With many investors worried about the economic turmoil that has engulfed the globe, here is stunning the roadmap to the coming global SDR.
Stephen Leeb: “Wake up, America. We have a problem that’s threatening our economy and perhaps even our continued existence as a free society, and no one is paying attention. The problem: we have too much money and too little wealth. Today our money-to-wealth ratio is probably lower than for any other developed country in history. But there’s no indication that policymakers here understand the key distinction between money and wealth or even see the dire implications…
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The Chinese do. They realize the vastly disproportionate amount of money compared to wealth in the West has made the world’s dollar-denominated monetary system a cancer. The Chinese are scared to death it could spread to contaminate them, and they’re determined to change the system.
What’s the distinction between money and wealth? Wealth refers to real things – commodities like oil and germanium, and the products created with commodities, and even the information needed to create those products. Wealth (with money as a facilitator) must be used to create wealth or it lies fallow and is no different than the paper money that piles up in West. There is no future without future wealth creation. And gold, which is the only thing you can call both wealth and money, will be at the center of future wealth creation. If you are going to survive a transition rockier than any we have ever experienced, owning gold, and especially gold mines, is absolutely essential.
It’s revealing that on Friday the country’s top two government economic policymakers contradicted each other within the space of barely an hour, resulting in the market lurching in opposite directions. First Federal Reserve Chair Janet Yellen said an interest rate increase might be in the cards but that any rate hikes would be slow and gradual. The markets rallied.
Right on her heels the Fed’s No. 2 official, Stanley Fischer, said there could be two rate increases before yearend – i.e., increases might not be gradual. The markets sank.
Why is this revealing? Because markets used to be all about the future. Now they are rudderless, rising when the spigot is wide and faltering when the spigot narrows. Wealth creation has nothing to do with it. And clearly even Fed officials with access to the most complete information have any idea what is going to happen next.
Which brings us back to the Chinese, whose ideas about the future are firmly focused on creating a century of well being for their populace. One stark contrast between China and the U.S. is in how we use technology and information. The U.S. too often uses information to create money, not to manage the relationship between money and wealth. Some examples: nanosecond trading, targeted advertising, millions of words of cascading rules and regulations that keep zillions of lawyers and people in financial services busy and well paid. This is a form of targeted helicopter money.
China Is Working To Create A New Monetary System
The Chinese, in sharp contrast, are marshalling information and technology towards a particular goal, which is to create a new monetary system – one that centers on gold, information, and collections of currencies known as SDRs.
Several weeks back, KWN showed a chart of China’s extraordinary gains in the field of supercomputers (see above). Not only has China had the fastest supercomputer for several years running but last year it surpassed America with the most supercomputers among the 500 fastest machines. In 2015, we banned the export of Intel chips in an effort to slow the Red Dragon down. China didn’t miss a beat. This year’s fastest computer is three times faster than last year’s winner. And this year it is all made in China. But as we discuss below, China has focused on super computers not for bragging rights but as a necessary tool for creating a world that will let it build and secure its future.
The Stunning Roadmap To The Coming Global SDR
Here is China’s goal. Come October, SDRs will include the renminbi, which will be part of a melded currency that also includes dollars, euros, renminbi, yen, and the British pound. Each of those currencies is assigned a relative weighting, which along with currency fluctuations determines how many SDRs a particular currency can buy. When a currency is rising relative to others, it is worth more SDRs than when it is falling – the arithmetic is as simple as that. Moreover, rarely if ever do currencies follow dramatically different paths.
Since the IMF issues SDRs in limited quantities, any impact on the world’s monetary system is at most nominal. If the U.S. creates trillions of dollars, those dollars may be worth fewer SDRs to the extent that other currencies aren’t being printed at a comparable rate. But right now, it doesn’t matter – the dollar will still be king of trade, and that’s true with or without the renminbi included in the SDR. This will change only if the SDR can develop a raison d’etre that trumps the dollar. Adding gold as a sixth component, an idea originated by Lord Desai, an emeritus professor at the London School of Economics, could trigger that change, completely rewriting the rules of the game.
Once you include gold, the basic arithmetic gets turned on its head. Because gold is not identified with any nation and is largely fixed in quantity, it has the potential to rise and fall against all currencies together. Gold, as noted above, is both money and wealth. And the kind of broad-based money printing we have seen recently will make gold dramatically scarcer relative to other currencies and dramatically more valuable. For example, if gold entered the SDR with a weight roughly equivalent to that of the yen, pound, and renminbi, some small fraction of an ounce would be worth roughly 10 percent of the SDR.
This Is How Gold Holders Will Win Big With The SDR
What happens if gold doubles in value relative to all other currencies? Then gold will buy more SDRs than any other currency, including the most highly weighted one, which is the dollar. Goodbye wanton dollar printing, hello SDR.
That’s the basic outline, but it’s a bit more complicated than that. For starters SDRs would have to be created en masse by the IMF based on currencies and gold deposited with the IMF. Some countries, like the U.S., might not participate. The risk of that, however, would be that the dollar would cease being an important unit of trade. Who would want to hold dollars when it risked losing value relative to another accepted currency?
The most complicated step comes in setting up systems for trade. And here is where the Chinese have a nearly insurmountable edge. You’ve probably read at least something about bitcoins and blockchains. These units of information have the potential to surmount all the problems associated with the transfer of funds, including the identification of the transferee, the possibility of hacking, and the need for a paper trail. And bitcoins and blockchains are created by incredibly complex software that China, thanks to its dominant position in supercomputers, has control over. According to The New York Times and other sources, about 70 percent of bitcoin trades go through just four Chinese computers.
It is critical to note that there is no way the Chinese can cheat. Once a bitcoin and the ledger associated with the bitcoin, the blockchain, are created they are impenetrable to all.
There will be a lot of steps but in the end the SDR will have only one competitor and that will be gold. Any country wanting to deposit SDRs with the IMF will need gold and with gold fixed in amount it will also fix the number of SDRs. The road to greater wealth for countries and the world as a whole will be paved by higher gold prices.
No doubt there will be a lot of kicking and screaming before we get there. There may be attempts to push gold down. But once bitcoins and blockchains make their way onto the international scene, even without gold they will be a much safer and more convenient way to conduct trade. With gold included, the long-term distinction between wealth and money will largely be extinguished.
As we’ve said many times, the amount of gold you buy should be limited only by the extent to which you can manage the near-term drops. Our other advice is that because of the risk of confiscation – especially in the West, which may be gold-poor – we strongly recommend a heavy emphasis on gold mines rather than on the metal itself.
Gold is special for many reasons but mostly because it is the only thing in this world that is both money and wealth in a single package. The more you have of it, the better off you will be. It is the only sure ticket in today’s world.”
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