How the Currency War Will Be Fought – And Won
Part II of Scott's interview with Lawrence Lindsey... Make 'em rich... The advantage of owning the world's reserve currency... How the currency war will be fought – and won... The battleground is set between the U.S. and China... How to protect yourself...
Editor's note: Today we bring you the conclusion of Stansberry NewsWire editor C. Scott Garliss' interview with former Federal Reserve official and presidential adviser Lawrence Lindsey.
Lindsey is the author of six nonfiction books and has recently published his first novel, Currency War, which is set in the storyline of the escalating conflict between the United States and China.
As you'll see today, Lindsey has a pretty clear image of how the real currency war may play out in the years ahead... how either the U.S. or China can win it... and why the result matters so much to world order.
Scott Garliss: I want to talk more about your new book now... Currency War. It's fiction, but you describe some very real storylines, like the idea of China wanting to replace the U.S. as a world superpower, and that this process will not happen through armed conflict. You also discuss the country's ambitions to replace the dollar with the yuan as the world's reserve currency. Can you elaborate?
Lawrence Lindsey: Sure. First, a little history... When the Berlin Wall came down, foreign policy decision-makers in Washington, but also in Tokyo, which was a big player at the time, had a decision to make. And that was: "What the heck do we do about China?" And the consensus view – and I was in government at the time and I found it quite logical – was make 'em rich. Rich countries have something to lose, and therefore, tend not to go to war with each other.
That's not perfect. World War I was a great contrary example, but in general, the richer a country is, the less likely it is to be aggressive. Ergo, "Let's make 'em rich, and then they'll be peaceful." And that kinda, sorta worked. The leaders, from Deng Xiaoping to the current leader, President Xi Jinping, all of them before Xi focused on making China rich. Now I'm sure in the back of their minds, they said, "Yeah, once we get rich, we can build up our military." And the military's part of the ruling class.
But the main job was "make China rich." Xi Jinping has a very different perspective. Xi Jinping – and you can read it in his speeches – thinks the first mission is to maintain control of the Communist Party within China. The second goal is to accelerate, to the extent possible, China becoming a world superpower. He mentions prosperity as like the seventh point. That's not what he's about. It's about power for the Party and power for China.
We've had a really radical change in policy in Beijing, with Xi. And the policymakers in the West, including the private sector, haven't figured that one out yet. They're still grappling with it. But to the extent you continue to make a country rich, through your efforts, not theirs, and that country is out to dominate the world, you're helping them dominate the world. Everyone in the West needs to think about the consequences of their interactions with China.
On the yuan, one aspect of being the world superpower is that we have the world's reserve currency. The rest of the world trusts the dollar more than they trust everybody else's currency. And that really helps us out, because the U.S. is able to have foreigners cover a major portion of our debt. If you run a deficit, you can pass a good portion of the financing on to foreigners. And we're better off because of that. If China is able to topple the position of the dollar, it's not just a change in the marquee at the movie theater. It is a direct attack on our ability as a country to continue to finance ourselves. Xi Jinping knows that, and that's one front in their war.
SG: In Currency War, you talk about how China and the U.S. have both been through cycles of having an asset-backed currency, being on the gold standard, and coming off and going back to a paper standard. And it seems like you lean in the direction that China has learned from that lesson more than the U.S. – or their current regime is taking advantage of that and weaponizing the U.S.'s debt against it. Do you think the current U.S. administration fully appreciates this? It doesn't sound like they do.
LL: You're right. Another major point in Currency War is that what stands behind any currency is credibility... Please don't report me to the Fed for saying this – they have a special dungeon downstairs where people go if they speak this rather obvious truth. But the great thing about being able to print money is that you can buy goods and services at the cost of a little piece of paper. It's actually made out of cotton, but let's call it a piece of paper. The cost of making more paper is something like zero, and you can buy real things with it.
