by RUSS WINTER [13]

“All warfare is based on deception.” – Sun Tzu, “The Art of War” (500 B.C.)
“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world.” – Thailand Deputy Prime Minister Olarn Chaipravat in an interview with Bloomberg
“An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis.” — People’s Bank of China (2009)
It should go without saying that China and Russia have designs to end the U.S. Dollar hegemony free ride. This is fundamental to understand and will be a game changer. The impacts on the standard of living of these players will be profound and especially negative for the U.S. How and in what manner this plays out is the question. I strongly believe that the answer lies in two parts: letting the U.S. put a noose around its own neck and then at the appropriate time, kicking the chair out from under it.
The first part of the operation is now advanced and is described below. The second part involves China and Russia preparing its relative currencies to be accepted in lieu of dollars. It means making the yuan and ruble at least equal to, if not superior to, American dollars in world trade. As you can imagine, the U.S. — a country with a debt-to-GDP ratio approaching 110% — can ill afford this sort of challenge to its status as a reserve currency.
China has already advanced the Yuan as a principal exchange currency by incorporating a series of deal with other countries. Such arrangements are hardly mentioned by U.S. financial media, but they are going on constantly. So far, the People’s Bank of China (PBOC) has signed nearly 2 trillion yuan worth of currency-swap deals with 20 countries and regions, including Hong Kong. Here’s a breakdown of happenings:

•  Earlier this month, the European Central Bank announced a large currency swap arrangement with China. [14]
• An Asian ”renminbi bloc” has been formed involving seven countries.
• Russia, Iran, Angola, Sudan and Venezuela have converted oil sales to China into the Chinese Yuan. Worldwide, we see more than 5 million barrels per day traded in Yuan rather than U.S. dollars.
• Thechinamoneyreport.com [15] on June 16 reported RMB-yen trade is growing strongly a year after launch.
• BBC News, April 9: “China and Australia in Currency Pact [16]“
• BBC News, Feb. 22: “UK and China Poised for Currency Swap Deal [17]“
• BBC News, March 26: “China and Brazil Sign $30bn Currency Swap Arrangement [18]“
• Thechinamoneyreport.com [19] on June 4 reports that Singapore has launched a Yuan clearing service.
• Although ignored in the U.S., there has been increased chatter among foreign media about the RMB (aka Yuan) reaching safe-haven, reserve currency status, as Asia Today [20] reported on July 22.

I suggest that the kicking the chair out from USD hegemony involves at least partially backing the Yuan, and Ruble for that matter, with gold. China’s reserve assets were 30.2% of the world total at the end of last year. How much of this is already in gold?
China is secretive about the number, I think it’s because it had some catching up to do and it’s incorporating Sun Tzu-style principles, namely deception. The last time China revealed its gold reserve levels was in 2009 at 1,054 tonnes, which caught the market by surprise.
Another reference point is that China’s foreign exchange reserve increased from $2.2 trillion in 2009 to $3.4 trillion today. During that period, U.S. dollar reserves held by China fell from 69% to 54%.  If only 10% of that $1.2 trillion increase went to gold, then let’s see … At an average price of $1,200, that would be nearly 3,000 tonnes, bringing China’s total gold holdings up to 4000 tonnes. Conventional wisdom would point to between 3,000 and 4,000 tonnes. The U.S. supposedly has 8,133 tonnes in its reserves. Russia has doubled its gold reserve in four years.

China’s mines produce an average of 350 tonnes per year. During the last four years, it has produced 1,400 tonnes. Certainly, its domestic production went toward its reserve. Production estimates for 2013 are 440 tonnes. It should be noted, however, that from 2002 to 2009 China had produced approximately 1800 metric tonnes of gold, which strongly suggests that its figure of 1,054 tonnes for 2009 is understated and deceptive, maybe by a factor of two to three times.
Between 2011 and 2012, imports into China via Hong Kong surged to a total of 950 tonnes. Some, but possibly the majority of this ended up in gold reserves. Furthermore, no one talks about “illegal” gold imports smuggled into China, which may add to the total.
?
This year, the gold grab has reached entirely new levels, no doubt just one of the “unintended consequences” of the gold short attack in the paper “market.” In the first five months of this year, China imported more than what it did for all of 2011, or 525 tonnes.

