Darryl Robert Schoon - China, Inflation & Gold

China created paper money and paper money…
then created inflation

Darryl Robert Schoon
8 February 2011

Ralph T. Foster in his invaluable book, Fiat Paper Money, The History and Evolution of Our Currency, writes that paper money made its first appearance in Szechwan, a remote province of China early in the 11th century.

Because of a shortage of copper coins, provincial officials had begun circulating iron coins; but the difference in value and weight between the two metals caused unexpected problems.

As Foster writes: [housewives needed] one and one-half pounds of iron [coins] to buy one pound of salt…Paper was the answer. People began to deposit their iron money in money shops and exchanged deposit receipts to transact business.

The money shops' deposit receipts then began circulating as money. But the money shops soon issued more deposit receipts than their supply of coins and by 1022, confidence had eroded in both the notes and the supporting iron money [and] government authorities closed the private note shops.

When the Chinese government intervened, the government quickly discovered the advantages paper money-at least to the issuers. The Sung dynasty immediately banned the issuance of paper notes by private money shops and on January 12, 1024, the Sung court directed the imperial treasury to issue national paper money for general use.

In the beginning, the imperial treasury backed its paper notes with cash coins equal to 29% of the paper money issued. Eventually, however, the Sung, like each succeeding dynasty, would print far more money than it actually possessed in backing.

The consequent loss of confidence in paper money caused Chinese scholars to question the nature of money...Ye Shi (1150-1223) spoke out against excessive amounts of what he called "empty money" when he observed how paper inflation hurt the economy; and scholar Hu Zhiyu (1127-1295) concluded that only backing gave paper value and blamed the retreat from convertibility for the loss of public confidence.. paper money, the child, is dependent on precious metals, the mother. Inconvertible notes are therefore "orphans who lost their mother in childbirth". (page 19)

For the next 600 years, succeeding dynasties would each attempt to utilize the advantages of paper money and avoid its disadvantages. Not one dynasty was able to do so. All attempts to use paper money ended in runaway inflation and dynastic collapse.

By 1661, China finally learned its lesson and the new Qing dynasty officially outlawed paper money. Regarding China's 600 year experiment, Foster writes:

Over the course of 600 years, five dynasties had implemented paper money and all five made frequent use of the printing press to solve problems. Economic catastrophe and political chaos inevitably followed. Time and again, officials looked to paper money for instant liquidity and the immediate transfer of wealth. But its ostensible virtues could not withstand its tragic legacy: those who held it as a store of value found that in time all they held were worthless pieces of paper. (page 29)

Today, almost 1,000 years after paper money first appeared and 350 years after China banned its use, China's is again issuing excessive amounts of paper money; and, once again, paper money's initial prosperity is about to give way to inflation and economic chaos in the celestial kingdom.

Southern Weekly, a Chinese language publication, recently noted: China has not only been the country that prints money at the fastest rate but also been the country with the largest money supply in the world in the past decade. China's M2, a broad measure of money supply, was up 19.46% at the end of November from a year earlier...This compares with 3.3% and 2.5% of annual M2 growth in the US and Japan respectively over the same period…

China's money supply, M2-to-GDP ratio over the past decade is the highest in the world. The nation with the longest history of excessive money printing and consequent inflation has clearly forgotten its past. The past, however, has not forgotten China.

2011: CHINA, INFLATION & THE PRICE OF GOLD

Asian nations, China and India in particular, have a long history with gold. Precious metals as a hedge against chaos is deeply embedded in Asian cultures and when chaos takes the form of inflation, gold is the default hedge; and, today, inflation is on the rise.

China raised interest rates for the third time since mid-October ahead of a report forecast to show inflation accelerated to the fastest pace in 30 months. February 8, 2011, Bloomberg News

This has profound implications for the price of gold. As inflation continues to increase, the buying of physical gold by the Chinese will send the price of gold skyrocketing. In fact, it has already begun.

