China, Gold, and the Dollar, Part 2: The Other American Recession

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Part 1 of the interview series ended with Craig R. Smith suggesting that it’s time for America to weigh its military and economic options as the global recession worsens. Part 2 in the series is below.

James R. Gorrie, Managing Editor, Absolute Wealth

James: That’s the other American recession, isn’t it? The recession of American geopolitical power. The argument can be made, that as you mentioned, the dollar went off the gold standard in 1971. It was usually mostly off by then anyway.

You could say that we’re now on an “oil standard.” The dollar is being backed and supported by the agreements with OPEC in 1975 going back that far which created the petro dollar and the demand for treasury bills, and all that kind of thing.

You can look at the Chinese, as well as the Indians paying for oil from the Iranians in gold. Isn’t that really a direct assault on the dollar, the international financial system?

Craig:  Sure, absolutely. That’s why you see superpowers. I do look at China as a superpower now, being strategic in their acquisition of true assets. For example, why is China going so intently into South America, into Africa, into Australia?

They are getting natural resources in the form of mineral deposits, oil deposits. The Chinese are not out buying huge vast amount of technology. They’re buying real assets, real resources.

I think all this plays a threat on America. The crazy part about it is we have our focus on the wrong place. Anybody who runs a business knows that you cannot spend more than you bring in unless you have a plan for what that borrowing is going to do to increase your income down the road.

Keep in mind borrowing is not a bad thing if what you’re borrowing and the way you use that borrowed money propels your future growth. The problem is we are borrowing $58,000 per second to merely maintain the status quo. There is no strategic plan in how we’re going to for example harvest the incredible natural resources we have right here in America in the form of oil, gas, and deposits that we have here.

On the other hand, China is doing all this very strategically. The answer is yes, the US dollar is under tremendous pressure. My coauthor Lowell Ponte and I, our new book will be out in September called Earth A.D., which stands for earth after the dollar.

We argue in that book we are going to in fact lose our reserve currency status of the US dollar being universally accepted in the world. People say, “That will never happen. We’re America.” Really? Tell that to Great Britain.

People forget the pound sterling was the universally accepted currency for a number of years when it was replaced by the US dollar under the Bretton Woods agreement. I believe, and I’m almost 60, (that) in my lifetime, we will see the US dollar become a second or third tier currency against other currencies because the other currencies that are emerging like the Yuan will be based with real assets behind it, not just promises to pay fraudulent IOUs that are cranked out by a Federal Reserve.

But in fact, they will be currencies that are tied to resources that are strategically placed all over the world, whether they be in South Africa, South America, Australia, or many of the other places that the Chinese are developing incredible trade relationships with right now.

James:  You’ve identified China as a superpower today. I wouldn’t disagree with that but I would also say that China is very, very close to not being able to feed itself in any given year. They’re making that situation much worse with their own defilement of their farmland. Their pollution levels are ungodly, and all these types of things.

As you mentioned earlier, they’re not a market economy. They’re a command economy with some capitalism on the side, which means there are tremendous inefficiencies going on. It’s hard to be a superpower if you can’t feed yourself. I’m trying to look at the bright side for a moment.

Craig:  You have to keep in mind that we tend to look at China through our social eyes. We can’t do that. Let me give you an example. If the state that runs the nation of China, the inner workings of the command economy, if they felt that best benefit for the future of China was to allow 100 million of their people to starve in order to promote the state, they have no problem in making that decision. If you don’t believe that, look at North Korea. Kim Jong-il starved thousands of his people because he wanted to feed some other people.

You have to remember, in a communist nation, the number one thing you look at is how to promote and sustain the state. If that means cutting your population in half because you can’t feed the population, so be it. The others have to carry the weight.

I know that that’s a cruel way to look at it but that’s the reality of communist China. That’s why our state department should be talking about human rights. We should be talking about how we work together, not against one another.

I think the times of war, quite frankly, where we’re talking about bombs and missiles, and so on and so forth, is quickly evaporating. I think we’re going to be fighting currency wars like were laid out in James Rickard’s book (Currency Wars). I think clearly the future is how are we going to fight wars.

It’s going to be for resources. You have to keep in mind what is it really all about at the end of the day. It’s about food. It’s about shelter. It’s about energy. It’s about true, natural resources to sustain human life.

You know the old saying, “We can live without food for 30 days. We can live without water for 14 days, and you can live a whole lot less without air.” We need those things. In a nation like China, if it means sacrificing a huge portion of your population to maintain the state, they will do it.

