Robin Holdings
May 04th,2022
When tariffs hit the pockets of Chinas upper class, depreciating the YUAN 7%, it was hard to ignore what changing US administrations could mean for their pride, wealth, and power. What was most concerning is this was a manipulation of their currency which they did not enact themselves? They quickly worked to reduce dependence on the US banking system and the west in general. Their one-party system cannot be subject to the whims of an increasing arrogant US democracy. Their people will no longer accept poverty to fund US excess. It won’t happen overnight, but it is clear they want to trend in one direction: erosion of dollar’s global reserve status. Objectively that is the only true path forward for the CCP long term.
Already they control Pakistan and other developing nations via debt manipulation and injection of capital I.e., the belt and road initiative. At this point their main dependence on the west is raw minerals. The Belt and Road initiative and their massive investments in Africa are evidence of this. As is the extension of 800billion in virtually unconditional long term YUAN swaps to over 60 countries.
The US Federal Reserve extended direct swap lines to all main Central banks to increase dollar liquidity like they did in 2008. China declined these this time. Instead, they have been seen buying JGBs and swapping to dollar for a .59% interest rate.
South Korea, Japan, and many other south Asian countries now export more to China than the US. They will have to follow the YUAN and China, as will much of Asia. The ramifications of even a 20% appreciation of the WON/YUAN/YEN would mean 26% of US imports increase in price in the midst of a recovery. We will not stop importing Chinese goods because of a 20% increase in the YUAN. Especially if the rest of Asia follows suit and let their currencies appreciate in relation to the dollar.
Now more than ever the dollar seems like a less attractive asset. Mismanaged and backed by equity value and supply that will unavoidably decrease as a percentage of the whole worlds; it is already overvalued. The west’s excess has been funded by cheap labor and Chinese poverty for too long. A one-party system allows for long term plans that a democracy does not.
Europe and the US virtually exhausted monetary policy over the past 10 years to artificially inflate their standard of living and mitigate the cost of their decrease in % of the world’s economic production. Europe will have no way to fight this either.
The FED wasted all the money they printed because it didn’t add any value to the dollar. The US did not increase its global economic production/value as a share of the whole worlds. Quantitive Easing and Stimulus artificially kept CPI at pre pandemic levels even when we had 6.9% unemployment. If they allowed deflation, we would have been worse short term, but it would have helped retain the dollar’s value.
We over leveraged our assets and a pandemic hit. Then we handled it worse than anyone in the world. Asia did the best and there is ramifications to that. We had 600 deaths per million in the USA, 3.7 in China, 6 in South Korea, 8 in Japan. This has an effect, the US closing for months and counties established new import lines with China and Asia as they stayed open. Asian populations are more disciplined. Once oil goes back up though and imported inflation sets in, it’s hard to see the US avoiding stagflation in 2022.
We need a massive government jobs program that produces something the world needs. It doesn’t have to make a lot of money; it just needs to prop the dollar’s value by increasing its production. At the same time, it would allow us to increase rates without triggering a recession. It’s really that simple. We can use massive debt to do it and Asia will have no choice but to finance it because the dollar is still the reserve.
Powell and the FED predicted and 159% slower decrease in Unemployment so the QE and Stimulus was far in excess and will end up hurting the country significantly. If anything, a good chunk of that money went to imported goods that just increased the value of Asian equities. US manufacturing and production was severely constrained. The stimulus stimulated Asia in particular.
The way I see it the real value of the dollar can be determined by asking: What percentage of the worlds Production and Equities does the US account for?
Dollar Value = (((US Production + Equities) – (US Liabilities)) + ((Rest of World Production + Equities) – (Rest of world Liabilities))) / (US Production + Equities) – (US Liabilities)
That percentage determines the dollar’s value, there is slowing increasing but quantifiable amount of value in the world. We gain and lose a percentage of it based upon the value of our assets and production. As equity supply increases there is more dollar tied assets that can be invested in. As the share and importance of a nations production in relation to the rest of the world increases, these assets are worth more and become more lucrative. This increases demand for dollars organically allowing us to increase rates to stem the healthy inflation that would result from the increase in demand.
The US would be able to hold to and even increase the dollar’s value without unorthodox monetary policy because our percentage of equity supply/production would have gone up.
The unavoidable truth is that for long time now the value of the dollar has been a facade. Monetary policy cannot make up for economic production. Asia has been content to accept its manipulation so long as it benefitted them. The real problem is Asia began producing significantly more and more percentage of the worlds production and reallocating an increasingly significant amount of the world’s equity supply to YUAN/YEN/WON assets with the money they made from US/Western greed and excess.
When the YUAN was untied from the dollar in 2005 China had the opposite plan funnily enough. Their aim was to push growth into overdrive by depreciating the YUAN. They bet than the increase in export volume would outweigh the decrease in value. At the time they still had 100s of millions of people content with what would be considered extreme poverty in the US.
The most valuable long-term asset, if fully realized, is Human Capital. This must be factored into the predicted value of future cash flows in and out of a country. Particularly if these assets are perceived to become increasingly “tappable” while previously they laid idle. A genius human brain has the potential to create more production and value than any other thing. China has pushed 700 million people out of poverty in 20 years. They are starting to fully realize and exploit the value of their Human Capital as more and more young brains get adequate education a real opportunity to produce. With the advent of technology, it was only a matter of time before the inequality of knowledge began to diminish.
This new generation is becoming rapidly less content to subsidize our excess with cheap labor. Even with the strictest forms of government censorship the CCP cannot stay in power if this populace they are educating at record levels is to be appeased. Naturally as you realize more and more share of the worlds Human Capital at a record pace, i.e., people become smarter, the government is expected to use these newly generated cash flows to improve the value and living conditions of their Human Capital at the same pace.
It is possible to squander these gains by not using the capital to increase Equity supply or production in a meaningful way or by way of corruption at the top ranks. In these cases, the people will not see the return on their investment, I.e improved standard of living, that would be expected. This does not bode well for the ruling class long term as history shows us.
If China could, they would keep it like it was in 2015 forever, but they can’t. Between an unreliable US Dollar/Government and an increasingly impatient and vocal Chinese populace they have no choice but to Appreciate the YUAN to its true value.
The decision makers want to stay in power. To do this they must appease the people and being subject to the whims of US Democracy and the Dollar is no longer conducive towards that goal.
It may be unavoidable that China and the YUAN overtake the US. The one thing we have is freedom and true capitalism that allows us to truly innovate and push limits. If we can embrace that again, improve our realization of Human Capital. I think we can compete long term despite population, at the very least we can create a global system where we are equal.
