History ALWAYS Gives Us an Answer – China, The Roaring 20’s and The US Dollar has 5 More Years of Pseudo Life
This past September was a huge fizzle.
I have always warned people about September and October when it comes to economic collapse. Historically whenever our nation would fall into economic collapse, it is always around that September / October time frame.
Well it did not happen and all the hype cause a big huge FAIL.
Let me say that if things remained the same from April of 2015 on, I strongly believe that we would have seen an economic collapse.
But once all the hype started building steam, I had to re-evaluate my ideas of the coming third quarter.
One of the primary events that really gave me pause for thought.
The US Dollar Has Approximately 5 More Years of Pseudo-life Left
Why do I say that? Because something took place this summer that gave me VERY SERIOUS pause for thought. A black swan event that took many by surprise.
China’s economy literally self-imploded and they basically flushed themselves down the proverbial commode.
Let me explain.
In today’s world of fiat currency, financial systems are based on confidence.
Think about it– these governments and central banks have absolutely nothing tangible to offer. This is why the dollar and most other currencies are based on fiat.
They print up countless pieces of colored monopoly paper bills, backed by nothing of value and pass it all off as ‘money’.
Our financial system is precariously being held together with spit and toothpicks and a very thin veneer of confidence.
In order for it to functioning, every participant in the financial system must have confidence. Or at least have confidence that everyone else has confidence.
Without confidence, the system collapses very quickly.
Confidence is everything. And China lost it.
For years the Chinese government has been trying to build a reputation as a credible financial leader in order to compete with the West.
The US dominates global banking transactions with the SWIFT system and the world does not like being under the US thumb.
But this past March 2015 that all changed when China launched the AIIB.
See, the west dominates finance world with the IMF and World Bank; but China has launched the Asia Infrastructure Investment Bank to compete.
The US dollar and euro dominate global reserves and international trade; but China has quickly loosened controls, established renminbi financial centers around the world, and entered into numerous swap agreements to compete.
It’s working and it looked like China was getting ready to replace the US dollar as the global reserve currency.
Or at least it was.
Confidence in China has been building, most clearly evidenced by renminbi (china’s currency) activity.
Even five years ago, the renminbi didn’t even register in the international financial world.
Yet its usage now has exploded, to the point that the renminbi is now the 5th most widely used currency in global payments, ahead of the Canadian dollar and Swiss franc.
But what happened is that China really messed things up in a major big way.
The absurd bubbles in China’s stock markets have burst. We all remember that and read about it in the news this summer.
But here is what really pulled the legs out from under China.
When the bubbles popped in China, instead of letting the market take its natural course, the Chinese government has stepped in to “manage” the crisis with the most mystifying, baffling steps imaginable.
Their early anti-crisis actions included slashing interest rates and reserve ratios to ‘encourage’ banks to keep lending.
Then they actively prompted small investors to dive headfirst into the marketplace, even suggesting that people offer up their homes as collateral to buy stocks on margin.
Now they’ve resorted to halting trades– half of Chinese stocks are now suspended. You can’t buy them. Or sell.
They flat-lined their economy and now they’re banning large buyers from selling any stock to the point that they’re even threatening to jail short-selling investors who profit from stocks declining.
That is not the serious issue.
China has singlehandedly destroyed much of the credibility they spent years building.
What does fiat currencies need to be successful?
Confidence and credibility and China lost it all in spades.
Why The US Dollar Has 5 Years Left
What was not in the main stream media news is that the IMF is supposed to decide whether or not to include the renminbi in their ‘SDR’ pseudo-currency basket.
But this vote has been delayed.
IMF delays China’s bid for global reserve currency status
The IMF is due to decide by the end of the year whether to include the renminbi in its so-called special drawing rights, the elite group of currencies it uses to determine the value of its own de facto currency.
The decision depends on the IMF determining just how “freely usable” the tightly controlled Chinese currency has become. The push for inclusion has been driving a series of reforms by Beijing, which is keen to see the renminbi labelled a reserve currency alongside the dollar, euro, yen and sterling.