On February 2nd, the Financial Times reported: Fears of inflation have also driven demand for gold as a retail investment… Precious metals traders in London and Hong Kong said on Wednesday they were stunned by the strength of Chinese buying in the past month. "The demand is unbelievable. The size of the orders is enormous," said one senior banker, who estimated that China had imported about 200 tonnes in three months.

On February 8th, Karen Maley in Australia's Business Spectator discussed this growing phenomenon in her article, China's gold tsunami: It's not hard to understand the growing Chinese enthusiasm for gold. Officially, China's inflation rate was 4.6 per cent in December, but many believe the actual inflation rate is considerably higher. But Chinese savers earn a paltry interest rate of 2.75 per cent on one-year deposits, which means that they face negative real interest rates.

Faced with these dismal returns, Chinese households and businesses have been pouring money into physical assets, such as food, real estate, and commodities as a hedge against inflation. Chinese authorities are now trying to quell property market speculation by making it more difficult for buyers to get bank finance for their second and third investment properties, and have begun experimenting with property taxes in some cities.

This has caused Chinese investors to turn to gold. According to the Sprott newsletter, China, which is already the world's largest gold producer, imported more than 209 metric tons of gold in the first ten months of 2010 alone. This compares with the estimated 45 metric tons it imported in all of 2009.

DON'T WORRY ABOUT 2012
2011 IS HERE

The response to the 2008 global collapse set in motion an even greater danger-runaway inflation. In 2009 world governments attempted to offset the global collapse in demand with historic levels of liquidity. The excessive printing of money has now led to higher prices.

Prices, especially food prices are rapidly rising. Tyler Durden, www.zerohedge.com, makes this point with stunning clarity: One of the benefits of America finally seeing what Zimbabwe went through as it entered hyperinflation, ignoring for a second that the Zimbabwe stock market was the best performing market, putting Bernanke's liquidity pump to shame, is that very soon everyone will be naked, once companies finally realize they have no choice but to pass through surging input costs. And while some may be ecstatic by the S&P's modest rise YTD, it is nothing compared to what virtually every single agricultural product has done in the first month of 2011. To wit: Corn spot up 7.76%, wheat up 5.63%, Rice up 10.08%, Hogs up 10.16%, Sugar up 5.64%, Orange Juice up 3.33%, and cotton.... up 17.08%. That's in one month!

Rapidly rising food prices have already contributed to governments falling in Tunisia and Egypt. Other governments, well aware of the risk that inflationary food prices pose to their continued rule, are now stockpiling food to prevent further protests.

This buying will only drive the cost of food even higher: Jim Gerlach, of commodity brokerage A/C Trading, said: "Sovereign nations are beginning to stockpile food to prevent unrest." "You artificially stimulate much higher demand when nations start to increase stockpiles."

"This is only the start of the panic buying," said Ker Chung Yang, commodities analyst at Singapore-based Phillip Futures. "I expect we'll have more countries coming in and buying grain. www.telegraph.co.uk/news/worldnews/middleeast/8288555/Authoritarian-governments-start-stockpiling-food-to-fight-public-anger.html

INFLATION & THE FUTURE PRICE OF GOLD

Even the hardened paper boys on Wall Street are aware of inflation's impact on the price of gold. The meteoric rise of gold in the late 1970s was caused by rapidly rising prices. In the last decade, however, gold began moving steadily higher as did all commodities in a disinflationary atmosphere. That, however, is about to change.

With gold already moving higher, the increasing inflationary impetus will send the price of gold far beyond its present price. Gold's spectacular ascent in the 1970s is now about to be dwarfed.

Last night, I, Ralph T. Foster, our wives and another couple had dinner together and the topic turned to the future price of gold. There was agreement that while its ascent was certain, gold's ultimate price was a matter of pure conjecture since the reference points used to value that price would be virtually worthless pieces of paper money.

History is the context within which our present circumstances present themselves. Of late, change has been so rapid that many believe the past is merely that which preceded the present. They are wrong.

History is about to repeat itself, albeit in a new iteration. Paper money's journey to the west and back again is about to reach its fatal climax. Paper money's ten-century drama is almost over; and while a new and better era will replace it, the collapse of the present era will be unprecedented in magnitude.

