China, Gold, and the Dollar, Part 3: The Other American Recession

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Part 2 of the interview series ended with Craig R. Smith suggesting that China is deliberately diversifying its economy to reduce American leverage over them. Part 3 in the series is below.  James R. Gorrie, Managing Editor, Absolute Wealth

James:  From the Eurozone perspective, Europe has been much more protective of its markets than the US. If the US bails out Europe with a ton of new money, and maybe even if it doesn’t, I think going forward, there will still have to be a lot of protectionism in Europe. They lean that way anyway, don’t they?

Craig:  Yes, they do but let’s be serious about it. Let’s say they have protectionist measures. I’m trying to think of a good example. Let’s say they have protectionist examples against widgets that are made in China but everybody in Europe needs a widget.

Now, in order for Europe to survive and even grow, they have to buy these widgets. That protectionism will go down the drain if it means China has something that they need to buy.

That’s why I think what China is doing is very smart. They’re not going out and buying junk. They’re buying mineral deposits. They’re buying rare earth metals. They’re buying oil. They’re buying natural gas fields.

They’re not out wasting this money. They are going out and buying true assets, unlike in America, where we buy big screen televisions, fancy SUVs. I’m not saying there’s anything wrong with that, but we live for today.

The Chinese are very different from the Americans. The Chinese are long-term thinkers. In America, long-term is 90 days. In China, long-term, they think in dynasties.

These people are not thinking about today. They’re thinking about 100 years from now. I do not think that that is going to make them superior to America because we still have the greatest natural resources. We still have the greatest technology, and still have the greatest capital markets.

But if we don’t recognize that and continue to make sure that we maintain the best of all those, then China could become a very serious threat to us economically.

James: Let’s go down to the micro level. In chapter seven of your book, you mentioned the money delusion. You relate the case of Germany in the summer of 1921, when you quote Ambrose Evans- Pritchard, who said, “people’s willingness to hold money can change suddenly for psychologically or spontaneous reasons.”

But by the summer of 1922, no one wanted to hold onto any money in Germany. Today, I’m asking you to speculate about our situation. When will the dollar stop being a reliable store of value and when will people not want to hold it? When do you think that will or might happen? What will precipitate that occurrence?

Craig: I’m not sure that I can tell you when and where it will happen, but I can tell you the scenarios that will present themselves before we see it occurring. I’m very concerned that recently, the strength in the US dollar has been a direct result only because of the world’s fear that there’s no safer place to keep their money than in the US dollar.

As a direct result of that, the dollar is strengthened. As you know, we have huge corporate deposits sitting on the sidelines and huge bank deposits as a direct result of it. Furthermore, the government has had the ability to borrow as much money as they want at ridiculously low interest rates.

But what happens when the rest of the world recovers and people are willing to redeploy their money into emerging markets? What happens when they go ahead and say, “I’ll cash that ten-year Treasury bill out that’s paying 1.6% and buy a farm down in Brazil.”

When that happens, the US dollar will start creating velocity. That’s my biggest concern. The Federal Reserve, you’ve heard all kinds of ridiculous numbers, that it has created up to $15 trillion. The Fed created $2.5 trillion, rounding it off, in the crisis of 2008.

As you know, they doubled their balance sheet. Clearly, that money is sitting in corporate deposits and bank deposits.

Once that money comes off the sidelines, then you’ll start to see what happened in Weimar, Germany from 1922 onward. People forget what happened in the first couple years of Weimar, Germany as I outlined in the book in chapter seven. We quote the book “Dying of Money,” written by Parsson in ’74.

The book showed that the effects of the beginning inflation were good in Weimar Germany. They had very low unemployment. The big manufacturing centers of Germany were expanding and growing.

The illusion of all this new printed money was great. It made everybody feel better. It’s kind of like right now in America. Corporations have never had more cash than they’ve had before.

But once that money starts building velocity and all of a sudden, prices start going up, you know the stories, James. Hyperinflation set in.  Do you know workers at certain times were being paid twice a day so that at lunch time, they could go out and buy their groceries because before they got home at night, their groceries doubled in price?

Hyperinflation in its definition is when you see a 50% increase in price within a 30 calendar day period. I know this is going to really surprise you, but I believe by 2015 unless some serious changes are made, we will see months in 2015 where you will see inflation rates of 50% a month.  If we stay on the course we’re on, hyperinflation is not just a possibility, it’s a certainty.

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

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