Guest Post: The Exter Pyramid And The Renminbi

Tyler Durden's picture

Submitted by Mao Money, Mao Problems

The Exter Pyramid and the Renminbi

The pyramid is the strongest structure known to Man. The weakest structure is the inverted pyramid. There is an economic theory called the Exter Pyramid to describe the financial system. It is an inverted pyramid ranking assets by risk. Gold, the safest asset, holds its place at the tip of the pyramid. Riskier assets, such as cash, deposits, bonds, stocks, real estate, non-monetary commodities, etc., take their respective place above gold.

When the pyramid gets top-heavy, it has to re-adjust itself by reducing the value of the riskier assets and increasing the value of gold and other less risky assets. Although finding the true value of the total Exter Pyramid for a country is extremely difficult, we can use readily available data from a few asset classes to understand a basic structure.



America's basic Exter Pyramid was worth USD 28.4 trillion (CNY 178.92 trillion), including gold. China's basic Exter Pyramid was worth CNY 126.1 trillion (USD 20.02 trillion) including gold. (In the charts above, gold was shown as a negative number for visual effect. The value of gold is based on the official holdings at that time multiplied by the current market price.) If you factor in GDP, the closeness of those numbers seems very odd.


The instability of the Exter Pyramid shows the relationship between the gold base and everything piled on top of it. The higher the ratio, the more upward pull there is on the value of the base, and the more downward pull there is on the value of the upper levels. After peaking out at 769.65 to one in July 2001, China's financial assets to gold reserves ratio has fallen to 353.34 to one in December 2011. America's ratio went up to 300 in the late 1990s, early 2000s before dropping down to 64.72 in December 2011. This would explain why gold has been in a bull market while stocks have been a bear market.

We can also look at cash to upper levels. China's ratio of financial assets to cash was 21.51 to one and America's was 25.59.

There is no correct ratio, we can only compare two or more economies and see which one is higher or lower. A higher number means eventually there will be an increase in value of the base (gold) and a decrease in the value of the upper levels (everything else). In this case, a re-adjustment (which is happening) will cause the revaluation of value to be highest in gold in China, then gold in the U.S., then cash in the U.S., and then cash in China. Since the price of gold is linked world-wide, that would mean a drastic change in the value of the rénmínbì. If the real value of each countries' stock markets and gold reserves were to not change, the CNY would have to devalue 90.01% to equilibrate. That would mean an exchange rate in the range of CNY 64.1386 to one U.S. dollar. If the Chinese stock market were to adjust to the same proportion of the Exter Pyramid as the U.S. stock market at the end of 2011, then the exchange rate value of the rénmínbì would have to be CNY 35.8691 to one U.S. dollar.

Although the Exter Pyramid is difficult to measure, we can easily compare basic asset classes across economies. There is no correct ratio, but if we compare the U.S. and China, we can see that China's basic pyramid is considerably more top-heavy than America's basic pyramid. The only way to bring them to equilibrium would be to drastically devalue the rénmínbì against the U.S. dollar.

 

 


P.S. from ZH

There is another explanation for what is going on that does not involved devaluating the CNY: it very well could be that just like in early 2009, China will any minute announce that it has built up a massive gold stockpile over the past 2 years which has gone on undisclosed.

Recall from April 2009 Reuters:

Shanghai/Beijing: China disclosed on Friday that it had secretly raised its gold reserves by three-quarters since 2003, increasing its holdings to 1,054 tonnes and confirming years of speculation it had been buying.

 

Hu Xiaolian, head of the State Administration of Foreign Exchange (SAFE), told Xinhua news agency in an interview that the country’s reserves had risen by 454 tonnes from 600 tonnes since 2003, when China last adjusted its state gold reserves figure.

 

The confirmation of its surreptitious stockpiling is likely to fuel market talk about Beijing’s ability to buy secretly and its ambitions for spending its nearly $2 trillion (around Rs100 trillion) pile of savings. And not just in gold: copper and other metals markets are booming thanks to China’s barely visible hand.

 

Speculation has gathered speed over the last year, since the tumbling dollar has threatened to weaken China’s buying power—and give it yet more reason to diversify into gold, oil and metals.

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PolishHammer's picture

Rory McIlroy new world number 1 nerds...

Silver Bug's picture

I think we can all agree. China has been secreting, or not so secrectly hoarding massive amounts of gold. Their Exter pyramid is going to be much stronger than first assumed.

