Debt, The EU, And Greece

Heh, that's interesting. That's one expensive trophy!

Malor wrote:

Resources are limited. Money is just a claim on resources.

Currency is a commodity that may be traded for other commodities. Its value is exactly what people are willing to trade for it. It is commonly conceived of as a repository of "wealth", but it's not--wealth exists in the entire economic system, not simply the currency.

Currency is valuable because it provides a "base case" for trading. Its liquidity and common acceptance allow people to make uneven trades and "carry over" the left-over parts of the trades, including "one-sided" trades where one party provides only currency.

Resources are limited. Money is not a claim on resources. Wealth is not a claim on resources. Wealth is not limited.

The fallacious conflation of wealth, resources, and currency is more or less the heart of mercantilism.

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Hypatian wrote:
Malor wrote:

Resources are limited. Money is just a claim on resources.

Currency is a commodity that may be traded for other commodities. Its value is exactly what people are willing to trade for it. It is commonly conceived of as a repository of "wealth", but it's not--wealth exists in the entire economic system, not simply the currency.

Currency is valuable because it provides a "base case" for trading. Its liquidity and common acceptance allow people to make uneven trades and "carry over" the left-over parts of the trades, including "one-sided" trades where one party provides only currency.

Resources are limited. Money is not a claim on resources. Wealth is not a claim on resources. Wealth is not limited.

The fallacious conflation of wealth, resources, and currency is more or less the heart of mercantilism.

Currency/Money is not a commodity like gold. It is fiat as I have already posted. It comes from thin air by issuing credit.

http://wfhummel.cnchost.com/moneyand...

But money started out as commodity money when governments issued tokens such as gold coins. So in reality commodity money is fiat money that cannot expand. Perhaps this is Malor's confusion when he says we are "running out of money." He still thinks money is a commodity.

http://wfhummel.cnchost.com/unifiedv...

I do appreciate a good Money/Wealth debate, but can we bring this back to on topic?

The US continues to be the least bad investment of choice, but mounting debt levels here still have many concerned...

http://www.businessweek.com/news/201...

And I can't find the article, but I was reading that despite the bailout, many markets are still pricing in the Greece default as likely, although I do not know how near term.

Jolly Bill wrote:

I do appreciate a good Money/Wealth debate, but can we bring this back to on topic?

The US continues to be the least bad investment of choice, but mounting debt levels here still have many concerned...

http://www.businessweek.com/news/201...

And I can't find the article, but I was reading that despite the bailout, many markets are still pricing in the Greece default as likely, although I do not know how near term.

Long term rates are still at record lows showing there is still high demand for US Treasuries. I bet US Debt could be doubled and we wouldn't be in a problem. Well hopefully if they did do that it really jumpstarts the economy and Debt to GDP goes down. To me this shows lack of demand and plenty of supply.

Remember my Social Security proposal. Government Debt <> Government Spending.

Malor wrote:
The money is always there since money is made from thin air. There is no such thing as running out of money.

This is probably your most dangerous idea. Resources are limited. Money is just a claim on resources. Playing around with the money f*cks up a system, redirecting resources away from those who have earned them to those who print money. Do enough of that, and the system will eventually collapse.

Money is not a resource. It is a storage of wealth and a means of exchange which is being transfered from the working people to the bankers as I have posted.

Labor on the other hand is a resource. And it is being highly underutilized right now when we see such high unemployment rates.

Wealth is not limited.

You are out of your mind. If wealth isn't limited, why don't we all have yachts and mansions?

Wealth is energy, stuff, and knowledge. Modern currency has no inherent value. It is not wealth. It is debt, a claim on real wealth.

Malor wrote:
Wealth is not limited.

You are out of your mind. If wealth isn't limited, why don't we all have yachts and mansions?

Wealth is energy, stuff, and knowledge. Modern currency has no inherent value. It is not wealth. It is debt, a claim on real wealth.