Ralph T. Foster's Fiat Paper Money, The History and Evolution of Our Currency, can be ordered at http://home.pacbell.net/tfdf/ . My latest local TV show, Dollars & Sense, can be viewed at www.youtube.com/user/SchoonWorks#p/a/u/0/0JB4_lFwi4c

Buy gold, buy silver, have faith.

Darryl Robert Schoon
www.survivethecrisis.com
www.drschoon.com
blog www.posdev.net/pdn/index.php?option=com_myblog&blogger=drs&Itemid=81

Chinese Puzzle

Antal E. Fekete
8 February 2011

There is really just one question about China, the Western mindset's "enigma wrapped in mystery". How could the Chinese have made the colossal mistake of investing their hard-earned savings in the debt of the U.S. government - to the tune of $ 1 trillion, the largest sum one country has ever loaned another in all history. (There is only one other puzzle greater than this: How could the U.S. government in good faith allow its debt to accumulate in Chinese hands? But we leave that question for another occasion to discuss.) U.S. debt is easy to buy but hard to get rid of. The harder, the larger are the sums involved.

It is true that a huge bull market in bonds has been rolling on for the past 30 years - since 1981. But putting all of China's eggs into the same basket was a terrible mistake even if we ignore the reckless fiscal and monetary policy the U.S. government has been pursuing since 1971. Belatedly, the Chinese are trying to correct their mistakes through diversification.

China could have learned from Japan's sad example. Before the Chinese appeared as buyers, Japan was the largest investor in U.S. debt. In 1971 Japan was running an unprecedented trade surplus vis-à-vis the U.S., and the exchange rate of the Japanese yen was 300 to the dollar. American policymakers and money doctors put enormous pressure on Japan to let the yen float upwards, as this was the "in-thing" to do after the Nixon-Friedman conspiracy made the U.S. default on its foreign gold obligations "respectable", on the spurious theory that this would first ease, then eliminate the American trade deficit.

Japan, in effect still an occupied country, yielded to the American pressure and the yen rose so that by 1981 only 100 yens were needed to buy one dollar. This was a 3-fold appreciation of the yen, but it did not bring about an improvement in the American trade deficit with Japan, as promised by Friedmanite propagandists. Instead, there was a 10-fold further deterioration! Yet the Americans did not revise their policy recommendations, and continued to insist on floating the yen upwards. It appeared that the Americans had a hidden agenda that was not the elimination of the American trade deficit. Could it have been abatement of the American debt? Indeed, the yen-value of Japan's foreign exchange reserves held in dollars was cut by two-thirds as a result of foreign exchange policy forced upon Japan.

The Chinese should have seen the writing on the wall: buying dollar-denominated assets was tantamount to kissing good-by to your savings. In terms of the Nixon-Friedman conspiracy this was extortion, an underhanded way of secretly siphoning off the savings of America's trading partners running surpluses, disguised as exchange-rate policy.

Worse still, when the Japanese wanted to draw on the remnants of their savings held in American banks to tie them over temporary cash shortages, they found that the money wasn't there. The American money-doctors were ever-ready to come up with a solution. The Japanese government had excellent credit rating and no debt to foreigners. Why not borrow the money it needed? Once more, the Japanese meekly complied. They swapped their temporary need for dollars for permanent government debt in yens. By now the Japanese government has the worst indebtedness on record: it would take 2 years of Japan's GDP to pay it off. See the vicious combination: selling bonds in an appreciating currency while buying bonds in a depreciating currency? A free one-way ticket to the poorhouse.

China should have seen the trap. The Americans want them to buy all the dollar-denominated bonds. Then they would start twisting arms to let the yuan float upwards, ostensibly as a valid exchange-rate mechanism to rectify trade imbalances. Clearly, it is not a valid mechanism because, well, it does not work. It only makes the trade imbalance worse. Neither are the Americans shooting for elimination of their trade deficit. They are shooting for an abatement of America's debt. They know that higher exchange rate for the yuan means imperceptibly siphoning off China's savings. An indigent country, China, underwrote with its savings the profligacy of an affluent country, the U.S. Unbelievably, China appears to be caving in to American demands and let the yuan float upwards..