 

http://ericsprott.blogspot.com/

spiral_eyes's picture

Taking gold completely out of the equation America's EP looks like a batshit insane ultra-bloated head and shoulders top.

China's looks relatively sustainable, and fuelled by savings. 

trav7777's picture

"strongest structure known to man"??  WTF kinda gobbledygook is this?

francis_sawyer's picture

Hey... I'll bite... What, IN FACT, kinda of gobbledygook is it?... (assuming there's STRONGER gobbledygook &/or, if the 'kung fu' of the PYRAMID 'gobbledygook' hasn't much strength... as the case may be)...

Caveat: I'm not the brightest engineer in the toolbox...

 

flacon's picture

I think Trav is thinking of a sphere, as depicted hin his avatar. 

UP Forester's picture

Yeah, 'cuz them Egyptian Spheres are still there.

Maybe he's thinking of bubbles.  But I don't even want to know....

markmotive's picture

A gold backed Yuan is the next phase of the global monetary regime.

 

So says Doug Casey.

trav7777's picture

total horseshit...more "Rising Sun" nonsense.

The chinese are concealing FAR more bad loans than they ever could be gold reserves

francis_sawyer's picture

so why do you bash physical PM ownership (in numerous threads)?

trav7777's picture

you need to learn to read, seriously

francis_sawyer's picture

I apologize... I guess I just must be one of those mathematical probability monkeys (named 'francis_sawyer' no doubt), that possesses some sort of extant capability of randomly typing THE BIBLE [or internet response to a ZH thread]) on a mechanical keyboard... You're right... I can't really read... Ignore all my comments, as they are randomly generated...

Hugo Chavez's picture

I am confident you are right.

rqb1's picture

China has made so many bad loans they would make countrywide blush

Barmaher's picture

Why would you post that here you fucking moron?  

PolishHammer's picture

He also won a million dollars.

bank guy in Brussels's picture

Right off the bat, the thing that seems odd about these 'asset pyramid' estimates, is the general rule-of-thumb that the total assets of a nation tend to be about 4x GDP, this includes everything, land and buildings, silver, fine whisky etc.

So with global GDP at USD 75 trillion or so, total global assets of all types are about 300 trillion.

With China's GDP being perhaps 55 or 60 % of US GDP, so total Chinese assets are maybe proportionately in line with that?

Of course many of these numbers are just too fudged and vague and unreliable ... I remember once some Chinese official was quoted as saying, the Chinese learned about how to lie about 'official statistics' as one more thing they copied from America.

CompassionateFascist's picture

All this assumes, of course, that there is X tons of gold in Ft. Knox. Since the vaults haven't been inspected in decades, one suspects otherwise. The US inverted pyramid has no base. It will topple in the the next stiff breeze.

arby63's picture

You are probably quite correct; however, China isn't exactly a breeze of sunshine disclosure either. I suspect we're in this downward spiral together no matter how it plays out. From a layman's perspective, it appears to me that China is far more dependent upon the U.S. consumer than the U.S. consumer is on Chinese crap.

luna_man's picture

 

 

"it appears to me that China is far more dependent upon the U.S. consumer than the U.S. consumer is on Chinese crap."

 

Oh, yeah?...Aside from food and few other items, what have you purchased lately, that didn't have "made in China" on it?

trav7777's picture

very little I buy comes from China.  I don't shop at walmart like you proles.

trav7777's picture

what was the part that had you so confused?

francis_sawyer's picture

let's start with this... "you proles"... pray tell (me where I shop)... &/or IF I do...

We can move on from there if you wish...

Actually, I was at Wal-Mart last week... I bought a box of plinking ammo, some lettuce, a wedge of parmesean cheese, a couple of goldfish for the acquarium, and some Yuengling Beer, (all made by the Chinks I suppose ~ especially the Yuengling, that sounds Chinese, right?)...

t_kAyk's picture

Yeungling is made in Pennsylvania, Americas oldest brewery

turtle777's picture

It's spelled Yuengling. The root is German, Jüngling ("Young Man").

dark pools of soros's picture

Trav must be one of those IKEA budget hipsters - wants to feel like he is a Crate & Barrel man but needs those Target single mom friendly prices 

ffart's picture

How do I find clothes that aren't made in china. This is a serious problem. I bought a goretex ski jacket last year and the zipper already fell off. This is the third time this has happened, HELP.

