The notion that China is trying to back its currency (the RMB) with gold, in some effort to create a convertible RMB gold standard, is a bizarre libertarian fantasy that you can see on their blogs.
First, what do they mean by “back”? Do they mean China will back its currency 100% with gold? Or just 60% or 50% or 40%?
Since most of the “hard money” libertarians want 100% gold backing to money, it is difficult to see how they would be satisfied with anything except something close to 100% backing.
But a question occurs: is there even enough gold in the world to back the RMB with gold?
According to this, China’s broad money supply (M2) reached 113.18 trillion RMB by February 2014, or about $18.18 trillion US.
Unfortunately, the total value of world gold supply as of August 2013 – even at what many think are inflated prices – was about $9 trillion. I am assuming from this graph that the total value of world gold supply today would be somewhat less than $9 trillion.
Nevertheless, even at the August 2013 gold price, China would have to buy up every single piece of gold in the world, including bullion, gold coins, and gold jewellery, to back just 49.50% of its total broad money supply.
A far more conservative estimate here suggests that official government holdings of gold in China as of this year might be about 2,700 tonnes: that is, worth about $110 billion US. This, however, is less than 3% of China’s foreign exchange reserves.
With $110 billion US worth of gold, China currently has enough gold to back just 0.006% of its total (M2) money supply.
Of course, a massive effort to buy up the world’s gold supply would raise the price of gold, but about 20–25% of gold stock is held by Western central banks, and they are not going to sell their gold to China any time soon.
And if China really made a move to start buying up massive supplies of gold, it is likely that a concerted Western foreign and strategic policy (probably including Japan) would quickly counter it.
All in all, the notion that China could ever back more than small fraction of its currency in gold is a fantasy.
Even if China could do so, it's very unlikely that they would do so. Given that the PRP as a state capitalist system is pretty much the opposite of the libertarian ideal, what non-libertarian motive could the Chinese authorities have to back their money supply with gold?
ReplyDeleteOn a second note advocates of silver-backed currency will probably use this as an argument for a silver standard. Though I heavily doubt whether there's enough silver for just backing China.
if China really made a move to start buying up massive supplies of gold, it is likely that a concerted Western foreign and strategic policy (probably including Japan) would quickly counter it.
ReplyDeleteWhy? What is so special about gold that Western central banks want to 1) maintain their dominance of the global supply and 2) prevent China from accumulating a significant portion of that supply?
For the same reasons that an attempt to corner the oil market, or copper market or rare earth metal markets would be opposed if any nation attempted it: first, as a matter of strategic policy, and practically to stop troublesome supply problems and distortions in the price of metals/commodities used for industrial purposes.
DeleteGold differs from those commodities in that industrial usage comprises only a small fraction of annual demand. Assuming these statistics are correct, annual industrial demand (8%) is dwarfed by jewellery (44%) and investment (36%) demand (and around 10% of industrial demand is dental-related, for which gold substitutes are readily available).
Deletehttp://www.exchangetradedgold.com/media/ETG/file/GDT_Q4_2012.pdf (PDF p. 17)
The annual gold production of the US and its close allies (e.g. Aus, Can), at over 600 tons, exceeds annual global industrial demand for gold (428 tons in 2012).
http://www.bloomberg.com/news/2012-04-05/top-10-gold-producing-countries-in-2011-table-.html
The stock of privately held gold jewellery, at around 70-80,000 tons, would be diverted to industrial usage if the price were high enough. This far exceeds annual industrial demand.
http://www.bullionmark.com.au/how-much-gold-is-there
So your belief that Western nations would act in concert to prevent China from dramatically increasing its gold holdings, for the purpose of securing national supplies for industrial usage, isn't persuasive. And gold prices have been highly volatile over the last few years, so smoothing out price fluctuations also doesn't seem to be a high priority for Western governments or central banks.
DeleteThe industrial use argument isn't convincing, so again I ask: why should Western central banks be reluctant to sell part or all of their gold holdings to China?
You've missed the main point of what I said:
Delete"For the same reasons that an attempt to corner the oil market, or copper market or rare earth metal markets would be opposed if any nation attempted it: first, as a matter of strategic policy, and "
How would China cornering the gold market harm the West's strategic interests?
DeleteI just told you: first, to stop troublesome supply problems and distortions in the price of metals/commodities.
DeleteSecondly, it would be straight power politics and strategic interests.
Any nation that would attempt to corner a commodity market would be a matter of concern. If. e.g., Russian tried the same thing, it would no doubt provoke a response from the West too.
"What is so special about gold?"
DeleteIt's really really special. And shiny, and stuff like that.
'Nevertheless, even at the August 2013 gold price, China would have to buy up every single piece of gold in the world, including bullion, gold coins, and gold jewellery, to back just 49.50% of its total broad money supply."
ReplyDeleteI agree it seems highly unlikely that China will adapt a gold standard. But if they did they would probably not also adapt 100% reserve banking. Therefore it is only the base that needs to be covered by gold. not the whole of broad money.
Such a system would still be far from any gold standard imagined by the die hard Rothbardians I link to above. And any significant run on high-powered money (read gold) would destroy the system or force suspension, as we know from the past.
DeleteIt would also cause ridiculous economic problems in needing to cover all base money growth with gold: that would lead to an inflexible and chaotic monetary system. It's highly unlikely Chinese policy makers are as stupid as that.
Other Chinese money supply aggregates as of January 2014:
M1 ( cash in circulation plus current corporate deposits):
33.73 trillion yuan = about $33.73 trillion US
M0 (cash in circulation):
5.86 trillion yuan = about $941 billion US
http://www.china.org.cn/business/2014-01/15/content_31203711.htm
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Given official government holdings of gold might be only about $110 billion US, it has a long way to go even to cover base money!
I took a closer look a the discussion.
DeleteI don't think its really about China creating a "convertible RMB gold standard", so much as about China moving to replace the dollar as international reserve currency. This would still leave the Yuan as a floating currency but would involve selling some or all of its dollar holding for gold plus other commodities and financial assets.
I have no idea how likely this scenario is, but it's clearly different from China moving to a gold standard where it has to cover all its base money with gold.
They could set a value on gold of four times its current price and hope few would want to sell theirs to them. The price would jump to that level without much changing hands. This would wreck havoc on trying to maintain exchange rates though and they want to keep the value down to support employment, not up to support capitalists.
ReplyDelete"This would wreck havoc on trying to maintain exchange rates though and they want to keep the value down to support employment, not up to support capitalists."
DeleteHow does currency devaluation create employment?
Being tha China is the world biggest gold producer and importer and I would not be surprised if China is quietly buying cheap miners as we speak, any increase in gold price resulting from China's mere announcement to monetize gold would have to result in a rapid increase in price. This can be done in a span of few years thereby allowing for the next "permanent" price base formation. At that point Chana could make a final decision on 100% or less backing of the Yuan, but even if they abandon the backing they would stand to benefit from increase price in their gold holdings. It would be interesting speculation as to where the gold price would stabilized if China announced her intention to monetize in some unspecified future time.
ReplyDeleteSpeaking of China's role in the history of money...Lord Keynes, have you read Niv Horesh's latest book, Chinese Money in Global Context: Historic Junctures Between 600 BCE and 2012? If not, please see the following links.
ReplyDeletehttp://www.amazon.com/Chinese-Money-Global-Context-Junctures/dp/0804787190/
http://www.sup.org/book.cgi?id=22655