The supply of yachts and mansions is limited. Yachts and mansions are only one type of wealth, and not a particularly interesting one.

Wealth is not limited because the forms of wealth are not limited. You mention knowledge: does it diminish one person's knowledge when they give their knowledge to another? No, because there isn't a finite amount of "knowledge" in the world, any more than there is a finite amount of "wealth".

A classic example of why mercantilist ideas don't work is to think of the process of cutting wood, using that wood to make a fine chair, adding fine carving and details to the chair. When you turn the wood into a chair, it is still made of the same "stuff" that it was before, but it is more valuable. Carving it uses the knowledge and skill and energy of the carver, but doesn't add any stuff to it, but it is more valuable. More interestingly: let that chair be the place where someone is sitting as they do something terribly famous, and no effort, material, or energy has been put into it, yet it is more valuable, simply because of the idea it represents.

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No currency has any value, not even if it is backed by gold or something of the sort. Its value is exactly what people are willing to give you for it. Why does the price of gold fluctuate? Because of supply and demand. It's not some magical repository of value, it just tends to retain a high value because demand is high and supply is low. Part of the reason for the high demand is the same reason modern currency retains its demand: because people trust that other people will accept it in exchange for goods and services.

If the demand for gold suddenly disappeared, it would be worthless. If the supply of gold suddenly increased without bound, it would be worthless. (There's a science fiction novel where a society living in a space colony weights their shoes with gold, because it's a cheap byproduct of the process they use to produce radioactive materials, which are in actual demand.)

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In the end, wealth is not about how much stuff you have, it's about how good your life is. At any one time, the overall "goodness of everybody's lives" is limited, but as time progresses, that is not certain to be the case.

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In the short term, yeah, there are definitely dangers to printing money: you're increasing the supply of something that people are trading (hence my calling it a commodity: it's a thing that people trade), which overall decreases the value of each individual unit of currency. In the course of time, the wealth in the system may grow to make up for the discrepancy (increasing demand), or money may be removed from the system (decreasing supply).

It does tend to make people unsettled, partially because they have weird old-fashioned ideas about money and value being intrinsically linked to physical things. That makes the value of the money even less certain, as people who aren't certain how valuable money is or is going to be in the future will have a hard time determining how much of it they're willing to trade for how much of what else.

But that's the thing, too: Managing the money supply is all about poking the supply/demand curve for money in exchange for other things people need. If people are hoarding money, the demand for money is too high and the system starts to have issues—that's deflation. Deflation happens when people assume that it's safer to have money (or gold) than it is to invest that money in ventures that will pay back, and when they assume that their money will buy more tomorrow than it will today. (Why buy bread today when it's on sale tomorrow?) As more people start holding on to their money, the value of the money that *is* moving increases, and more people start holding on to their money (since it is "worth" more), in a cycle of pain.

In that kind of situation, it makes perfect sense to add more money to the system, to ease the breakdown that's being caused by the pressure of supply and demand for money. Decrease the value of money that people are holding, so that they are willing to exchange it for goods and services again, instead of hoarding it. Printing more money in this case does really add wealth to the system, because it allows economic growth to happen again (as people pay other people to do work, give loans to people starting new businesses, etc.)

On the other side, when inflation is rampant there's a lot more money to be had than anybody wants. In that circumstance, people aren't willing to invest without very high rates of return—better to buy things now, before the money loses too much value. Adding more money in that kind of situation is a disaster, as people value money less and less and start to reject it as a medium for trade, because it is losing value (demand) so rapidly.

So, sometimes it's good to print more money, sometimes it's not.

But that's the good thing about an unbacked currency—you can make that choice. It's a lot harder to suddenly dig up a lot more gold or to get a lot of gold out of the economy all at once. The lack of a natural source or a natural sink of cash means that money's value is *purely* down to the supply available and the degree to which people desire to have money. Suddenly discovering new money sources or an important new use for money isn't going to happen, and that keeps things reasonably simple. (Especially considering that nations barely manage to keep things working with the simple form.)