Coke and Hookers's picture

Browse through this. You'll discover surprising stuff, like laptops assembled in America and American made jeans!

http://www.howtobuyamerican.com/index.php

http://americansworking.com/

http://www.madeinusa.com/

http://www.madeinamericasc.com/

RafterManFMJ's picture

 

 

I'm with you trav7777; you should see the Ipad I hand made with gravel and bits of wire.  I can even get on the internet with it, if I balance it on my cable modem.

Hugo Chavez's picture

Anything from china is easily substitutable within a few years from africa bangladesh, or vietnam.

We americans can put our sweatshops and find slave labor anywhere. China has no monopoly on that. China is in the weak position, not the usa.

SilverDOG's picture

Hugo Chavez

 

C'mon Hugo, 

 

OIL will be the difficulty. Shipping cost and worthless petrodollar. Mexico is far more fathomable. Neither will be chasing USD however.

Hugo Chavez's picture

We can have the amero for all i care, and open borders with mexico. It matters not in the long run which currency we or the mexicans use.

Wave propulsion systems and wind are slow, but doable.

arby63's picture

Unless I have no alternative, not much. I avoid Chinese made goods. I'd say I am pretty correct about the dependency. We can always revert back to some type of manufacturing (even if it's small scale) but China--in no way that I can see--can ever (within our general lifetimes) break its ties with the American consumer. Tell me how. Europe? They will be importing rice just to prevent starvation within 20 years.

deflator's picture

I do not see the U.S. generally reversing the trend of manufacturing away from China and Asia , be it Veitnam or elsewhere in Asia. The typical American worker has to drive to work and just those inputs be it gasoline costs, insurance, taxes, etc. put him at a permanent disadvantage.

 I have been discussing this very thing with my co-workers and I doubt any of them would agree with your "leverage" theory. Not all of the real 8% yoy inflation is attributable to money printing. A good bit of it is do to the ascention of Asian workers.

superflyguy's picture

Problem is that if you never travel you cannot understand other markets. If you travelled, you'd realize that others purchase chinese goods too but there are a lot more of them than Americans.

300mil people in the US, half of which are on food stamps don't really purchase many of the chinese toys anymore. And it won't get any better as price of oil and value of dollar goes down. Thailand, Malaysia and Vietnam on the other hand may be poor right now but are on the way up. If only a tiny percentage of their population becomes wealthy, it will be a significantly bigger market than the US.

zipfish's picture

This is bullshit, those 3 countries have a total population of under 200m.  How would a tiny percentage of them be a bigger market than the US (pop 300+mil)?  Especially when even the poorest American on welfare and food stamps would be considered to be a decent earner in say Vietnam.

matrix2012's picture

 

There's a bigger region so-called ASEAN there with much bigger number than superflyguy's one :)

ASEAN (Association of Southeast Asian Nations) has 10 member states: Indonesia (237.6 millions), Philippines (101.8), Vietnam (90.5), Thailand (66.7), Myanmar (58.8), Malaysia (27.6), Cambodia (13.4), Laos (6.5), Singapore (5.1), Brunei (0.4) with combined population of 608.4 millions, and their rapidly growing economies have a combined gross domestic product — the total value of all goods and services produced — approaching $1.5 trillion.

 

Unprepared's picture

This Inverted Pyramid theory would have been more helpful if it compared core equity to leveraged debt including the derivatives King Kong swinging on top of it.

matrix2012's picture

Unprepared, i like much your swinging KING KONG....

it's very humorous to find the KING KONG creature comes down playing here, yet it's aptly said!  It's strange that the theory just didn't see the elephant in the room :D 

Oracle of Kypseli's picture

There are two schools of thought on Fort Knox:

It's either empty, hence collapse.

Or, it's actually full to the brim plus other peoples' and other ECBS' gold, hence world domination at some point.

Either way, not a good thing.

Get your own while available for purchace.

francis_sawyer's picture

The world hinges upon what Pussy Galore & her flying circus were able to accomplish...

LowProfile's picture

Pfft.

80% of the world's gold is privately held.

Crisismode's picture

Ft. Knox looks pretty private to me.

 

If you think it is owned by the American People, think again.

 

 

non_anon's picture

the Sunday hits keep on coming!

Manthong's picture

Mao Money..

Isn't that Cramer's program?

Unprepared's picture

Cramer's program is Mao Money ... Yao Pwablem