Sic transit gloria money

The Dow was up 105 points yesterday. Gold fell $8. Nothing proven one way or another. We don’t know what will happen this year. Nor does anyone else.

Meanwhile, the newspapers are widely reporting the rise of the Chinese currency. It is already the Avis of world currencies, number two in terms of trade, with the dollar in the number one position. And it is gaining.

“Era of renminbi dawns as China’s influence grows,” a headline in the Financial Times tell us.

Readers who expect the dollar to reign supreme forever are destined for disappointment. And most likely, it will be the renminbi that gives the buck a good run for its money.

A government is always and everywhere a reactionary institution. It works for the people who control it. They are, by definition, the rich, the powerful and the elite who have more to lose from change than to gain from it. Thus do they look into the future, with a wary eye, and do all they can to prevent it from happening.

The future, however, is what happens when you let things take their course. So, the feds intervene – manipulating, meddling, and strong-arming – as necessary, to try to stop it. That is why we have quantitative easing. And ZIRP. And bail-outs. All of those things are designed to keep the old system going. The Fed tries to boost demand. More demand means more sales and profits. Which means more sales clerks. And more orders placed to China.

Yes, the system is fundamentally weird. But it suits everyone. The American elite like it, because it keeps asset prices rising, shifting wealth from the public to the rich. The Chinese like it, too. They take their sales revenue and build more output capacity and more infrastructure. Empty towns. New factories. Big highways. Plenty of opportunity for sweetheart deals, bribes, and kickbacks. And what the hell; as long as the masses are working.

FREE daily investment email from MoneyWeek
Receive our thought-provoking investment email Money Morning every weekday morning, plus occasional promotions, & become a smarter investor.

Please enter a valid email address

To sign up, enter your email address:

Japan doesn’t have a choice. It faces a grim combination of debt and demography. Over more than a quarter of a century, Japanese citizens loaned their money to the government. Now, they’re retiring and looking to the government to get their money back. But the Japanese feds spent the money on stimulus projects of their own. Now, there’s no way they can pay it back.

Under pressure, look for Shinzo Abe to come up with more and more stimulus tricks. He’s stimulating producers to produce (and sell) more. And he’s stimulating consumers to buy more, too. Mostly, he’s just ‘printing money’ to keep the scam going – like the Americans and the Chinese.

Everyone is happy as long as it lasts. But it won’t. The US has a monopoly position with the world’s reserve currency. It aims to hold onto it as long as possible. For when the dollar ceases to be the world’s reserve money, all hell will break loose. Then, those trillions of dollar in vaults all over the world will get out their passports and head home. They will fill the airports, clog the customs lines and ultimately swamp US markets with unwanted monetary refugees. The price of the dollar will collapse along with US assets.

But wait. Don’t ditch your dollars right away. This sort of thing takes time.

In the 16th century, Spain had the world’s leading currency. In the 17th century, the Netherlands took the number one place. In the 18th century it was France’s turn. In the 19th century, the British pound was the world’s money. And in the 20th century, the greenback was as good as gold.

Now we are in the 21st century and a new power has its elbows out. Since 1980, the US economy has approximately doubled in size. During that same time, the Chinese economy has grown 13 times, or more than six times faster. That is per capita, by the way.

Will that continue? Not likely. But the Chinese economy, in GDP terms, is still growing twice as fast as the US. Both are delusional. Buying things with money you don’t have makes you no better off than making things for people who can’t pay for them. But the delusion is only part of the story. The other part of the story is that China is poor and getting wealthier, America is rich and getting poorer. Somewhere they will battle it out, maybe in the marketplace, maybe in a hot war. And sometime, the upstart (if not China, someone else) will win.

In the meantime, betting on China is cheap. You can get a dollar’s worth of ‘made in China’ stock-market earnings for just seven bucks. US earnings, on the other hand, sell for closer to $20 each. We’ll take the challenger.

FREE daily investment email from MoneyWeek
Receive our thought-provoking investment email Money Morning every weekday morning, plus occasional promotions, & become a smarter investor.

Please enter a valid email address

To sign up, enter your email address:

[xyz_lbx_custom_shortcode id=5]

• Stay up to date with MoneyWeek: Follow us on TwitterFacebook and Google+

MoneyWeek magazine

Latest issue:

Magazine cover
Cleaning up

Profiting from the fight against pollution

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.

29 May 1660: Charles II restored to the throne  

While Charles II was formally proclaimed King by parliament in April, he only reached London on this day in 1660.

The Kids' Portfolio: the four best funds to buy for your children

Investing for your children's long-term future is an excellent idea. But what should you buy? The Kids' Portfolio is a simple collection of four funds intended to be tucked away for 20 to 40 years.