That is a huge advantage. What could get in the way of that? If people don't trust the paper you're passing them, they're not going to give you goods and services, or at least not at the same price. One of the early consequences of bad policy is you see prices going up. It says, "Ah, I don't like your currency as much as I used to." So that's the stage we're at now, and the Chinese are out there encouraging it...
The problem is, who the hell is going to trust these guys making the paper? We all know in our hearts what they are. They're thugs and they're communists and – so, "Do I really want to trust the paper issued by a bunch of communists?" No. The U.S. is in great shape, as long as it doesn't bungle it and people, at some point, decide, "Yeah, they're communists, but, my God, the other guys are a bunch of money-printers, and so I'm going to go with the lesser of two evils." And that's the story of the threat that we're talking about in Currency War. I don't want to give it away, but the way the problem is "solved" is that both countries end up making their currencies credible, and that establishes a new world order, in terms of currency.
SG: Would you categorize the current crackdown on technology as Xi exerting control over the country?
LL: Absolutely. Two weeks ago, Tencent's stock price dropped about 10%, in part because they're a big runner of online gambling, and in one of the state papers, there was an article about online gambling being the new opium. Guess what? This is the early warning shot of a coming crackdown, and Tencent took a hit as a result. Now, is cracking down on online gambling the sign of totalitarianism? Not quite. It is a sign that these guys are puritanical and they're not out to let people have fun.
Before that, they went after the for-profit tutoring industry. Chinese parents, like parents everywhere, want their kids to get ahead through education. In China, lots of parents hire tutors to augment what the kids learned in school, in order to give them a leg up in school. There's a lot of money to be made in that, and foreign hedge funds have poured money into companies in China that ran tutoring services. "Hmm, OK, we've got a problem here," thinks President Xi. "I really don't want China's future, its youth, being told what to think by a bunch of folks in the private sector, much less the foreign finance private sector."
So he put out a decree that there could be no more tutoring for profit in the country. "I don't care if the kids don't get smartest fast, but I'm not going to have them indoctrinated by anyone but state schools." It's all about a power grab. And we now have mass arrests of just about everyone in Hong Kong who stood up to China. Anyone who protests is now hauled off to China.
So there's an example, again, of exerting power. In Xi's mind, Hong Kong is part of China, and he's going to make sure nobody in Hong Kong is able to express any real dissent. They also changed the election system. People don't control the elections anymore.
SG: That leads me to my next question... China wants to dominate global technology, and they're trying to play rapid catchup to the U.S. and Europe, and semiconductors is one of the big prizes there. And Xi Jinping has expressed intentions for Taiwan to become part of the mainland.
Taiwan produces the bulk of the world's semiconductors. Do you think what Xi's saying with regards to Taiwan is populist rhetoric? Or do you think this is Beijing's intention?
LL: There's no question that one of Xi's policies is that Taiwan be reunited with mainland China. Now, let's be a little bit nice to them: Why is that? Well, if you look at Xi's speeches, he talks about the deep humiliation that China suffered following the Opium War. Step one of his goals of "overcoming that humiliation" is to reunite China... Since 1895, Taiwan has been part of mainland China for a total of four years, out of 125.
Xi is going to reunite China. Taiwan is going to be brought into the Chinese orbit. Pure and simple. The voters of Taiwan do not want that. They like what they have. Their GDP per capita is probably four times GDP per capita in the mainland. And just think of it this way: Do you really want to have your 1.4 billion poor cousins in the same family with you? I would bet that at some point during the current administration, Beijing will make a play for Taiwan.
They'll camouflage it as much as possible, but it'll be a de facto military seizure of Taiwan. And then they have us by a very sensitive part of our bodies, because they will be controlling the semiconductor industry.
SG: What would your recommendation to investors be on how to protect themselves from inflation or China or both?
