrete, steel and glass on narrow bases which must be exerting tremendous pressure on the hapless patches of land on which they have been constructed. 
  • Sea levels are set to rise by much more than earlier estimated. The rise by multiple meters is indeed worrisome. All the more since coastal cities are sinking. there is apprehension in US that there a probability that coastal cities would get inundated by rising sea levels which would get exacerbated by acceleration of the arctic and Antarctica ice shelves. globally there are several coastal cities which face flooding like several in India, south east asia, europe.
  • the series of vicious storms which were created in inland USA after heavy rains for long periods which lead to saturated soil which fueled conditions for fresh storm creation, notably in Texas, Florida, etc. unprecedented precipitation and flooding spreading across most continents. 
  • gradually more economies are moving towards bankruptcy. Greece is the first one to bite the dust. there are several more waiting in the wings. interest rates have turned negative in more than 20 countries. even the richest nation  US has govt debt of $ 18 tr. some huge govt corporations have become bankrupt like the national highway authority. some more are one way...already in moribund states.
  • it is as if most countries are slipping into comatose states...and being administered calibrated doses of debt, taxes, subsidies, deficit financing, revive their sinking pulse rates / economies...some have been put on ventilator one daring to pull the plug...rising violence, crime, riots...being quelled by police and military apparatus...few bright spots are there...too few..far and in between..mostly in asia...but overall global economy in doldrums..
  • to add to the deadly cocktail..of climate change, economic collapse...the dreaded sceptre of terror...lead by ISIS and formation of the Islamic Caliphate with ambitious global takeover indeed a most debilitating body blow to a world already reeling under the twin impacts of climate change and economic bankruptcy..
  • an unreal surreal scenario of horrific proportions unfolding with absolute certainty...few days ago...there were twelve incidents in 24 hours of lasers being directed at commercial air flights in new jersey...frightening indeed..air travel may become unsafe...drones every lasers..dirty bombs with some dreaded terrorist strains of viruses..mosquitoes....its indeed a free for all... mankind forging ahead gamely with hope that this is just a bad dream..a suffocating nightmare...out of which we shall awake..and find all this is not true..just a figment of imagination...not real...nothing is real...nothing really matters...nothing is absolute...everything is relative...

Saturday, 6 June 2015

The Next Global Reserve Currency...from Daily Reckoning

Daily Reckoning
June 6, 2015
  • Chuck Butler places his faith in China’s “treasure chest”...
  • A way to play six emerging market currencies, with no risk...
  • Then, Chuck explains why he believes the yuan will be the next global reserve currency and what it means for your investments...

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Baltimore, Maryland
June 6, 2015
Peter CoyneDear Reader,

“Economists could give you 100 reasons why China will land softly” explained our friend, Chuck Butler, last month, “and another one could give you 100 reasons why not. I simply look at what I call their ‘treasure chest of reserves’ -- nearly $4 trillion. It’s mostly dollar-denominated assets. I also look at the huge, huge pot of gold they have.”

Chuck was kind enough to make time to get on the phone and explain his forecast for the Chinese economy, its currency and the impact both will have on the de-dollarization trend underway globally. 

His conclusion? Power was shifting from East to the West... and sooner than you might think. Recall the “plateau” version of the future that we examined on Wednesday. It suggested “the whole world will converge toward a plateau of development similar to the life of the richest countries today.” 

“It’s a communist country, I understand that” added Chuck. “I don’t ever want to have people think that I'm glorifying a communist country. But what they’ve been able to do over the years is move to a position of power and strength in that they have a huge treasure chest of reserves.

“When they have a slowdown in their economy they can just point to that and apply stimulus to get their economy going again. It wouldn’t cause major problems in the country because they wouldn’t increase the debt; they wouldn’t rob Peter to pay Paul.

“They would basically take from their reserves and fix the problem. That’s one of the good things that they can do because of their political system. Though, even the U.S. could do that, if, in fact, we weren’t running an $18 trillion deficit. 

“That’s why I think that they’ll be able to have a slow landing and transition their economy,” said Chuck in conclusion. “They’ll also be even better prepared to float their currency by the end of this year, back it with some sort of percentage of gold and make it the most attractive currency in the world.”

Chuck explains why he believes the yuan will be the next world reserve currency and what that means if you hold dollars, below...


Peter Coyne
for The Daily Reckoning

P.S. It’s worth your time to check out the Future Economies MarketSafe CD that EverBank, which Chuck’s a part of, has issues. The only catch is that you’ll need to act quickly to take advantage of it. 

Why the rush? According to the mainstream media there’s nothing to worry about -- the U.S. dollar is very strong right now.

But, as we’ve explained in these pages before, that’s only because, at the moment, other central banks are printing money at even faster speeds than the Federal Reserve. That can’t last forever. With signs of a slowdown, it could be only a matter of time before the Fed reverses their course and the dollar goes into a steep decline.

