Back in February 2007, Mencius Moldbug predicted that dollar hegenomy will end, not when the Chinese government calls in U.S. treasury debt, but when Chinese savers lose faith in the Yuan and head for gold. Are we closer to that happening today?
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A tremendous post. Perhaps the best elegy for BWII I have read yet.
One point that this otherwise magisterial discussion does not cover, though, is that Chinese savers are not sheep. Their actions - as yesterday showed - are a variable in the equation.
When anyone, Chinese or otherwise, exchanges other goods for RMB or claims to RMB, he or she is buying an instrument whose value can only be defined by the PBOC’s balance sheet. Which consists largely of long-term liabilities of entities with a notable propensity to pay off old debts by issuing new ones. (At some point, we may have to start thinking of the US government as just another SOC.)
The RMB is certainly undervalued with respect to the dollar. But this relationship tells us nothing about the RMB’s relationship to other assets.
As China modernizes and as frictional effects decrease, the fact that yuan and yuan savings instruments are not an effective store of wealth - at least not compared to any asset whose price can keep pace with the growth of the Chinese money supply - creates demand for alternative stores of wealth.
In other words, assets like Shanghai A shares and real estate are, in a very literal sense, competing with the Chinese monetary system.
No human economy has ever existed which did not include at least one asset whose valuation relative to other goods cannot be explained by direct supply and demand. I always laugh, for example, when goldbugs claim that gold is the only workable currency because of its “intrinsic value.” Dollars have intrinsic value too - you can snort coke with them. If anyone ever manages to float a fiat currency whose supply is fixed, gold will trade for $20 an ounce and people will be using it for doorstops.
(The fact that no one will sell you gold for $20 an ounce today is not caused by the fact that today’s currencies have negligible intrinsic value. It is caused by the fact that they are financially unstable, their supply is expanding rapidly, and traders do not, at present, believe that any sustained contraction is a politically credible possibility. See, for instance, this story from Malaysia.)
In any case, if there is any force that seems most likely to rein in the PBOC, it is the humble Chinese saver. (Is there a Chinese equivalent of “Mrs Watanabe”?)
History records many attempts to turn stock markets, and real estate, into monetary systems - to overvalue them in the same way that paper currency is overvalued now, or that gold was overvalued under the classical gold standard (and is still, to a lesser degree, overvalued now). All of these efforts failed, for a very simple reason - an asset which is not intrinsically scarce cannot absorb monetary valuation.
When stock markets are overvalued relative to the cost of borrowing money, for example, the result is textbook Austrian malinvestment. Factories cannot sustain a price higher than the cost of building a new factory. Nor can skyscrapers, although there are some real estate markets (like the one I’m lucky enough to live in) which exhibit real scarcity.
No - the Chinese state needs to offer its citizens a genuinely scarce monetary asset, whose price actually increases and whose supply does not, when more of them buy more of it. The RMB at present does not fit this description. Nor do Shanghai shares.
I know very little about China and its government, and I have no way to predict when this issue will become acute, or how the PRC will respond to it. But it strikes me as a very good candidate for the eventual proximate cause of the end of BWII.