Why has China has launched a media campaign blitz urging its citizens to buy up gold coin for use as a medium of exchange within country? Such a policy clearly runs counter to authoritarian governments' typical inclination towards totally fiat monetary systems. One commentator postulates that China may be attempting to better position the yuan to possibly oust the dollar as the world's reserve currency.
Consider how this might be accomplished. One great advantage the dollar has over competitors at present is the shear size of its monetary base which provides significantly greater liquidity than any other single currency. Nevertheless, if China were to successfully convince even a small percentage of its enormous population to convert to gold-based trade, it can essentially expand its monetary base without debasing its currency, i.e., no inflation whatsoever. In other words, to the extent that intra-national gold-denominated transactions can replace yuan-based transactions, more yuan will be available for use in inter-national trade. Because China's non-debasing policy would stand in stark contrast to the U.S. Federal Reserve's publicly acknowledged debt monetization plan, China's currency would likely engender greater confidence among the community of nations. This, in turn, could lead to more and more countries turning from the dollar to the yuan for settlement of international transactions. Wade W. Slome, President and Founder of Sidoxia Capital Management, LLC and popular commentator in the financial media, recently commented on this dynamic:
As new, growing powers such as China, Brazil, India, and other emerging countries fight for precious capital to feed the aspirational goals of their rising middle classes, money will migrate to where it is treated best. Speculative money will flow in and out of various capital markets in the short-run, but ultimately capital flows where it is treated best. Meaning, those countries with policies fostering fiscal conservatism, financial transparency, prudent regulations, pro-growth initiatives, tax incentives, order of law, and other capital-friendly guidelines will enjoy the spoils.
Needless to say, this has serious implications for the likelihood of sustaining the current U.S. hegemony in international trade. So what counter strategy might be employed to maintain American preeminence? Oddly enough, the solution may well lie in the U.S. Constitution. Article I, Sec. 10 provides, in part, that "no state shall make anything but gold and silver coin tender for payment of debts." Relying on this declaration of monetary authority, more than a dozen states are currently considering plans for reestablishing gold and silver coin as an optional medium of exchange in intrastate commerce.
So what would be the likely impact of such initiatives? First, we would anticipate a localized economic stimulus occurring in any state adopting such a plan. This would result from an expansion of the monetary base caused by introducing long-term investment gold and silver holdings of the citizenry into the local money supply. Second, the Federal Reserve could justifiably scale back its debasing money-creation stimulus plans. The more states embracing such a plan, the stronger the dollar can become. Shoring up its purchasing power would tend to restore confidence worldwide in the dollar as the global reserve currency.
Who would have thought that a return to sound money could become the ultimate stimulus plan not only for Utah, but for America as well?