LL: All of the things we've just discussed fit into a basic pattern of history. The French phrase for it is fin de siècle, the end of the cycle – countries rise, countries fall. I don't think our future is preordained, but you have to think about what happens to real people when social order dissolves, when the country is threatened from abroad, when there's widespread inflation – they all tend to go together, by the way – and that governments do whatever it takes at the end. And so societies tend to end with a combination of three things: inflation, taxation, and confiscation. The government has to finance itself, to keep itself in power, to defend the territory, all these things. Nobody trusts their money printing anymore, nobody really wants to buy their bonds.
So the financing comes from inflation, meaning printing the money, making people take it, taxation, or simply taking the property. If that is one of your concerns, you say to yourself, "What assets are least subject to inflation, taxation, and confiscation?" And I can't give economic advice, under the law, but I can tell you what I do with my own portfolio. Slightly over half of my portfolio is in real estate or real-estate-related areas, including my own houses, rental housing, stuff like that that I use. The last thing that the U.S. government is going to do is confiscate houses, because that will surely cause a revolution.
At the moment, real estate is favorably taxed, relative to other assets. And if they try inflation, the houses tend to go up along with inflation. So that would be, in my mind, one of the ways of protecting yourself. The other asset class that you might consider is anything that hurts when you drop it on your foot – meaning hard assets. In my portfolio, I tend to own a lot of miners. I don't really care what they mine – gold, silver, copper, aluminum, oil – because generally commodity prices rise with inflation. And the advantages of miners are that, not only does their income statement look better because the price of what they sell goes up, but their balance sheet looks better too, because the value of the assets they have in the ground also rises.
And the third piece of my portfolio, which I'll admit did great early this year and is not doing so well now, is to be short long-term government bonds. They are going to have to solve the problem that they see with inflation. The only thing you can do to stop the U.S. debt-to-GDP ratio from growing is to have GDP grow faster than your debt.
And you can't grow real GDP much, so what you have to do is grow nominal GDP by having a lot of inflation. There's no real science, but when I use the back of an envelope, my rule of thumb is the price level in 2030 is going to have to be twice what the price level in 2020 was. Doubling of prices over 10 years looks a lot like the '70s, 7% to 10% inflation a year. And that's assuming we do it in an orderly fashion. At some point, it's going to be hard to buy a 10-year bond yielding 1.2% when you're going to be paid back in confetti worth half the money that you put in originally.
In the end, I believe that is going to be the driving force that is going to push longer-term rates in the U.S. up. Ultimately, the Fed's mission to simply cover the bonds and hold interest rates down is going to fail.
SG: And then lastly, is there a Ben Coleman sequel?
LL: Ben is the lead hero in Currency War. He's chair of the Fed, and his wife is a former MI6 agent. And I don't want to give more than that away, but that is a pretty powerful combination. And she grew up in Hong Kong, so she is very aware of China, and that's also part of the book. I have a fertile imagination, and a currency war is not the only way China is going to be fighting us to become the world superpower.
So when I'm sketching out a sequel, that's kind of where I go, and I'll leave it at that. How's that? I'm scooping myself a little bit here, aren't I?
Editor's note: We hope you enjoyed Scott's interview with former Federal Reserve official Lawrence Lindsey here in the Digest the last two days. If you are interested in learning more about his new book, Currency War, and want to get your hands on a copy, click here right now.
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In today's mailbag, more feedback on Stansberry Research's partner and professional golfer Kevin Kisner's PGA Tour win over the weekend... and kudos for Part I of Scott's interview with Lawrence Lindsey. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"I've been a longtime subscriber to Stansberry Research. I was glad to see that you picked a winner to sponsor in the golfing arena. Kevin Kisner is a great guy and golfer and did an excellent job of winning the Wyndham Championship. The logo looked good on Kevin.
"Congratulations!
"By the way, I think that you are doing a great job navigating the minefield economy and advising the members on how to manage their investments." – Paid-up subscriber Robert L.
"That was an enjoyable, no BS interview from Mr. Lindsey and Scott Garliss. I will be sure to catch part two. Thanks for sharing." – Paid-up subscriber Evan R.
Regards,
C. Scott Garliss
Baltimore, Maryland
August 17, 2021