In 1979 the
European Exchange Rate Mechanism (ERM) – a precursor to the euro –
was established. The ERM created a semi-fixed currency exchange rate
mechanism among the European members of the system which was anchored
to the Deutsche Mark. By 1992, less than two years after England
joined the ERM, it was obvious to interested observers that the
British pound had become significantly overvalued relative to the
Deutsche Mark.
At the time,
England had a large current account deficit and was experiencing a
nasty recession. Although the British Government was committed to
maintaining the BP’s peg to the Deutsche Mark, George Soros, in
what became billed as “the trade of the century,” began to
accumulate a large bet against the pound. After wasting billions in
taxpayer funds trying to support the pound, the British Government
eventually capitulated by exiting the ERM and the market forced a
nasty revaluation of the pound. Soros ended up netting over a
billion dollars in profits. (For the record, it has been speculated
with valid source documentation that the Rothschild family was behind
Soros’ attack on the British Government/Bank of England).
Let this be
a lesson in price-fixing, as the only thing accomplished by the
British Government’s endeavor was a massive transfer of wealth from
taxpayers to George Soros & Co. and likely even more to the
Rothschild family. Price fixing markets always fails eventually.
Fast-forward
to the present and we find Soros now attempting to profit from what
looks like a methodical, strategic devaluation of the Chinese
renminbi (yuan) by the Chinese Government.
But there’s
a big difference between England circa 1992 and China 2016. China is
running a massive trade surplus, it’s the world’s largest
importer/exporter and likely sports the world’s biggest GDP. It’s
financial condition is reinforced by $3.3 trillion in foreign
currency reserves. It can be argued that China is on the ascent to
become the next world superpower.
Perhaps the
most interesting “wild card” held by China is its Central Bank
hoard of gold. The $3.3 trillion in forex reserves does not include
the market value of the China’s State-owned gold. Alasdair Macleod
has produced compelling arguments which suggest that China could hold
well in excess of 20,000 tonnes of gold, nothwithstanding the current
amount to which China publicly admits.
Most
analysts who have been observing China for at least over a decade
have been wondering how it would be able to unload its massive
Treasury holdings, which at one point were around $1.4 trillion. The
market turmoil surrounding China’s intermittent currency
devaluations has stirred up a flight to safety bid for Treasuries in
the global markets into which China has already unloaded a couple
hundred billion dollars worth of Treasuries. Is China selling
dollars to support its currency or is there a more clever strategy at
work?
China likely
is not going to wait around to be a bagholder of a trillion dollars
in eventually worthless Treasuries. Enter George Soros who announced
recently with much bravado that he was betting big against the yuan.
The Chinese Government, via the State-owned People’s Daily
newspaper issued a frank warning to those who are openly speculating
against the yuan. Clear it was a shot across the bow back at Soros.
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