Another incredible number is the volume of ounces transferred out of the London bullion market (LBMA) in May. That month alone it increased to 28.2 million ounces. To put that in perspective: 28.2 million troy ounces translates into 877 metric tonnes of gold. The amount of physical gold delivered year to date on the Shanghai Gold Exchange is 1,198 tonnes. Again, it’s much more than one would expect of the appetite of institutions, banks and individuals. The “Chinese granny” investor story is overplayed and may be a bit of a decoy. Much of this are PBoC and their proxies.

In 2009, a Chinese state council adviser known simply as “Ji” said that a team of experts from Shanghai and Beijing had set up a task force to consider expanding China’s gold reserves. Ji was quoted as saying, “We suggested that China’s gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years.”
The numbers I’ve cited are consistent with China easily reaching the Ji gold holding of 6,000 tonnes this year. The kind of withdrawal numbers being reported out of the LBMA, Comex and GLD (418 tonnes YTD) suggest that the PBOC through it’s proxy, the State Administration of Foreign Exchange (SAFE), is involved in a physical gold raid of such magnitude that the 6,000-tonne target has been left in the dust. The great gold sale has facilitated a push heading closer to 10,000 tonnes.
More importantly, as long as gold prices remain suppressed, China will continue to be a large-scale buyer. Perversely, if gold prices remain low, it will serve to accelerate the timeline for China to take down USD reserve currency hegemony. The U.S. can ill afford a China gold reserve buildup of 1,000 tonnes or more a year, let alone raid 2,000 tonnes and at cheap prices.
Meanwhile, China reportedly is progressing well on its ambitious plan to recast large gold bars into smaller, 1-kilogram bars on a massive scale. The big gold recast project points to the Chinese preparing for a new system of trade settlement. In the process, they are constructing a foundation for a new gold-supported monetary system that will give them advantages to their trade payments.
Finally, higher gold prices are necessary if the U.S. wants to curb China demand and prevent an emperor-wears-no-clothes scenario on the home front. You see, once yuan becomes a currency fully backed by gold, the next logical step will be not just domestic but international pressure on the U.S. and others, like Germany, to lift the iron curtain and reveal whether the gold they claim backs their currency really exists. Then get ready for all hell to break loose.
http://www.zerohedge.com/print/476704

There has been some degree of concern among regulators during the course of this year with regard tohigh speed algorithmic trading and what certain authorities consider to be the disruptive behavior in which certain traders engage by using algorithms to outpace other market participants.

Today, the US Commodity Futures Trading Commission (CFTC) has brought a successful case against two parties, citing them for engaging in what the CFTC considers to be the disruptive process of spoofing. This is a milestone case, as it represents the first time that a trading firm has been prosecuted under the Dodd-Frank Act’s prohibition of spoofing, which is defined under the act as the illegal practice of bidding or offering with intent to cancel before execution.

Britain’s Financial Conduct Authority (FCA) collaborated with the CFTC on this matter, and has also issued a penalty to the same parties.

One of the reasons that algorithmic trading is on the agenda of regulators is that it facilitates positions to be opened and closed at extremely high speeds, using extremely high technology, therefore giving certain traders a distinct advantage over others.

In this particular case, Panther Energy Trading LLC and its Principal Michael J. Coscia utilized a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts.

The resultant toxic order flow of firms that use algorithms without contravening any laws has resulted in German regulator BaFIN proposing a mandatory delay in trade execution times to prevent disruptions, and go against latency arbitrage by those with quicker systems and complex automated algorithms.

Certain firms, without any encouragement from regulators, are also considering imposing a latency floor in order to absolve them of any such business. EBS recently embarked on such a consideration.

The CFTC’s order against Mr. Coscia and his firm finds that this unlawful activity took place across a broad spectrum of commodities from August 8, 2011 through October 18, 2011 on CME Group’s Globex trading platform.

The CFTC Order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.

According to the Order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts.

For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel.

By placing the large buy orders, Mr. Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell.

Finance ministers from the G20 group of leading nations have formally backed plans to tackle international tax avoidance and evasion.

A statement issued earlier supports the automatic exchange of tax information between countries.