Great post Hypation - I don't have the patience in myself to say something like that but I agree 100%. Expect I would say that all money is fiat not commodity. See my link about the Unified View. It is just semantics though since you do understand.

Yeah, it's really more about the term "commodity money" than anything else. I was using the term to mean ~"A commodity is some good for which there is demand, but which is supplied without qualitative differentiation across a market", and specifically trying to make the point that when it is being traded, money is just like any other thing that is being traded.

I wasn't actually aware of "commodity money" being used as an antonym of "fiat money" until I followed your link.

I don't have time for a long post, but I'll say this much: you cannot eat money. It doesn't feed you or power your car. Ultimately, real wealth is purely physical stuff and energy. Knowledge is wealth only the sense that it makes generation of the first two items more efficient, or new forms of them possible.

It all boils down to that in the long run... things and energy. You can use things and energy to make new things and energy -- investment -- or you can use it for consumption, raising your living standard. Some of that can make you more effective at creating new things and energy, so some living standards are strongly investment-oriented, but high standards are actually wealth-destructive, because energy that's being used to drive your air conditioning is energy that's not building tractors.

It's kind of like fishing... at a given fish population level, you can extract a certain number of fish each year pretty much forever. If you take too much, you reduce the amount you can take in later years, up to and completely destroying the fish stock. If you come up with methods of increasing the number of fish, this increases the baseline extraction levels you can support indefinitely.

Economies are roughly similar, in that a given amount of energy and goods production can provide a particular living standard for a given population essentially forever, at least until the raw materials run out. But your population is always growing, and you constantly need new sources of goods and energy. If you invest existing wealth into new wealth creation, then your baseline living standard will go up if you're exceeding your population growth. If you route that wealth into destructive uses, then your baseline living standard will decline.

This is just hard physical fact, and any economic theory that ignores these things is substituting an abstraction for the truth. We are physical creatures, and we have hard requirements for energy and shelter, and comfort tends to increase our productivity a great deal.

That's all I have time for right now. I'll try to revisit this tomorrow if I can.

The thing that confuses me about what you said: you describe investment in terms of increasing wealth, or non-investment in terms of decreasing wealth. That's fine... but in what way is your "if we properly invest and don't consume too much, we end up with more wealth than we started with" contradictory to what I was saying about wealth increasing over time?

It seems like we agree on that point, although we may differ on exactly how one should define "consumption" and exactly how much of it you need for it to be a bad thing. (For example: I know people who think that playing games and reading novels is the worst thing I could possibly be doing with my time, that I should be more productive instead of enjoying leisure. On the other hand, I value my free time immensely, whatever I'm doing with it—and I know that I would go batsh*t insane without some down-time from "productive" activities. Presumably, since you're a gamer, you agree that not all non-productive activity should be abolished.)

The other point in what I was saying was: Regardless of how you manage a money supply (i.e. dig stuff out of the ground or print stuff), you need to produce more money (increase supply) in a deflationary environment in order to decrease the value of holding on to money and get people investing it.

When I am king, I will give Malor and goman each a tract of land with equivalent natural resources , because I am curious to see their different points of view played out side by side.

Meanwhile, Japan PM Naoto Kan warns of 'collapse' under debt pile.

They were following goman's prescription almost to the letter, issuing new debt to try to hide old, bad debt. They haven't hyperinflated, but they also haven't solved anything, and now are in a very, very weak position.

You have to let things fail to get back to health when you have a systemic debt problem, not issue more debt. Deflation, as awful as it is, is not the enemy. It's the truth, and truth always improves the functioning of markets and economies.

When I am king, I will give Malor and goman each a tract of land with equivalent natural resources , because I am curious to see their different points of view played out side by side.

Well, assuming that they were large enough to be self-sufficient, and didn't interact with anyone else, what you'd see on my side is constant minor crises. Little things would be blowing up all the time. ("Wheat prices plummet! Iron prices skyrocket! Systemic instability!")

