Aat,

Some quick thoughts:

Thank you for making me think about this. You’re right. I just saw today the same figures for GDP that you must have seen showing the Eurozone GDP being slightly larger than that of the USA. Although the Eurozone’s population is 50% larger than that of the USA, so that its GDP/capita is 1/3 less than that of the USA both are still towering over that of China on a GDP/capita basis.

I think that the world financial markets believe that the Euro is not yet politically stable enough to be “the” reserve currency. However I think that the Chinese by taking their recent actions in the Spanish market, for example, are telegraphing to the financial community that they are betting on the continuing existence and ultimate staying power of the Euro.

I also think that we may well going towards a world of three “reserve” currencies, the US dollar, the Euro, and the Yuan. This would continue until the GDP of China, per capita, is closer to that of Europe or the USA at which point the Chinese GDP, in gross, will be multiples of that of Europe or the USA. Sometime in that period the yuan would become the world’s reserve currency but only if it is then freely convertible.

Note well that China is now the world’s monopoly producer of rare earths and that China only sells rare earths, or anything else , for Yuan, the exchange rate for which it sets unilaterally. Thus for all intents and purposes the rare earth market is, de facto, denominated in Chinese yuan. The big question is will China take action to continue this situation when and if there is significant production of rare earths outside of China or outside of its economic control. China will dominate rare earth production by volume into the indefinite future, and it will always price its rare earths in yuan. I firmly believe that China will also always be the largest demand market for rare earths, so that if the day comes that it cannot meet that demand domestically and it then must buy in the world market then that day will be the first day that the market price of a rare earth in a currency other than the yuan matters.

China fears inflation more than anything else, and commodity price inflation in particular, and so long as its domestic economy is self suffcient in rare earths it will not allow internal rare earth prices to soar uncontrollably. This is one reason why China is cracking down on illegal mining and export; it knows that high prices for rare earths outside of China will tempt Chinese prodcuers to export as much as they can.

There is a good chance that China is restructuring its domestic rare earths market to increase production, so that it either can or threaten to increase exports and thus maintain its control of the rare earths as a yuan denominated commodity. This would eliminate outside pressure to increase the internal prices of the rare earths.

Thanks again for making me think,

Jack Lifton

But aren’t you leaving out the Eurozone too quickly? The figures show that the Eurozone has a bigger GDP than the US. Even China (and Russia) have their own reasons to suggest to use the Euro in stead of the (US)Dollar as the world standard.

Your thoughts please?

Greetings from Holland, Aat

Enjoy your commentary!
Michael