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July 25, 2003

The Yuan, the Euro, Taxes, and Gold
by Alex Wallenwein

Question: what do the euro, the yuan, taxes, and gold have in common?

Answer: they all determine the future economic viability of the United States.

There are people in the market today who suggest that investors buy some hush-hush secret yuan-denominated assets to cash in on when the yuan is allowed to float, which will make it rise against he dollar - or so they predict. They say the yuan is "the strongest currency in the world today."

That may be so - or maybe not - but one thing is for sure: China will not allow its currency to suddenly soar 50% or more against the dollar. It will not happen, must not happen, at least as far as Chinese leaders are concerned.

Why?

It is true that China's currency is currently artificially and severely undervalued because of its low peg to the dollar (at probably 40% or more below its natural value), and that if the yuan were allowed to float, it would rapidly climb versus the dollar, and a bunch of money could be made in the process.

But remember that the Chinese economy is totally and utterly export-dependent. China's internal market is virtually nonexistent. The Chinese, as a general population (with the rich "communo-entrepreneurs" in the free economic zones excepted) are still poor. Many of the products produced in China are produced by Chinese laborers for foreign companies (especially US companies) and have no market in China.

If the dollar were to lose 40% or more of its value against the yuan, China's export-dependent economy would be finished in one fell swoop. No American would continue to buy Chinese products if they suddenly cost 40% or 50% more. The American companies that remain profitable by lowering their labor costs through the utilization of Chinese labor would have to fold up their Chinese operations and lose their investments over there. The Chinese boomtowns along the coast would go into rot and decay. The Chinese military no longer would have the wherewithal to pay for Russian submarines for its planned take-over of Taiwan.

The Europeans, on the other hand, do have an internal market - and a huge one at that. Sure, they are hurting just like the next guy when their exports get too expensive as the euro rises, but they can survive what for them will be a temporary downturn, however severe. The Chinese cannot.

The communist Chinese's goal is to annihilate the US. Of course, they would much rather do it through economic warfare than through military conquest.

How can they eliminate the US? By helping contribute to the downfall of the US dollar without killing their exports (some pain is acceptable, but not economic 'death'). How can they do that?

For the Chinese economy to survive in case of a loss of the American market, whatever export market China loses when Americans stop buying Chinese goods must be replaced somehow. The American market must be replaced with the European market. That means, the yuan will have to fall against the euro so China can unload its artificially cheap products on the Europeans instead.

How can they achieve this?

They can sell the 316 billion reserve dollars they racked up by running their trade surplus with the US - for euros.

When the Chinese sell dollars and buy euros, the euro will rise against the dollar. Because the Yuan is for the time being still pegged to the dollar, this will increase Chinese export competitiveness compared to Europe, which will allow them to shift their exports to the 'market of the future.' US bought and paid-for productive assets in China can then be nationalized (it's an emergency, you know) and thus acquired for nothing, and can then be used to produce goods to sell to the Europeans.

The Chinese can then repeat that neat little trick they did with the US and peg their currency to the euro instead, keeping its value competitively low against the euro, racking up future trade surpluses against the Europeans as well. They still have five years left under WTO rules until they must let the yuan float against other currencies.

Isn't that just too cool?

Meanwhile the US economy will begin to collapse of its own dead weight. The tapped out US consumer (the only thing that still holds up any semblance of economic health in the US) will quit spending as the re-fi boom stalls. As the economy worsens, people will lose jobs and the ability to pay their loans back, causing massive loan defaults and monetary base contraction.

These deflationary pressures will offset to some extent the inflationary effect of the inevitable deluge of US dollars returning home as China and other countries continue selling dollars for euros - but not by enough. All of this will decreease Americans' ability to spend and consume and buy imports.

The other Asian "tigers" will follow the Chinese example and shift their export focus to Europe as their American market falters.

So far, so good (or bad, rather). But will Europe be able to consume enough to make up for China's potential loss of the American market?

Well, that's not really the question. Why? Because it doesn't really matter whether they will consume "enough" or not. And why is that? Because, as the housing re-fi boom wanes and reverses, and Americans can no longer generate that additional spending cash, the "American consumer" will not be able to consume enough when "he" loses his jobs and income as the economy spirals lower without his spending-support. That means the US, the Asians' main current export market, will shrink and disappear - anyway.

That is the crux of the matter. "No money, no spendy." The only way to avoid that is to guarantee that the bond market will continue to grow forever - or at least for the next few years. Only then can the re-fi boom be continued. As Greenspan during his recent epiphany revealed, the Fed stands ready to buy US long-term treasuries to pump more money into the failing system, should deflation appear.

What does that mean? It means the US government will borrow more money from the Fed, for starters, raising its indebtedness (the federal deficit). Second, as other nations see the euro and yuan 'writing on the wall', they may decide to sell into this lucrative, Fed-induced rally in bond prices, forcing the Fed to print even more money to "buy" the debt paper in order to prevent yields and therefore long term rates (mortages) from rising - all to prolong the re-fi boom.

If these two factors ever coincide, the result will be hyper-inflation in the US. What will Greenspan do then? Sell the same treasuries he just got done buying with such fervor? Who will buy them? How will he reduce the money supply? How will he fight inflation? By raising rates and choking off any business investment whatsoever? By raising taxes in a weakened economy?

Europe, on the other hand, however badly its major economies may presently be hurting, will be able to consume far more than the US when the US enters its final downward spiral, and that's because the euro's continued buying power is virtually guaranteed, while the dollar's is highly in question.