If the Chinese wanted to draw on the remnants of their savings held in American banks, they might just find out, as the Japanese did before them, that the money isn't there.

It can be safely predicted that the American debt-mongers would again be on hand to come up with the solution. China has excellent credit rating and zero debt to foreigners. The Chinese should borrow the dollars they needed, to tie themselves over, rather than liquidate their dollar holdings. Like Japan earlier, China, too, could swap its temporary dollar shortage for permanent government debt in the domestic currency. This is debauchery: Mephistopheles trying to corrupt the uncorrupted. This is lacing foreign banking systems with toxic debt.

The Chinese puzzle can be stated as follows. The irrational and masochistic behavior of the Japanese can be explained by the fact that Japan is still an occupied country. But China is not. China could refuse to listen to the siren-song of the American exchange-rate manipulators and debt-mongers. Why doesn't China stand up to this corruption? "Just say no" to the drug of indebtedness, and expose the debauchery behind it!

Here is the explanation of the Chinese puzzle from a non-Chinese perspective. The 1972 popping up of Nixon in China (which was worth composing an opera on the theme) started the pilgrimage of young uncorrupted Chinese scholars to American universities. Well, at least those among them who were economists, monetary scientists, and banking experts have been thoroughly corrupted and brainwashed. Keynesian and Friedmanite theories have been pumped into them through force-feeding. They have never been told that there is a coherent and respectable body of economic knowledge refuting, point-by-point, the false and corrosive economic theories of Keynes and Friedman. China utterly lacks scholars who are well-versed in Austrian economics and in valid monetary theory, to provide antidote for the Keynesian and Friedmanite poison. China was made a fertile ground for American debauchery.

Friedman's theory of deliberate use of foreign exchange rates as a tool of balancing foreign trade is vicious, false, and fraudulent. It has never worked. It never will. It is motivated by American self-interest, ready to wage a new opium war on China, to reduce the indebtedness of the U.S. through a disguised devaluation of the dollar, at the expense of its trading partners, and to push the responsibility for the trade imbalance on the surplus countries.

The correct solution to the trade problem is not the flotation of currencies up and down. Quite to the contrary: the solution is the stabilization of foreign exchange rates! China badly needs advisors who are able to show the way in this direction.

Antal E. Fekete
aefekete@hotmail.com

Silver to Soar in 2011?

Marc Davis
8 February 2011

Silver promises to become the next big buzzword among investors in 2011 and beyond, according to one of the investment industry's most prescient and successful experts on precious metals.

Eric Sprott is the founder of the Toronto-based investment firm, Sprott Asset Management LP. His renowned hedge fund, Sprott Hedge Fund LP, is heavily weighted in precious metals and has generated an estimated 23% annualized return over the past decade. Other similarly oriented funds under his stewardship have also been stellar performers in recent years.

He's now so bullish on silver that he launched the $575 million Sprott Physical Silver Trust in November of last year as he believes that: "Silver will be the investment of the decade."

"I think that silver could easily get to $50 this year," he tells BNWnews.ca.

This all bodes especially well for publicly traded companies that are already mining silver, he says. Likewise for ones that are developing primary silver deposits or gold deposits with plenty of silver as a byproduct.

"If the price of silver continues to go up, silver stocks are going to perform even better," Sprott adds.

Sprott says the big catalyst for surging silver prices in the coming years will be exponentially increasing investment demand, which is already beginning to overwhelm existing silver supplies. The mining industry only produces around 800 tonnes of silver per annum. This is a relatively inelastic supply, regardless of silver prices, he adds.

As household investors are becoming increasingly jittery about the debasement of the U.S. dollar and other major currencies, they are loading up in record numbers on silver bars, coins and silver-denominated exchange traded funds, Sprott says.

However, there's also a quantum shift in investment demand taking place among big players in the precious metals market, including India (which is aiming to increase its imports by about 77 million ounces per annum), and of course China.

