China’s Nuclear Option To Sell US Treasurys

The next biggest currency, after the US dollar, is the euro. The euro now has the obvious problem of negative interest rates. So China would be borrowing at a positive interest rate, to buy assets with a negative interest rate. That is, it would pay to finance a portfolio that it would pay to hold. One need not be an economist of the Austrian School, to understand that this is not sustainable.

Summary

In part I, we have enumerated quite a list of challenges to the so-called “nuclear option”:

  1. Yuan holders are selling yuan to buy dollars, PBOC can’t squander its dollar reserves
  2. If it doesn’t buy another currency, it merely tightens monetary conditions in China
  3. If it does, it will drive up the price of whatever it buys, but crash it when it sells later
  4. It is still supporting the dollar, as the euro is (like the yuan) a dollar-derivative
  5. It would lose money by holding the position, due to the interest rate in the euro
  6. It incurs severe exchange-rate risk (the euro is in a downtrend against the dollar)
  7. And the debt of Spain, Italy, and others is headed for a train-wreck

Part I is the setup. All countries are trapped in this mad system of irredeemable currencies with the dollar as the world’s reserve. It cannot be changed, other than by moving to the gold standard.

In Part II, we will show that China (or anyone including the mythological bond vigilante, unicorn, and dragon) cannot affect the dollar interest rate.

Supply and Demand Fundamentals

The price of gold nine bucks. Brace for it… the price of silver fell more in proportion, 37 cents. We now have a new high on the gold-silver ratio.

For many years, some in the silver community wrote that silver was being consumed. That it was coming out of hoards and into industrial production, never to return. They meant it as a scarcity argument for a higher price. But if it is true, it is an argument that silver is being demonetized. Perhaps it is due to the Great Moderations of the central banks, or at least that is what the Fed’s apologists would say. Perhaps Or it could be that digital forms of gold, and products like the Aurum (a Monetary Metals lessee), remove the reasons for a second monetary metal to exist. No doubt the crypto bugs would say that bitcoin is replacing the monetary metals, and silver will go out the door first.

We don’t agree.

We will look at the data, and see the growing scarcity of silver that correlates to its shrinking price. But here, we want to make a different point. One which the crypto bugs would do well to seek to understand (and the Fed apologists understand, which is why they fight all the harder for irredeemable money).

It is not only the right of every human being to take his money home, withdraw it from the system, and refuse to extend credit. Not only is this a moral right, but it serves an important economic function also. It provides a break on credit expansion, and a floor under the interest rate. A floor that the Swiss franc, euro, and yen are sorely lacking. The dollar lacks it too, though we have seen only decades of falling rates, not negative rates yet.

Whatever you may think of this theory, there is no way to stop people from hoarding the monetary metals. Governments can try force, but they are more successful in pushing the metals underground than in stealing very much of them.

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