On the other hand, we’re just the opposite. We will sacrifice the state to keep the people alive, which I believe is the right model, just so you know. But we have to take those dynamics into consideration.

James:  We won’t sacrifice our state. We’ll sacrifice the market. We’ll sacrifice the producers.

Craig: You’re absolutely right. I’ll give you a perfect example. I have a ranch up in Northern California. I’ve owned it forever and a day. It’s a cattle ranch. I decided that I was going to clear my front field. I have a lot of neighbors. It’s in a very poor part of California.

The neighbors want to till the land and work it together, and share the vegetables, kind of like a cooperative. I’m not using the land. That’s terrific. I got the packet the other day from the state of California. There are 15 different forms I have to fill out, five different permits I have to get.

It’s going to cost me lawyers and this and that in order to be able to use a piece of property to be able to grow food! Whenever we allow those types of regulations in that top-down running of our lives by the government, we’re out of control and we’ve got to change that if we’re going to compete in a global world.

I don’t think our politicians in Washington, D.C. understand that.

James: No, they don’t. If they do, I think they become so inured and so insular to the real world because Washington is its own world with its own rules. I think you either have to play by those rules in that world or you’re not in that world for very long.

I want to go back to an interesting question, and that is let’s suppose – well, we know--that China is moving away from the dollar. I think it seems to be rather a matter of a managed decline rather than a sharp decline.  Is China really willing to sacrifice 1.3 – can they absorb the loss of over a trillion dollars in debt in assets? Can they absorb that and come out okay if the Yuan becomes the currency?

You got to assume that they’re moving away from the dollar as fast as they can, but as prudent as they can.

Craig: Keep in mind, I call it the Donald Trump attitude. Donald Trump is very sensitive to the whole idea that China would be nothing without America. Let’s be honest. We have a $13 trillion economy. If they ever lost our market to sell their goods and services, they would be begging us to get back in.

China is sensitive to that. However, I think China is like any savvy market maker. Let’s say you and I had a position of 100 million shares of some very small company and we wanted to sell those shares.

If we went to the market with 100 million shares of a small company, the stock would probably drop 50% overnight or more. We would have to quietly and slowly start to divest ourselves of that company if we didn’t want to crash the price.

I think the Chinese see that in the dollar. I don’t think the Chinese will ever get completely away from the dollar but clearly, if you look at their appetite for treasury bills, you see that they’re starting not to be so attracted to treasuries anymore.

You’ll see less buying of treasuries. As they go to buy, say, oil fields in Iran, you will see them convert some of their dollars to purchase those oil fields.

Will they sell it all out overnight? Of course not, because they can’t afford to not have their markets open to us.

But I am thoroughly convinced – and again, this is speculation on my part--that China understands its vulnerability being so closely tied into one specific economy. The Eurozone has about a $14 trillion a year economy. If you add up the other continents, Africa, so on and so forth, you find that, in my opinion, they are going to start diversifying from the US economy and start to create economic growth throughout the rest of the world.

Then, if America says, “Hey, we’re going to cut you off,” it’s no problem. They have the Eurozone to sell to. They have Africa to sell to. They have South America to sell to.

That’s what I think is happening. They have built their strength off the US economy and now they’re going to diversify because they know that having all their eggs in one basket puts them in a very difficult position to negotiate.

This ends Part 2 of my interview with Craig R. Smith.  Part 3 will run next Friday.  JRG.

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One Comment

1. 

   Surferdude

   July 11, 2012 at 12:16 am

   Aloha! Interesting Insights to say the Least! I would however,take exception to the Idea of the STATE of China,being able to do the Horrible Things to its population that were inflicted during the MAO era! First even though its not even close to being an OPEN Country,it has to a point been "WESTERNIZED" and there is a Large ACCESS to the INTERNET! It has a very Diverse/Fractious ETHNIC culture,and even the "POOR" in China,have been ALLOWED some Political say/power. So, I dont think the "STATE" will have as easy a time dealing with MARKET ISSUES/State ENFORCEMENT,as they might have had,lets say Before TEANNAMEN Square!! CHINA will be RUTHLESS,to say the Least.However, I think the Capitalist Gene is Now OUT of the Bottle,and wont RETURN! lol This is a long-winded way of saying that RESISTANCE in China,will be Far Greater/Larger than the Ruling Communists can ever IMAGINE! COMMERCE is AMAZINGLY POWERFUL,no matter what type of Government is trying to Control/Guide it! Thanks for reading,aloha~~nik

   Reply