"China's net imports of silver were 112 million ounces last year. In 2005, they were net exporters of 100 million ounces," he says.

"That's a 200 million ounce shift in an 800 million ounce annual market that seldom ever grows because production hardly ever goes up. So where's it all going to come from? We don't know."

In fact, silver promises to outshine gold over the coming years, Sprott says. "Silver is the poor man's gold. Gold has had a great run for the past 11 years. But I absolutely believe that silver will outperform gold this year. Currently, there's more investment dollars going into silver than into gold."

Such a game-changing scenario should recalibrate the gold to silver pricing ratio in silver's favor, thereby eventually restoring it to its traditional level of about 16 to 1, he says. "It's the easiest call of all time."

"Silver as a currency always traded in a ratio of around 16 to 1 compared to gold, when it was a currency in the U.S. and the U.K. The current ratio is 48 to 1. If we go back to a 16 to 1 ratio, the implied price for silver would be $85.62 (per ounce)." he adds.

"On that basis, if gold goes to $1,600, then that would value silver at $100. And we certainly think that gold is going to $1,600. In fact, I'm willing to bet that this ratio will overshoot on the downside. It might even get to 10 to one."

The only reason why silver is still trading at a 48 to 1 ratio to bullion's spot price is that its price is being "manipulated" by big banks, Sprott says. That's because they don't want precious metals to become a popular alternative currency to Fiat money (currencies that are not backed by hard assets).

"Then there's also a huge short position out there on silver," he adds.

But time is on silver's side, he says, as the sovereignty debt crisis deepens in Europe and a continued policy of Quantitative Easing in the U.S. continues to undermine the value of the greenback.

Courtesy of www.Top40GoldStocks.com

The Big Sleep

Scott Silva
Editor, The One-handed Economist
8 February 2011

What motivates people to lie? Is lying instinctive, present at birth, part of human genetic makeup, or is it learned behavior, an acquired skill necessary for survival.

Certainly deceit is a vital part of survival. We know from nature, without cunning and deceit, the stalking lion goes hungry; the octopus changes its color, blending into the background to evade predators. This natural behavior allows the species to live for another day; life, and the species, goes on.

Some lies people put forward are crimes. Perjury or lying under oath is a crime. In fact, it is a felony that carries a 5-year prison sentence if one is judged to have lied to the FBI or to Congress. Making a false statement to a police officer is a misdemeanor.

But when the government lies to its citizens, few prison sentences have resulted. And the US government lies to us all the time. In fact, officials lie so often, and in so many ways-- print, speech, social media, reports, alerts and images-that people are lulled into believing The Big Lie. This is not just another conspiracy theory; the evidence is all around us. The government is stealing our wealth and freedom with every lie it utters.

For example, one would think that the Federal Reserve, the US Treasury and the Department of Labor work to safeguard the value of US currency and enhance prosperity of US citizens. These are important agencies of the government; their leaders must be confirmed by the US Senate. But the vetting process does not prevent the Fed chairman from understating the money supply or the Department of Labor from grossly understating the inflation rate. These measures are linked. That is, excess liquidity causes prices to rise. The Fed has added an unprecedented $2.3 Trillion to the money supply over the last three years. At his first press conference last week Chairman Bernanke maintained that inflation is "controlled at very low levels."

The Bureau of Labor Statistics keeps the books on inflation. According to its January 14, 2011report, the Consumer Price Index (CPI) rose 0.5% in December, and 1.5% for the trailing 12 months. But embedded in the low increase are many "offsets" that on inspection are pretty flimsy. For example, 23.9% of the CPI index is made up of what is considered "owner's equivalent of rent." This is one of the largest percentage items in the entire basket of goods that make up the CPI. Until the early 1980s, the CPI used the asset price method (You Get What You Pay For) to measure the change in the costs of owner-occupied housing. The new measure is subjective; the value of the rent that a given property might fetch is typically a much lower value.

In another example, the BLS takes credit for "productivity savings" for higher performance consumer goods, such as laptop computers, that sell for about the same price as those purchased one or two years prior. The consumer cannot spend the "savings", but the BLS subtracts the value from the consumer survey results.