It also backs plans by the Organisation for Economic Cooperation and Development to stop firms moving their profits across borders to avoid taxes.

The OECD said some firms “abuse” current rules to avoid tax.

UK Chancellor George Osborne said the announcement, which came after a two-day G20 meeting in Moscow, was an “important step towards a global tax system that is fair and fit for purpose for the modern economy”.

Last month, the G8 group of leading economies agreed a deal to “fight the scourge of tax evasion”, and nations including the UK, France, Germany, the USA and Australia are taking part in a pilot information exchange scheme.

British Prime Minister David Cameron made the issue a priority for the UK’s presidency of the G8 this year, and Australia has agreed to do the same during its G20 presidency next year.

The OECD said current tax rules, some dating to the 1920s, were created to avoid “double taxation” of companies working in more than one country – but it said they were being abused to allow “double non-taxation”.

BBC business correspondent Joe Lynam said the “bandwagon of clamping down on aggressive tax avoidance” was moving on from developed economies to emerging ones like Brazil and India.

The rules should mean bigger bills for companies which could previously “pit one country off against another in terms of tax”, our correspondent added.

The G20 asked the OECD to come up with a plan to improve tax cooperation, and the finance ministers said they “fully endorse the OECD proposal for a truly global model” of information sharing.

Their statement called on all countries to make automatic information sharing a reality “without further delay”, adding that “capacity-building support” would be provided for poorer nations.

The G20 said the changes should be in place within two years, but our correspondent called that “very ambitious” because hundreds of tax treaties exist between countries and “thousands of amendments” might be needed.

Many multinational firms currently avoid tax – legally – by means including loopholes and tax havens, but the new rules could require them to pay more in the countries where they do business.

Firms including Google, Starbucks, Amazon and Apple have been criticised for the amount of tax they pay.

Earlier this year, MPs attacked Google for routing £3.2bn of UK sales through Dublin and paying little tax as a result.

Starbucks has been questioned for transferring money to a Dutch sister company in royalty payments, though the firm agreed to pay more tax after strong public criticism.

The companies point out that these schemes are legal and they have a duty to shareholders to minimise their tax bills.

As a reprisal, let’s revisit the financial impact from Zero Interest Rate Policy (ZIRP) as it applies to responsible savers.  From the previous post, we just need to make a couple adjustments [5].   To assist in charting and calculations, the following data sets provided ample information:

The good news behind the bottom 85% of close-to-retiree status Baby Boomers that participate in the “markets” via sub $50,000 retirement money is that at some point, the voters might actually get smart and get mad at how much money has been siphoned from them.  Consult the chart below to see a historical relationship between total savings and amount of interest income earned on the savings.

 [6]

Note that prior to 2001, as savings increased (blue line), interest income received increased (red line) proportionally.  However, after 2001, the interest earned stopped increasing.  The green line shows the effective interest paid on interest bearing accounts.

Scaling into the shaded area representing 1986 to present, the following chart depicts the actual Fed Funds rate determined by FOMC.

 [7]

As savings increased when Fed Funds rate remained around 5%, interest income continued to rise.  However, post 2001, the interest income received stopped growing at the same rate.  With the exception of 2005 to 2008 when rates went back to “normal” in the 5% range – the interest income earned has remained stable at just under 1 trillion (Ben Bernanke is so smart).

Let’s apply some thought experiments and make a couple calculations – what would happen if the FOMC were removed and the Fed Funds rate “floated?”  Using average historical rates from the 1920’s for the 10 year note– the mean rate would sit around 5.82%.  With a floating Fed Funds rate, banks would be competing for money and providing responsible savers with some interest income.  Voila, a calculation is borne:

 [8]

By calculating the estimated interest income from historical ratios (orange shaded area), we can see that as of July 2013, approximate interest income would be just over 3 trillion (1/5^th of GDP) on savings of 6.8 trillion (using the left scale).  Whereas the actual interest income reported by NIPA remained at 1.1 Trillion, the difference in interest received and lost interest equals roughly 2 Trillion.  Remember, this is interest income to SAVERS forever lost since 2001.  By aggregating the entire shaded orange area, SAVERS have missed out on a whopping 10.8 Trillion in earned interest usage.  The final chart above makes a loud and clear statement toward the beneficiaries of the low interest rate environment.