China Converts Cold War Dividends into Currency War Ammo

SAN FRANCISCO ( -- America won the Cold War by exhausting the Soviet Union into submission, but in so doing paved the way for China to position itself as a competent rival superpower, albeit still emerging.

That was the essence of a lengthy and sometimes idiosyncratic lecture by distinguished contrarian investor Dr Marc Faber. He spoke to hundreds of people attending the Gold & Precious Metals Conference that wrapped up here on Monday.

Faber said that China was well aware of its military inferiority to the United States. Not willing to curb its great power ambitions China has employed more subtle, but no less consequential confrontation with the West under the guise of free trade, liberty and prosperity.

China is leveraging its ground floor cost base in concert with currency exchange rate manipulation to export a virulent deflation in finished goods, primarily to America and Europe. The squeeze is tightened by curbing imports from America in favour of regional imports, reflected in an ever larger surplus with the former and deficits with the latter.

The net effect is increasing regional dependency on China's consumption chain. At the same time wealth and productive capacity is transferred from the US and Europe with the long-term intention of leaving them much weaker and less capable of projecting influence and force around the globe.

Faber's presentation partially reprised his appearance in September at the annual Credit Lyonnais Securities Asia jamboree for top fund managers. His bearishness on the West and bullishness on the East is not new to those who have followed his work regularly, but attendees at the Hong Kong event say generalist fund managers were taken aback by his overall repudiation of financial assets.

The Swiss autodidact was well received by the mostly retail investor audience in San Francisco. Eschewing PowerPoint for an old fashioned overhead projector that was several lumens short of ideal, Faber presented long times series of data to validate his conviction that the global economy and the power structures derived therefrom are undergoing a sea change equivalent to the shift in power between the US and Britain.

Chinese shrewdness is only one aspect of the equation. The other is America's tremulous financial condition.

The Bush administration has been scapegoating China, much as former administrations did Japan through the 1980s. However, Faber warned that all the bluster about pressuring Beijing to revalue the renminbi will be of little consequence.

"If the double they value of the renminbi, will it change anything? I don't think so, not with factory wages of $100-200. They will go to $400, but they don't have health care or pension liabilities and so on. Production will still shift to Asia.

"The only way to correct the imbalance in the long run is for consumption to decline in the United States. It can decline because people start to spend less or because inflation starts to exceed income gains resulting in diminishing purchasing power."

Faber recommends that investors buy Asia where equities remain historically cheap. "No brainers" are real estate, tourism, gambling, agriculture and commodities.

He sees oil doing very well along with gold and other metals. "All paper currencies will in time depreciate in terms of their purchasing power. The only currency that will gain relative to other currencies will be gold, silver, precious metals and other commodities," Faber said.

He concluded with a backhander: "By the way the apostles of the new economy were right. The US does have a new economy - it resembles Mexico and Brazil."

Please note that a full text transcript of Dr Marc Faber's presentation will be available on Resource Investor this Wednesday.

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