The most egregious BLS whopper is how it accounts for food and fuel prices. It doesn't. It removes food and fuel components from the CPI, and calls the smaller number the "Core CPI" on the weak excuse that food and fuel prices are too volatile, that is, they tend to rise (or fall) too quickly to fit neatly into economic models. When was the last time food or fuel prices declined too quickly for any consumer?

Intentionally misrepresenting the magnitude and rate of change if the money supply and price inflation debases the currency and imposes a "secret inflation tax" on everyone holding US Dollars and dollar denominated securities. As the chart on the right indicates, the US Dollar has lost 35% of its value in the last ten years. Food and commodity prices have skyrocketed here and around the world, contributing in part to popular uprisings in Tunisia, Egypt, Jordan and elsewhere.

US citizens have always had a healthy disrespect for government. The fact is, those in power tend to look out for themselves, opting for policies that support their own re-election rather than enhance the prosperity of their constituencies. Thomas Jefferson wrote that "whenever any form of government becomes destructive" of citizens procuring for themselves "inalienable rights" to "life, liberty, and the pursuit of happiness," then "it is the Right of the People to alter or abolish it." George Washington viewed politicians (and bureaucrats) as necessary evils whose powers must always be minimized. Special-interest politics, which is to say all politics, "are likely, in the course of time...to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the Power of the People, and to usurp for themselves the reins of Government." Today, the beltway bureaucrats use deceit and sleight of hand to steal wealth and property from the great unwashed.

But not everyone is taken in by statements from politicians and bureaucrats acting to ensure their own survival. Some of us see the shadows on the walls of the cave for what they are-- the result of real movements kept outside our view. Many of us have learned that skepticism can be profitable. Some of us take advantage of investment opportunities in hard assets such as gold and silver and other commodities to hedge against actual, rather than government-reported inflation. We have avoided fixed income securities that pay negative real interest. And we are wary of big government programs designed to create jobs by spending yet more taxpayer dollars. This strategy is paying off for subscribers to The One-handed Economist, the investment newsletter based on the principles of Austrian Economics. For the last nine years, the newsletter's Model Conservative Portfolio has outperformed US Diversified Equity funds as measured by Lipper and published in Barron's. It posted a 66.7% return for 2010. This week we realized a 131% gain from a gold stock trade.

Which Currency Will Crash First?

Rosanne Lim
8 February 2011

2010 was an exciting year for currencies. The dollar, euro, the yen, and the yuan all went under the spotlight. Except for the yuan, each experienced drastic swings wrought about by internal or external factors. But overall, these events underwhelmed confidence in paper money. The main reason is because of the sovereign debt crisis that swept the world.

Most of the developed nations including the United States, Japan, and a number of European countries have unsustainable debt. The US and Japan, for example, are heading towards insolvency. Meanwhile, the only reason why several countries in the EU haven't defaulted is the bail-out by stronger EU members.

This year presents more challenges for the world's major currencies. While the markets are not as nervous at this point, problems remain just beneath the surface. The truth is that the world has not seen a sovereign debt crisis of the magnitude seen last year. With much of the developed world on the red, this has brought the market at the brink of disaster. We'll analyze some of the major currencies in this article including the yen, the euro, and the dollar. Developments in China regarding the yuan will also be discussed.

The Euro

It was all over the news in the later part of 2010. Several weaker members of the Eurozone would have defaulted already if they weren't helped out by stronger members. As it stands right now, Greece, Portugal, Spain, Italy, Ireland, and Belgium are on shaky grounds. A number of countries have had their credit rating slashed, resulting to soaring bond yields that are unsustainable. Taking on new debt has become very expensive.

Greece, the country who was most at risk of default at one point in 2010, saw their yields go up from 6 percent to 13 percent in a single month. Even countries that are not in danger are feeling the effects of the crisis. For instance, the French debt hit a record high on December 20.

Right now, there are rumblings that more European countries may need bailouts to stay afloat. According to Professor Willem Buiter, a chief economist at Citibank, a few EU countries can face financial collapse in the next few months. "The market is not going to wait until March for the EU authorities to get their act together…they are being far too casual."