The only real question is whether we’re in for a slow, steady fall or a sudden collapse.

But you can be prepared either way thanks to Chuck and his colleagues at EverBank. With their MarketSafe® Future Economies CD you get exposure to six emerging market currencies -- the Brazilian real, the Chinese renminbi, the Indian rupee, the Indonesian rupiah, the Mexican peso and the Turkish lira.

All six are could benefit from a falling U.S. dollar. And as Chuck explained, if the CD matures with just a .01% profit -- EverBank will pay you 10% on your initial investment at maturity. And if the final value exceeds 10%, you’ll get the higher amount.

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The Daily Reckoning Presents: What comes after the dollar?
The Next Global Reserve Currency
By Chuck Butler
Chuck ButlerI will admit some trepidation in beginning this morning’s commentary with such an audacious title, but long-time readers of the Daily Pfennig®newsletter should be neither surprised at my confidence in making such a statement, nor shocked that I would pull no punches in sharing my views on a topic as particular to me as the outlook for the Chinese currency, the renminbi.

In late 2008 and early 2009, the Chinese government began signing bilateral currency swap agreements with a number of trading partners, including South Korea, Hong Kong, Belarus and Indonesia. These currency swap agreements essentially provided a medium of exchange directly between the two respective countries, removing the U.S. dollar from the terms of trade. 

Shortly thereafter, I authored a letter for a Sovereign Society publication espousing alarm over China’s decision to sign a similar bilateral currency swap agreement with Argentina, China’s first such venture outside its immediate trading area. The significance of this particular currency swap agreement, as I wrote at the time, was that the Chinese government had officially launched its initial salvo against the reign of the U.S. dollar as the world’s reserve currency.

Since that time, the People’s Bank of China (PBOC) has entered into 30 bilateral swap agreements with trading relationships across the globe, including some pretty heavy economic hitters joining the ranks under bilateral currency swap agreements with China (Figure #1). 

I also made a presentation at a February 2010 conference stating that it was my opinion that the days of the U.S. dollar remaining as the world’s primary reserve currency would end by the close of this decade. With five years remaining in the decade, and based on the progress the Chinese government has made thus far over the last five years, this forewarning may yet prove to be conservative.
Figure 1
Source: EverBank Research Team, based on analysis of publicly available data from the Harvard Dataverse Network, People’s Bank of China.
Chinese economic liberalization initiatives are certainly not limited to the currency markets. In November 2014, the Chinese government launched a pilot program linking equity markets in Shanghai and Hong Kong, allowing investors the ability to trade directly across the Chinese border in renminbi-denominated stocks, and representing “one of the most significant liberalizations of China’s capital markets in years.”

Similarly, China has expanded access to its domestic bond market with the May 2015 approval of an additional 30 large foreign institutions permitted to invest directly in the country’s $5.9 trillion domestic bond market.

Moreover, the PBOC has formally requested renminbi inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) reserve basket of currencies, an international reserve asset held by the IMF to supplement member countries’ official reserves. 

At present, the four reserve currencies included in the SDR basket are the Euro, Japanese yen, British pound sterling and U.S. dollar. Suffice it to say, the Chinese government has the renminbi on a defined and concentrated path to join the ranks as a world reserve currency.

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So why the “sudden” push for the Chinese government to open its capital markets, enter into bilateral currency swap agreements, and challenge the U.S. dollar on its leadership position as the global reserve currency? 

The situation reminds me of the old financing adage: You should buy assets that appreciate and lease assets that depreciate. The PBOC appears ready to begin leasing U.S. dollars! Quite simply, the PBOC may be weary of holding U.S. dollar reserves in order to conduct global trade, given the manner in which U.S. bureaucrats and monetary officials have been managing internal finances.

The Chinese government certainly seems to feel confident that the time has come for the renminbi to take a leadership role on the reserve currency stage, and with good reason. The Chinese economy is now the largest economy in the world, passing the United States at the end of 2014 based on IMF estimates.

China is also the world’s largest exporting economy, trading $2.3 trillion in merchandise exports relative to U.S. exports of $1.6 trillion. Gross national savings in China now represent 49.5% of Chinese gross domestic product (GDP), compared with U.S. savings at just 17.3% of GDP.

China surpassed the United States in terms of manufacturing in 2010, and is now the world’s largest manufacturing nation with nearly $3 trillion in annual production output, compared with roughly $2.4 trillion in U.S. output. In fact, one-in-four automobiles sold worldwide are now manufactured in China.

The Chinese economy is also the world leader in gross value of agricultural output for rice, wheat, potatoes, corn, peanuts, tea, millet, barley, apples, cotton, oilseed, pork and fish. Based on Organisation for Economic Co-operation and Development estimates, the Chinese government provided farmers $165 billion in agricultural subsidies (2012 estimate), relative to Japan’s $65 billion and the United States’ $30 billion in agricultural subsidies.

