El Conquistqdor Francisco de Orellana

El Conquistqdor Francisco de Orellana
The Conquistador who put the Amazaon baisn "on the map"....Francisco Orellana

Saturday, October 13, 2012

Get Ready For the New Cold War

By Jeff Opdyke, Editor of The Sovereign Individual

On the outskirts of Tallinn, in a quiet neighborhood of pine and birch, the #16 house is home to a man who helped tear down the Soviet Union. He was there in the fading days of the empire, an Estonian-born member of the Soviet Union’s People’s Congress and an integral part of the process that unleashed a wave of capitalism-inspired economic freedoms and reforms across the former Soviet bloc. I stopped by earlier this week for a chat.

Over coffee and homemade apple cake, we spent a morning discussing the direction of Europe, the fate of the U.S. dollar and the future of the Estonian economy (uniquely one of Europe’s best). But our discussion about what’s now at play in the currency market grabbed my attention.

I have been saying for a while now that I think China is up to something with its currency … an unspoken plan to unleash a new global reserve currency backed by hard assets. My Estonian friend agreed – but then added an unexpected twist.

“The same is happening in Russia right now,” he said with a knowing smile. “They’ve called me to talk about it. We are on the verge of a global cold war fought with currencies.”

Fiat currencies have proven to be a financial pox on the world. They have allowed politicians to spend without regard to the amount of money a country’s population can actually support through the taxation and economic growth needed to repay the debt that necessarily arises.

A forward-thinking country that finds a way to reverse course – to re-engineer some version of a “hard currency” – has the opportunity to establish its money as a new global standard. And that is exactly the project my Estonian friend says is underway in China and Russia these days.

Both China and Russia want greater global respect and greater global swagger, financially. They’re wise enough to know, however, that there’s no way for the yuan or the ruble, in their current forms, to effectively compete against the dollar – in which 60% of world reserves are held.

But they also know the dollar is vulnerable. It’s over-rated. It’s backed by mountains of debt and politicians with little financial acumen. And as developing countries themselves, they know that emerging countries the world over are desperate for a U.S. dollar replacement. Everyone these days, except maybe our own citizens, are awash in growing concerns that America’s financial decline will one day annihilate the greenback.

To replace the dollar, China and Russia must build a currency with heft – one backed by something tangible and not just the empty promises of political and economic systems still managed in authoritarian ways.

That’s where hard assets come in.
Waging War With Assets, Not Ammunition

China, for years, has been stockpiling real assets like oil, coal, gold, iron ore and the like. Numerous China-watchers have commented on the fact that the country has been buying more than necessary to manage economic growth, which they puzzle over. Some think it means China is trying to goose economic growth and that ultimately the economy will prove to be a fraud.

I see something entirely different. I think China is fashioning a hard currency – a reserve currency it will unveil, possibly soon. The man in the #16 house agrees … and, he says, Russia is doing the same.

High-level Russian officials have contacted my friend to solicit his insight on building a reserve currency with the ruble. Neither Russia nor China would overtly announce that their aim would be to undermine the dollar or the euro. Rather, they would likely claim their new currencies – maybe even a single currency they create together – are simply a means of providing a refuge for those countries that want their reserves held in a currency backed by hard assets.

Despite such claims, of course, any hard-asset-backed currency would undermine the dollar since it would reduce demand for greenbacks. As demand falls off, the value of the dollar declines, which, in turn, has all sorts of nasty financial implications inside American households … but that’s for another story.

“Russia,” my Estonian friend told me, “is using oil, gas and minerals as the new tools of war instead of military tools. This will be the beginning of a currency cold war.”

Russia certainly has the assets with which to wage this war.

As of last count, the Russians had 911 tons of gold bars and an estimated 5,000 tons of gold ore still in the ground; the country owns the world’s largest natural gas reserves and the second-largest for coal; it produces more crude oil per day than any other country; and it has the largest reserves for aluminum and iron ore, among other mineral resources.

It’s clear Russia has the assets necessary to build a hard currency … “and they are clearly preparing for something,” my friend says.
America No Longer Controls Our Own Destiny

Whether Russia or China will ever actually launch an asset-backed currency is impossible to know. But, the risk is certainly there. For investors, the threat that either – or both – of them could pull this off underscores the risk.

All empires reach a point where they inevitably decline … or even collapse. America’s financial dominance is reaching that tipping point. Lots of people talk about the dollar losing value because of the actions of Congress and the mounting debts that politicians seem not to care about.

But the reality no one is paying attention to is that our currency’s decline – or even collapse – may not even be within our control anymore. Countries like China and Russia could hasten our undoing, and the great bulk of America won’t even see it coming.

In the event a new, currency cold war heats up, you absolutely want to be sure you have non-dollar currency exposure. You can add it to your portfolio in the form of foreign stocks, foreign-currency certificates of deposit – or, like me, foreign bank and brokerage accounts.

It’s insurance against what could happen.

Until next time, stay Sovereign …

Jeff D. Opdyke

No comments:

Post a Comment