Where did the bailout money come from? A lot of it comes from Germany but most people don't realize that a significant portion actually came from the United States. But the real question is, are these countries willing to pour in more money to nations on the verge of default? For the German public, they want bailout to weaker neighbors to stop. There are other reasons why continuous bailouts will not work.

Right now, some politicians in Europe are asking for the European "bailout fund" to be doubled to $2 trillion. There are analysts who think that it will require $4 to 5 trillion to help all European nations that need it. Even a country as wealthy as Germany cannot give away billions of euros to its neighbors indefinitely. When the bailout to financial black holes stop, the defaults are likely to begin.

Let's look at the short-term chart (courtesy of http://stockcharts.com) for euro:

In the Euro Index chart this week, there are a number of bearish signals which can lead to bullish sentiment for the USD index. We have observed that the right shoulder of the bearish formation was invalidated by the buying that occurred at the beginning of this week. However, the price then moved to the rising dashed ling, invalidating the breakout. As a result, the head-and-shoulder formation is still underway, which has bearish implications for the following weeks.

Still, that formation alone doesn't mean that euro will be the first major currency to crash. There are also other candidates…

Japanese Yen

Although Japan has the third largest economy, they are swamped with debt. The Japanese government has the highest debt to GDP ratio at 200% of all major industrialized countries. It is estimated that with this amount of debt, every person living in Japan right now owes around 7.5 million yen. Any other country would have defaulted. The main reason why Japan hasn't yet is the high amount of personal savings rate of its citizens. The Japanese citizens are buying massive amounts of government debt at very low interest rates.

Despite this, the debt level is worrying. Standard & Poor has said they will slash the country's credit rating if the debt gets any bigger. If confidence starts to falter, Japan has to pay significantly higher interest rates. At some point, Japan will have to face the threat of a meltdown unless drastic actions are taken.

The US Dollar

No one can argue that the United States is indeed in trouble. It has the largest national debt of all. With its national debt at $14 trillion, it is just $300 billion away from the $14.294 debt ceiling. If Congress fails to raise the debt ceiling, the US government will begin to default. While everyone fully expects this to be increased, the US cannot continue raising this threshold forever.

The US national debt is now 14 times higher than 30 years ago. Everyone is realizing that this level of debt is not sustainable. The Federal Reserve has already stepped in and "bought" more debt for the US government. Treasury yields have been moving up, potentially starting a massive problem in the future. This is mainly because the United States is increasingly relying on short-term debt.

Average maturity for US government bonds is now 4.4 years. As a comparison, the maturity of UK government debt is around 13 years. The situation can be dire if interest rates continue to climb. But there is one thing going for the United States: The Federal Reserve. It can keep on printing money and because the dollar is a global reserve currency, there is demand for it. But this can change quickly - and the consequences will be seen all around the Globe.

The Chinese Yuan

China is increasing its gold and silver reserves in line with its plan to globalize the yuan. The report published by the Economic Information Daily, the People's Bank of China - the country's central bank - is chalking up plans to buy gold and silver reserves when the prices are down.

A number of analysts predict that the Chinese yuan might overtake the US dollar as the global currency in a few years; one of them is global commodities expert Jim Rogers. He believes that the Chinese yuan will eventually dominate the currency market. China is already the largest producer of gold.

Last year, officials have announced that they will increase reserves to the tune of 10,000 tons over the next decade; the country's reserves currently stands at 1,200 tons. Chinese central bank adviser Xia Bin has confirmed that China must increase its gold and silver reserves. According to the report, "increasing gold reserve at the time of prices dip is the strategy of internationalizing the yuan."

There were rumors that the People's Bank of China will bid for IMF gold reserves but this did not happen in 2010. The main reason may be that bullion prices climbed by 30% last year aided by the depreciation of the US dollar against other major currencies, the European debt crisis, and strong demand from India due to festivals and other occasions. The investment appeal of precious metals also surged as investors sought to protect their wealth in an uncertain environment.