Had enough of all this doom and gloom for America? Don't believe America will simply lie down and die an economic death?

Well, there is one chance. And that chance is again dependent on the American "consumer" in more ways than one.

Remember tax reform? Remember George W.'s tax cuts? Well, they were a drop in the bucket, I know, but the principle is of course correct: leave people and businesses with more cash to spend, and they will spend it. Or save it. Or invest it in infrastructure. And the economy will grow.

But now picture this:

There is currently - and has been for several years - a kind of 'information virus" spreading like wildfire through the internet as you read this. The American socialist/statist/elitist's biggest and dirtiest little secret - is no longer a secret. The proverbial 'cat' is out of the bag, and it is proliferating as if it had bunny-blood in its veins.

What is that dirtiest of all dirty secrets of the US goverment technocrats?

The US income tax.

No, no, it's not unconstitutional. It's also not 'voluntary,' either, nor is it invalid because the 16^th amendment wasn't properly ratified, or whatever. But the uncomfortable and hard to believe - but relatively easy to prove - truth is that by law, i.e., by its own terms, the income tax is not imposed on the income of most ordinary Americans.

The truth is that the "income tax" is a perfectly legal, proper, and constitutional excise tax on income generated in international commercial activities. The truth is also that it was written and passed as such, and that it was from its inception not written to apply to the purely domestic income of most Americans.

Finally, the truth is that it was passed off to, and illegally enforced upon, Americans by outright deception - deception that can be traced and documented through ninety years of statutory and regulatory history. The truth is that Americans are not taxed on all of their US income, "no matter where it comes from" as most everyone believes today.

This truth is evidenced in the tax code and IRS regulations themselves - regulations that are as binding on the IRS (and even on all courts below the US supreme court) as they are on you. It was successfully buried for decades under increasing piles of legalese and regulatory gobbledigook, but now has been unearthed, and knowledge of this little truth is spreading - and spreading - and spreading.

The good news is that this truth is not spreading among the usual suspects of the effectively marginalized and de-fanged so-called "patriot" movement. Instead, the truth is spreading among regular folks like you and me, and your neighbors, business owners, a few celebrities, and even among some accountants, "and doctors and lawyers, and such."

The evidence that proves this to be true is far beyond the scope of this article, but it is laid out in meticulous, painstaking, logically undeniable detail at a neat little web site called http://www.taxableincome.net/ Taxable Income.

Now, just imagine you didn't have to pay taxes on your domestic US income any longer. I mean zero. None! And imagine no other American whose income is not derived from international trade or certain other foreign-related activities would have to, either. (Indulge me for a moment, here.)

Would that improve your personal balance sheet rather drastically? Sure would, would it not? Would it improve any US domestic business' balance sheet dramatically? You betcha. Would it cause people to save more, invest more, spend more, all at the same time? Probably. Would it eliminate the tremendous drag the entire record-keeping, income tax preparation, and filing requirement has on economic activity? It would. Would it keep the government's hot breath out of Americans' hair when the politicians suddenly have about a trillion or so less dollars to waste and buy votes with every year? You got it.

The point is, the fate of the American economy may ultimately come to depend on the rate of speed at which the news of the discovery of this dirtiest of little government secrets is spread, and its veracity is thoroughly studied, tested, and understood by all (eventually, that is. Come on, give people some credit, will you?)

The point is also that, without the power the US government derives from its ability to tax the incomes of ordinary Americans and American businesses, their power to manipulate the gold markets via the usual suspects of the Fed, the ESF, the gold banking cabal, and the commodities markets, will be severely limited to the point of non-existence.

Without the government's ability to "manage" the price of gold, the advantage of tying the dollar's success as a currency to a low gold price disappears, and so does the incentive to keep that silly, semi-official gold "price" under 31 USC Section 5117 on the books, which means that the US will then be free to value its gold stock at world market prices (as the Europeans now do).

And that means that gold can be freed to soar, supporting the value of the dollar instead of undermining it. Americans can earn, save, invest, and spend more, the euro will no longer be a deadly threat to the dollar, the US government will no longer be a threat to its citizens' liberty (too expensive), and the US can be freed to do what it does best: out-compete, out-invent, out-produce, out-trade, out-consume, out-save, and out-grow every other economy on this planet.

Utopian? Farfetched? Maybe. But truth has a way of eventually working its way through all the deceit, all the lies, all of the market-rigging, all of the legalese-writing, fact-distorting, mind-numbing, news-spinning, currency-inflating, and gold price-rigging that our rich and powerful are so overly happy to engage in.

Naturally, widespread discovery of this little truth will not be the magic pill that cures the US economic ill. Hard times are ahead, in any case. Might just as well have something positive to look forward to at the end of that long, dark tunnel. (And, by the way, that 'positive' is much easier to find if you have some gold with your name on it stashed away somewhere.)

But first, let's watch this current artificial stock-bubbling, and this economic-recovery-flat-lining mess unfold for a few more months. The current powers that be, and the mind-numbed masses, would have it so.

Alex Wallenwein
Editor, Publisher
The Euro vs Dollar Monitor

Just like driving your car, investing only makes sense if you can see where you are going. The Euro vs Dollar Monitor is your golden windshield wiper that removes the media's greasy film of financial misinformation from your investment outlook. Don't drive your investment vehicle without it!

Copyright © 2003-2008 Alex Wallenwein

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