Just as American Exports Are Set to Explode
By JC Collins
When we hear that the Chinese renminbi has depreciated against the US dollar we automatically think that the RMB is weakening everywhere. After all, the USD is the global benchmark on currency valuation. But we need to consider that the renminbi’s valuation is also based on a basket of trade weighted currencies. (See post China Just Ended the Dollar Peg…for the most part) Under this exchange regime the RMB has remained stable, even though Chinese monetary authorities have lowered the daily fixed rate against the dollar.
Over the last few days the dollar has been depreciating, which has caught many by surprise. Most POM readers will understand that this depreciation of the dollar has been expected, and in fact, has been a strategy of the both the Federal Reserve and the US Treasury for many years now.
Granted, the internationalization of the renminbi and its gradual rise to reserve currency status, coupled with a normalization of monetary policy by the Federal Reserve, could very well create a situation where stock markets drop and the dollar begins to weaken even further.
The recent upward movement in gold valuations would suggest the dollar is beginning to weaken. But as we covered in the post Gold at Center Stage, the renminbi is not yet positioned to absorb the capital outflows from USD denominated assets and securities and the precious metal is starting to benefit from this lack of strategic monetary planning.
Calling every aspect of this transition correctly is a damn hard task, and I definitely expected gold to go much lower before beginning to appreciate again. The range expected was around $800.00 per ounce. It was anticipated that the capital outflows from USD denominated assets and securities would shift to renminbi denominated assets, securities, and infrastructure development loans through the AIIB, New Development Bank, and Silk Road Fund.
Though this may still be the case, even though the AIIB has expressed it has no intention of using the institution to increase RMB internationalization, the NDP and SRF have not issued any such mandate. As of yet.
We could still see a major shift downward in gold valuations later in the year towards October, or before, as the new SDR weighting, which includes the RMB, becomes effective. This official recognition of the Chinese currency, along with massive infrastructure development loans, whether denominated in USD or RMB, could still lead to a big drop in gold.
Interestingly, along with a dollar depreciation and a commodities boom based on large infrastructure development projects worldwide, the POM analysis has also included the increase in American exports. This increase will naturally come from the dollars depreciation, as the “Made in America” brand once again becomes affordable for other countries.
The obvious timing of dollar depreciation and an increase in exports, corresponding to a monetary mandate of USD reserve reduction and diversification is not a coincidence. In fact, it is a well thought out strategy which has been built up over years as an answer to the global monetary imbalances.
The Trans Pacific Partnership trade deal (TPP) has probably been negotiated in secret for this very reason.
The US Treasury wanted the dollar to depreciate so exports can expand, domestic job growth increase, and the debt-to-GDP ratio lower, making the debt more manageable. This is offset with a new trade agreement, such as the TPP in the pacific, and the Transatlantic Trade and Investment Partnership (TTIP).
Both agreements are written to encompass a new economic reality which is based on a multicurrency framework as opposed to the hegemonic and unipolar dollar based framework.
The TPP will see American exports increase 9% a year, which will lead to domestic job growth and an increase in wages. An increases in wages will offset the inflation which will be realized through increases interest rates domestically, and an increase in the cost of imports due to the depreciating dollar.
The US economy will also see an annual growth rate of about 0.5%. Not bad. As long as it happens.
So you can begin to see how all the pieces are starting to fit together.
Let’s see how long this round of dollar depreciation lasts. My guess is that it is just the first up and down. It will recover in the coming days or weeks and get marginally stronger again, as will the Chinese economy. This will push gold back down, but hopefully not too far.
The game of monetary transition is far from over and is only just beginning. There will be a lot of up and down across all markets, including precious metals and forex.
I always sit back and wonder about the scripting of this multilateral monetary transition. When I hear Trump talk about making America great again, or suggesting that we should be friends with the Chinese and the Russians, I can’t help but think that the stage is set for the complete actualization of the POM thesis.
Sure, there may be a few odd and missing pieces, such as gold spiking recently. But let’s keep our eye on the moving ball. The big pieces are difficult to hide, and when they move around the ground shakes. – JC