In essence, what China wants to happen is to stabilize its currency. By making the yuan internationally tradable, its dependence on the dollar will be dramatically reduced. Hwang Il Doo of the Korean Exchange Bank Futures Co. said that while "the report is a positive factor for gold prices in the mid-and-long term", it won't have an "immediate impact on prices as gold's gain has more to do with the unrest in Egypt at the moment."

Can this be the Start of a Global Currency?

Concerns about the stability of currencies have improved the appeal of a united global currency. The same groups and individuals who thought up the WTO, IMF, OECD, and World Bank believe that the uncertainty produced by shaky world economy presents the perfect "opportunity" to introduce a world currency. Chinese President Hu Jintao has said that the "current international system is the product of the past."

Whether this comes to fruition or not remains to be seen. The United States has the most to lose if this happens. Certainly, American policymakers will certainly try to find a remedy. However, the problem is, the country might eventually be too deep in debt to do something about it.

Rosanne Lim
Sunshine Profits Contributing Author
www.SunshineProfits.com

Gold & Silver are outside The Matrix

Silver class-action suits against Morgan, HSBC consolidated in New York

By Evan Weinberger
Law360.com, New York
Tuesday, February 8, 2011

http://www.law360.com/securities/articles/224556

A judicial panel on Tuesday consolidated class-action litigation alleging that JPMorgan Chase & Co. and HSBC Holdings PLC violated antitrust laws by manipulating the silver market and potentially reaped billions of dollars while keeping the price of silver artificially low.

The U.S. Judicial Panel on Multidistrict Litigation on Tuesday consolidated the seven class-action lawsuits pending against the two banks in the U.S. District Court for the Southern District of New York......read on

GATA credited for exposing gold, silver market manipulation

By Adrian Douglas
Wednesday, February 9, 2011

In a report published yesterday and dispatched by GATA (http://www.gata.org/node/9577), Law360.com credits GATA with having been instrumental in making the world aware of the whistleblower Andrew Maguire, the watershed event that led to an avalanche of lawsuits against JPMorgan Chase and HSBC accusing them of illegally colluding to manipulate the silver market.

Maguire had warned the U.S. Commodity Futures Trading Commission of silver market manipulations (http://www.gata.org/node/8466) but the CFTC had taken no action, so Maguire turned to GATA.

The public is under the false impression that all that is required to expose fraud and corruption is for a whistleblower to come forward. But in fact whistleblowers are typically ignored and marginalized until it is too late.

The world did not hear what Sherron Watkins had to say about Enron until the company had already collapsed. The world never knew of Harry Markopoulos until after Bernard Madoff's Ponzi scheme crashed and burned. The public did not hear of Cynthia Cooper until World.com collapsed, and Colleen Rowley's warnings to her bosses at the FBI about terrorist activities were not known until after September 11, 2001.......read on

Martin Armstrong - An Islamic Revolution, is it on time?

Cycles Guru, Martin Armstrong ponders the ecomonic ramifications of religious reformations.......read here

Crash JPMorgan, Buy Silver

Cazenove star analyst says China to raise gold reserves five-fold and boost gold price

From Arabian Money:

Gold and silver prices were advancing this morning in anticipation of a return from the Chinese New Year holiday, while Cazenove star analyst Robin Griffiths gave the Year of the Rabbit a poke with a prediction that China is looking to increase its gold holdings from two to 10 per cent of national reserves.

Extrapolated into the market that would mean China buying around 5,000 tons of gold, according to King World News. Mr Griffiths told the channel: ‘I think we’re moving into a world where Chinese and Indian authorities are going to be more dominant than they were in the past, and in their culture of course gold is real money. On top of that, particularly China already has more than enough dollars, it’s finding that a problem. It doesn’t want to crack the dollar, but it doesn’t want to go long of any more because of its trading activities.

‘For as long as interest rates are super low, there’s no negative cost of holding gold. There is a seasonality to gold and very often it doesn’t start running until the end of February…Once we get into March, I think we can expect it to start motoring higher again.’......read on