Friday, April 24, 2009

The Gold is in Eastern Capitalism

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The head of China's State Administration of Foreign Exchange stated last night that China's gold reserves were 1054 metric tons, up substantially from previously reported levels. Purchasing gold, along with a whole host of commodities including oil and copper, seems to be China's strategy for getting rid of some of its almost $2 trillion worth of foreign reserve holdings (about half of which are in U.S. dollars). In separate news, a report by Deutsche Bank now predicts that China's GDP will be bigger than the U.S. GDP by the early 2020's. Based on recent reports of U.S. government chicanery in the manipulation of the financial system, capitalism seems to be disappearing in the U.S while it's on the increase in Communist China.

I have long predicted that the Chinese would be increasing their gold reserves, which are paltry compared to the current size of their economy. China also needs to diminish its foreign exchange holdings before the paper that its holding seriously devalues. These efforts have only just begun. Despite buying gold and stockpiling commodities, China's foreign reserves were up slightly to $1.954 trillion at the end of Q1 2009 from $1.946 trillion at the end of Q4 2008. In order to actually diminish its paper holdings, China is going to have to ramp up gold and commodity purchases substantially from recent levels. The implications are bullish for the commodity markets to say the least. China is not the only economy with small gold reserves and large foreign exchange holdings either, the Gulf Oil states fit this description as well. They also have good reason to be buying gold.

As China rises because it is becoming more capitalistic, the U.S. economy is heading down because of it is becoming less so. For anyone who doubts that the U.S. is turning into an authoritarian socialist state where the government calls the shots and no free is left in free enterprise, I suggest you read recent reports about the Bank of America and Merrill Lynch merger. It was arranged by Fed Chair Bernanke and Treasury Secretary Paulson (both Republicans and appointed by a supposedly conservative Republican president). When Bank of America CEO Ken Lewis tried to back out of the deal when he realized it could take his company down, Bernanke and Paulson told Lewis he and the board of Bank of America would be removed if he didn't go along with what the government wanted (recall that the CEO of General Motors was recently ousted and think about the implications for a moment). Lewis also claims Bernanke and Paulson directed him to lie to Bank of America shareholders, who remained uninformed about the actual state of things when they had to vote to approve the Merrill takeover. The government which is supposed to protect shareholders has obviously become one of their biggest enemies. We have pointed this out a number of times in this blog. Unlike the press, which is reporting this story now, the New York Investing meetup has been warning about this for over a year and a half.

Given the current state of affairs, no one should be surprised that China will over take the U.S. economically in as little as 10 years or so - at least based on official government figures. Keep in mind that the U.S. has overstated its GDP for many years and China may have been understating its GDP during its rapid growth phase. Investors needs to keep an eye to the East as economic power shifts there. The U.S. is now at a similar point historically that Great Britain was after World War I. Britain's world dominance was on the wane, while the more rough and tumble capitalistic U.S. was on the rise. Instead of facing this reality and making changes, the British engaged in denial and this assured their fall. The U.S is doing the same thing right now.

NEXT: Buy When There's Flu in the Streets

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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