Re; China backing its currency with gold.

Only one problem; to do that, you need to have a lot of gold. China has one of the lowest amounts of gold reserves of any major country.

Thanks for posting. I have been reading Antal Fekete for years at Gold-Eagle and at his own site. This is the most informing article yet on devaluation.

Writers take note; Antal Fekete uses adjectives and nouns in his writings as in; {imbecile theory of Milton Friedman}

Dr Fekete,

Under the classic gold standard, nations still fought wars and often they fought wars For Gold.

Britain maintained an empire under the 'standard'.

Some nations were lucky and had natural gold reserves and others had none.

Governments that did not want to comply with the standard, ignored it.

Under the later standard, Nixon ignored it.

What confidence is there that Any government will comply with any international standard that limits government ability to create and spend money?

It seems today we have a defacto Black Gold Standard.

He who has the Black Gold, makes the standard.

"John Danforth @RF;

"We will never be able to compete as long as..."

Quite the case. The US is anything but manufacturing friendly, with only a few state's exceptions. It is not only labor costs, but costs associated with frivolous liability litigation, bizarre tax codes, EEOC mandates, EPA regulations, and all the rest that you mention. Right now, there are more Obama-bucks than anyone can imagine just waiting to be borrowed. But who in their right mind would go into debt in order to open up a business in, say, California?

Obama is either clueless, or doing it on purpose. You decide as I've already made up my mind. Yesterday he claimed that the "middle class" tax cut extension was necessary because without it consumers would refrain from purchasing much of anything. Is this guy high, or just plain stupid? I want to give him some credit, but it's getting harder as each day passes.

We've been living with the so-called Bush cuts for the past years, and look where we are. What makes anyone think another year will make a difference? Obama and his fans will never look to where the problem is--the spending side of the equation along with our anti-business climate.

The Chinese are no one's fools. Anything they do is for their own best interests, and they think things through. My guess is that Hu and the boys realize Obama and his financial team are lightweights, and completely outclassed by events that have overtaken them. They will not say anything to his face. In fact, saving face is, even Obama's, is very important to them. However, when the time comes, they'll know what to do, and we'll know it by their actions.

Does anyone realize that we now trade based on a "Free Trade" theory falsified by the absence of gold as a settlement of trade imbalance and gold also no longer the basis of money of trading partners? When will people realize that the PE of nations with low labor costs NEVER want to let their people improve their lives with higher wages by the equalizing of people's well being promised by a true "Free Trade" situation.

@ John Danforth---

Prior to the computer, CNC machinery, most Third World countries had little industrial background to compete with generations of craftsmen (and women), we used to laugh at Chinese goods and the were inferior by far. Granted the cost of re-tooling America, the real estate properties,enviormental concerns, taxes have pushed our ability to do so to a real limit.

YeT if we don't, our dilemms increases tenfold in the future. In the last decades all those little job shops that kept producing all the little goods we consume, the 10 and 30 person companies of manufacturing have all but been closed. Even Vice Grip, a perinnial American sucess story gave it up two years ago, displacing 300 out of work for good.

We can never recover our economic foundation without it. It is where the money we call on came from in the first place. To think we can replace it with a few "fancy schmancy" jobs , leaves out future generations employment, for good. Granted there is a place for top end skills, but also a place for the mundane day to day factory duties, every one can't be a rocket scientist, surgeon, lawyer. Between the Chinese and illegal immigration, there are fewer and fewer middle level tax payers left. They are the bulk of funding for government, or were.

@ Kenn

I believe you mean cajones senor. In which case the former probably applies.

@ Dr. Fekete:

I think we are all in agreement "The soetoro=obama" admin. has overstayed it's welcome/use/credibility! But thank you for giving us more info to understand WHY! Terrific Piece.

Thanks for posting. I have been reading Antal Fekete for years at Gold-Eagle and at his own site. This is the most informing article yet on devaluation.

Writers take note; Antal Fekete uses adjectives and nouns in his writings as in; {imbecile theory of Milton Friedman}

That phrase, "Every one of those Congressional Democrats is a complete ignoramus where complex currency issues are concerned" is right on. I might, however, be bold enough to suggest using the phrase in a more general sense by deleting "currency".

The inaptitude of the USA government does show that democracy, as Hans-Herman Hoppe has written, is "the god that failed". Too bad that we're paying for that experiment throughout western societies.

Only in the US could Obama's obvious lack of knowlege, diplomacy and courtesy be hailed as having cajonies. Not long ago it was considered good character when countries paid their debts. Nowadays we have a "superpower" feebly attempting to intimidate a creditor. This will not turn out well.

Better to say "the checks in the mail" than to blatently display incredible stupidity to the entire world,,, and then call it cajonies?

Good going Limo

Perfectly spot on by Dr. Fekete.

The idea of a weak currency being "good" for an economy was always laughable to me. I willingly choose to get paid less in real terms, and have to pay more for what I buy in real terms. I want the value of my savings reduced. Someone thinks this makes sense?

