The Crumbling World Order and Who Will Pick Up the Crumbs?

Hugo Salinas Price

In the last fifteen months, from August 1, 2104 to November 27, 2015, International Reserves, as calculated by Bloomberg, have fallen three-quarters of a trillion ($752 billion) dollars, or 6.52%. International Reserves peaked at $12.032 Trillion on August 1, 2014, and have fallen since then to $11.28 Trillion on November 27, 2105. 

Central Banks increase their Reserves by purchasing Government Bonds - denominated in Dollars, Euros, Pounds or Yen - when those currencies come into their hands as a result of a surplus of exports over imports; all countries strive to have such surpluses, because if they are not able to export more than they import, then they are condemned to devalue their currencies in order to make their exports more attractive; they are also burdened with higher interest rates on their borrowings, as a result of the threat of further devaluation. Higher interest rates in turn, exacerbate the outflow of Reserve currencies and make devaluation all the more necessary.

 China's Yuan has recently been accepted by the IMF, to form a part of its "basket of currencies" and as of Oct. 1, 2016 the Yuan will be anointed as a Reserve Currency by the IMF. When that happens, China will have its own Reserve Currency, and less need to maintain its present enormous pile of Reserves in Dollar and Euro Government Bonds. So the sell-off of International Reserves might become even stronger. The Fed and the ECB have enjoyed selling Bonds at ever higher prices and ever lower interest rates, so low that in Europe these Bonds have a negative yield. They will have to develop an appetite for Bonds, because China is going to send a bunch of them back to the sellers when the Yuan achieves Reserve Currency status. As China liquidates a portion of its Reserves, guess what China is going to buy with the Dollars and Euros it receives for its Dollar and Euro Bonds? 

China is quietly accumulating gold and saying nothing. But we can try to guess what China is thinking: "The US is mired in an insoluble problem. Do nothing to provoke the US. The US will destroy itself in a huge collapse." 

China will then say to the world: "We sell cheap. Very cheap. But, we sell for gold, for very little gold; and we pay with gold for what we buy - for very little gold, but we pay gold. You want our stuff, you find a way to pay us in gold. Or else, what do you have to offer us, in exchange for our stuff? You have something we want - we pay in gold. Rest of the world, do as you please." 

The nations of the world are not going to flounder endlessly in the crisis that is upon us. Out of the huge crisis, China will break away and state its terms. And the terms will be: GOLD. The rest of the world will follow.

DYI