The bid for SDR inclusion is also among the factors cited by observers as being behind last week’s move by the People’s Bank of China to allow a greater role for markets in setting the daily trading band for the renminbi, which prompted the two biggest daily swings in the currency since the 1990s.
But the IMF said on Wednesday its board had decided that if it opts later this year to include the renminbi in the SDR basket, the move will not take formal effect until September 2016.
This potentially gives China more time to enact reforms, although most if not all would have to be in place before the IMF board makes its decision in September 2016.
Does the IMF and World Bank want China in there?
No not really because China is a single force to be reckoned with and they tend to play by themselves.
If China is voted in by the IMF, this is something that would be a major step in re-aligning global finance.
So why is this vote a big deal?
It’s a big deal because the vote only comes once every five years.
Until now, the IMF was practically backed into a corner. They had no choice but to let China into the old boys money club.
But now they have all the ammunition they need to deny China, yet again, for another five years.
They can point to this incident and say, “Due to the unstable nature of China’s capital markets and regulatory environment, we will not include the renminbi at this time.”
And that, ladies and gentlemen, keeps the US dollar in the driver’s seat for the next five years.
It’s The Roaring 20’s All Over Again
The 1920s were a decade best remembered for unprecedented affluence, a profusion of fantastic new consumer products, and a vibrant and creative urban cultural scene.
If one could describe the mentality it would be “eat drink and be merry for tomorrow we might die.”
We need to remember that the people were just coming out of WWI and also the Spanish Flu the wiped out millions.
The 20’s also brought a deep agricultural depression, jobs are getting harder to find, food prices going up, but still there was this mentality that everything is going to be ok.
There is a lot in common with the roaring twenties and what is going on today.
We can look at the roaring 20’s and we see a distorted reflection of our own times, viewed kind of like through one of those mirrors at a circus funhouse.
Look at the similarities…
In both eras—the 1920s and today—we see presidents elected because the voters liked their personalities, only to endure administrations mired in corruption and scandal.
In both eras, we see soaring stock markets, providing euphoric investors with incredible financial returns.
In both eras, we see a widening gulf between the incomes of the rich and the poor and middle-class.
In both eras, we see a populace enthralled by celebrity, zealously tracking every move of America's sports and entertainment heroes.
In both eras, we see a showdown between the secular values of the marketplace—in which everything is for sale, and sex sells—and the old-fashioned religious principles of fundamentalist Christianity is gone.
In both eras, we see powerful movements to restrict immigration amid fears that the arrival of too many newcomers to this nation will undermine American society and culture.
We know based on Ecclesiastes chapter 1 that man constantly repeats his history and that is where I think we are today.
YEAY… We made it through the September Convergence ! Let’s eat, drink and be marry for tomorrow we die.”
I keep writing about “Survive The Coming Storm.”
Well due to a black swan event that played well in our favor, we averted that storm today to only have it later barrel down on us at some future date.
How Long Do We Have?
Well if the IMF votes favorably for China in September 2016, not long.
But if they do what I honestly believe they will do and push them out 5 years, then we may have that long.
What we need to strongly remember is how did the Roaring 20’s came to an end?
It ended with a Great Crash, a Great Depression and the biggest war the world has ever seen.
Like today, the incredible affluence was / is only a mirage.
The decadent culture was an ironic prelude to a decade of hard times that lay ahead.
Man repeats his history and I believe that we are repeating again.
What you can do about it is up to you.
But if you just bury your head in the sand and expect it all to go away. Then that would be a very foolish idea.
We have been given a reprieve, economically speaking, which if you are wise, you will take advantage of.
Things ahead are not looking rosy in the least.
We still have to deal with the baby boomer ERISA situation that is growing every year and we have to deal with the real estate bubble that will probably pop around 2016 maybe 2017.
We also have the new president that we will have to contend with.
If it is Hillary, our nation will go down in flames.
If Trump wins, our nation could see economic health again, but at a huge price of pain that people will not want to face.
No matter what, the outcome does not look good.
So, start preparing to “Survive The Coming Storm.”
By Ray Gano
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