The Chinese are headed for an economic mess whatever path they choose. Staying the current course will result in mass inflation, and economic disruption. Eventually, I believe they will choose the path toward some form of a gold-backed currency, although this will also lead to a temporary economic disruption as well. They could do this via some type of arrangement with Russia. Natural trading partners, natural resources, etc. This combination also has the military strength to pull it off. Even better would be that Germany joins this group, as they offer the technology that the other two lack. However, this will be difficult for Germany to do given the ties to the US Military.

Once China backs the yuan with gold, it is game over for the dollar.

Absolutely fantastic article by Dr. Feteke! Concise, easy to for the layman to understand, but thorough and very, very full of truth. Thank you, DB and Dr. Feteke, for sharing this information! I'm learning more every time I log in.

@RF;

We will never be able to compete as long as there are lower taxes and more freedom to make things in communist countries than in the U.S., land of the free and home of the brave.

There have always been legions of poor people around the world, starving and willing to work for pennies. They have never been an economic threat to a system where individual productivity is hundreds of times what any poor hut-dweller can produce.

Our domestic policy of punitive taxation and regulation has gotten to the point where it was actually cheaper to put heavy industries in the mud of a third world country and put up with poor infrastructure, no local suppliers, no local talent, and extreme shipping distances than it is to put up with all the barriers to commerce erected by our slavemasters.

And now, after several decades of capital flight, those low-wage countries have the economy of scale we once had. They have built their infrastructure, built a supplier base, and grown talent. As they grow, they approach the point where they don't even need us as customers any more. Now, even if we shrug off our government and get the economy of scale back, we still have to overcome the wage disparity. We can do it with new and better inventions, if government would get its bootheel off our collective neck. If we are not released, we will lose the fast-disappearing remnants of the talent it takes to do this as well.

More taxation, regulation, tariffs, and currency-meddling will only further entangle us and empower our slavemasters, strangling any possible chance for a recovery in the future.

Be on guard against seductive arguments that appeal to envy in order to get you to advocate self-destructive policies out of anger at the success of others. Capital will always flee towards freedom. A people that allows its government to drive capital out needs to rise above resentment towards competitors and cut out the cancer that is making it sick rather than lashing out at those who flee.

Great article by Dr. Fekete, as always.

He is maybe the only economics writer in the popular press I consistently find enlightening. I have never understood how people accept devaluation of the currency as though it "only" affects foreign trade or tourists. Higher prices on the international market must, perforce, show up in the grocery stores.

Fantastic article, Dr. Fekete! Thanks for clearing up some confusion of mine around what I always sensed were voodoo incantations by the Keynesians, but which I didn't fully understand. The fact that you come down clearly and absolutely against the embezzlers and witch doctors presently holding sway in the U.S. Government is refreshing indeed. Calling a spade a spade is a prerequisite of any hope of recovery, and you have given us some hope.

Will the Republicans and the Democrats in Congress have the courage and the humility to admit their mistakes ... their crimes? Can Ron Paul prevail in his virtual one-man fight against the orgiastic soul-eaters? Time will tell, but the more we are willing to blow the whistle on our own corrupt leaders, and warn other governments away from engaging in the same sick behaviour, the sooner we can help this country kick its nasty addiction to lunatic economics.

However futile Obama's attempt, it's about time he showed some balls when it comes to financial arrangements with the Chinese. It may force Americans to produce our own goods again, at competitive costs. We cannot compete with thier labor , we have made a great mistake in the last two decades, allowing it all to leave , for the sake of a few dollars in the stock investors pockets. Thanks to the Chinese, we have lowered American wages, balanced it with cheaper goods, greater debt loads. Hmmmmm?

Professor Fekete illustrates how the perverse incentives of debt-money lead politicians to destroy their own economies. When politicians think in terms of foreign trade, it is seen as a race to inflate faster than the trading partner. The inducements are; They can claim to be helping exports, they can claim they are hurting imports by inflating prices and thereby helping domestic industries, they can hope to devalue the debt thereby, and last but certainly not least, they get to spend all that fake money to rule over their hapless citizens with.

Such is the pernicious inversion of justice created by paper debt-money.

China would be doing us a great favor if it tied its currency to gold.

Threats of a trade war hold no water. China has other customers and knows full well that punitive actions will only lower American's living standards another notch. In fact, China recently called the U.S.'s bluff, slapping huge import tariffs on chicken using the charge that 'dumping' is hurting their domestic industry. Click to view link

Now the threat has been answered. Let's see who blinks first! It won't be China, I'll wager.

To :
Dr. Antal Fekete and
DB,

This article( as well a lot from this admirable man ) is the wonderfull exemple f how someone must write and think.
Thank you DB and dr. Antal Fekete for such a great plessure to read something such valuable ,impecable logic and narative fluence – a 100 karrat diamond- in the millions tons garbage that bombards us every day from all publications.

It seems we are seeing an Empire in it's death throes. Wealth has been drained from it, it's military is essentially overstretched and can no longer support it's foreign policy and smaller 'minion' countries are resisting US influence.

The problem for the US is that, many of these smaller minion countries such as Latin America and parts of Africa have turned out to be rich in natural resouces. And lets not forget that the Russian bear still has a sore head from it's humiliation following the fall of communism.

When the oil producing nations start widely accepting the Euro as payment for oil (and i'm sure Iran is actively trying to make this happen in the background), the dollar will be good for firelighting (maybe).