By acquiring nearly $4 trillion in reserves of foreign exchange and gold, guess where China ranks in terms of global reserves? 

You got it: No.1.

China is also the world’s largest producer of gold, more than twice the production in the U.S., and is also now the world’s largest importer of gold placing the country ahead of India.

Of course, the Chinese economy is not performing without challenges. Some observers contend that the renminbi may be at risk due to the Chinese economy slowing lately. However, prior to the current era of monetary intervention, economies would naturally cycle through periods of expansion and contraction. Moreover, the financial law of large numbers contends that large entities growing rapidly cannot maintain high growth rates in perpetuity.

Critics also point to recent accumulations in local Chinese government debt, but as I pointed out in a recent Daily Pfennig®article, it makes perfect sense for a government to accumulate debt in a low interest rate environment. 

The difference, however, between China’s debt accumulation and the U.S. debt accumulation is first, China has been investing in infrastructure with presumably positive investment returns, and second, the Chinese government has $4 trillion in reserves to help offset this increase in debt, as needed.

In analyzing the progression toward a free floating and tradable renminbi, I would expect the sequence of events to unfold as follows: China continues to open its capital markets to foreign investment. Investors provide additional liquidity to the Chinese economy through bond purchasing. 

The IMF accepts the renminbi as one of its reserve currencies in the SDR – which, coincidentally, is rebalanced at the end of 2015 – under the condition that the PBOC eliminates the renminbi peg to its current basket of currencies.

Then the renminbi becomes a floating currency, and the Chinese government subsequently allocates a percentage of its massive gold reserves (and other hard assets) as backing to the outstanding currency float. Under this type of scenario, the renminbi may have a real opportunity to become one of the most attractive major currencies in the world relative to its fiat currency contemporaries.

Furthermore, if the renminbi is successful in becoming a reserve currency in the IMF’s SDR reserve basket, the IMF will be required to purchase an estimated $1 trillion in renminbi for the SDR holdings, also potentially driving up the value of the renminbi, assuming the currency is floating at that point. Clearly, it could be an interesting environment for the renminbi.

On an interrelated point, a fully floating renminbi could have far-reaching consequences for the U.S. dollar, particularly if or when the renminbi eventually assumes a position as a global reserve currency. Once global trading partners are no longer required to trade exclusively in dollars, countries will similarly be released from requirements of holding massive amounts of dollars in reserve, and eventually, the dollar could get sold. 

Could this be the Minsky moment that would place the U.S. in the same predicament that Britain found itself after losing its reserve currency status? Time will certainly tell. However, in this given scenario, U.S.-based asset values and interest rates could potentially be in for a tough run if this were to unfold.

Before I end, I want to emphasize that this view is my personal take on how things could unfold for the Chinese renminbi and the U.S. dollar. 

Obviously, in today’s dynamic world, any number of scenarios is possible, which means I could completely miss the mark. But, to me, there just doesn’t seem to be much left in the tank, and you can count on us to keep a close eye on future events. Time will tell if I’m right or wrong.


Chuck Butler
for The Daily Reckoning

P.S. The funding period on our the Future Economies MarketSafeCD ends on June 11.

It’s a five-year U.S. dollar CD that has a semiannual pricing based on an index. It doesn’t pay interest. What happens is that every six months we stop and take the prices of all the currencies in the CD -- which include the Brazilian real; the Chinese renminbi, the Indian rupee, the Indonesian rupiah, the Mexican peso and the Turkish lira -- and we record them.

At the end of the CD we add up all those six-month prices and if the average price over that period of time is greater than the initial price, that increase is yours. And if it’s below the original price, you get your all of your principal back. 

And it has an added kicker to it. It has what’s called a jump-note feature. All that means is that if the currencies only manage to gain, let’s say, 0.2% or even 0.1%, or anything above zero, then you automatically get a 10% return on your principal at maturity.

But if it’s above 10%, if the actual return is above 10%, then you get whatever it is. So let’s say those the average price over the five years is a return of 20%, then that’s your return. But if it’s 9%, you get 10% instead.

There are a few more details. The minimum funding amount is only $1,500. And of course EverBank is a Member FDIC. 

Keep in mind; you cannot withdraw this money during the five years, so it has to be money that you’re not going to have any use for. The only way you can withdraw it is if you die, and nobody wants to see that anyway.

The MarketSafe CDs are also IRA eligible, so you can put them in your IRA. There’s also a deadline to get in on our newest Future Economies MarketSafe CD. Again, the funding period ends on June 11.
Chuck ButlerChuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig®newsletter, Chuck has a career in investment services and currencies spanning 35+ years.

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