Goman's side would appear much more robust for at least twenty years or so. Things would be smoother, there would be higher growth, and very little in the way of instability. But then things would start to go very badly awry, and his nation would veer from policy fix to policy to policy fix, while the people near the money got immensely wealthy, and the people who made the actual wealth got poor. The distribution of income would end up looking like it does in the US, with the vast majority of people just scraping by, and a few hyper-wealthy individuals.... the people who understood how to manipulate money. Eventually, his system would collapse under its own weight, lost in economic wishful thinking, like "printing money doesn't matter". See: banana republics.

Meanwhile, my somewhat fractious and anxious state would just keep arguing its way along. Growth would be slower, but it would be correct and lasting, stable. There would be small problems all the time, but virtually no large ones. Incomes would be more equal, because there wouldn't be a systemic advantage to serving the people who print money. And while people would feel poorer, especially when looking at Goman's apparently prosperous and high-growth state, they'd be very grateful indeed when things didn't blow up a generation or so into the process. Well, maybe they wouldn't be grateful, because people just don't seem able to look back and forward that far, but they'd still be in fine shape, and tut-tutting over all the silly debt that goman's citizens had been carrying. Over the long haul, my side would end up far wealthier, because at no time would the system be lying to them about how much lifestyle they could afford.

The longer the experiment ran, the farther ahead my state would get. But for the first twenty years or so, maybe thirty, it would look like goman's side was far more prosperous.

Malor -that was uncalled for. To make it seem that I suggest is what the Japanese have done. I actually posted a critique of their policies from an economist, Richard Werner, who knows. I suggest you read what I post. Not what you read into what I post.

http://www.telegraph.co.uk/finance/e...

http://www.bbc.co.uk/news/business-1...

Debt deflation in Greece and Ireland. That is what happens with austerity.

And of course if GDP goes down it ain't gonna help that debt/GDP number.

This is not what happens with austerity, but rather what happens after a period of reckless spending and borrowing - a bubble. This is good news for Ireland and Greece, because it means those economies are now beginning to purge the malinvestment and bad debt, which is the first step to a proper, sustainable recovery.

I don't think anyone claimed that is was going to be easy, goman, nor that it wouldn't effect GDP or not cause deflation. I think we agreed that either austerity or printing money has its dangers and both need to be monitored closely. I'm willing to accept that if Honohan isn't worried, I won't be either. He has been excellent as the chief of our central bank these last few years. Same goes for our new financial regulator, Matthew Elderfield.

It might interest you that the news isn't all doom and gloom. Irish growth rates are predicted to rise 3% in 2011(PDF) after the battering of -3 and -7.1 in '08 and '09 retrospectively. 2010 looks set to have a decline of -0.9% which is not great but clearly in the right direction. So it seems something it working.

Here is how it was done Axon and others.

http://neweconomicperspectives.blogs...

Investment Banking by Blood Sucking Vampire Squids
By L. Randall Wray

While investment banking today is often compared to a casino, that is not really fair. A casino is heavily regulated and while probabilities favor the house, gamblers can win abut 48% of the time. Casinos are regulated—by the state and presumably by the mob. Top executives who steal funds end up wearing very heavy shoes at the bottom of the ocean.

By contrast, the investment bank always wins, and its customers always lose. Investment banks are “self-regulated” (meaning, of course, they do whatever they want—sort of like leaving your 15 year old at home alone all summer with the admonition to “behave yourself” and keys to the liquor cabinet and the Porsche). Top management rakes off all the funds it wants with impunity. And then the CEOs go run the Treasury to bailout the investment banks should anything go wrong.

This summer I was lunching with a trader who works for one of these investment banks (hint: there are not many left, and he was not with Goldman). Speaking of Goldman he said “those guys are good”. Indeed they are so good, he said, “I don’t know why anyone would do business with them.”

He explained: When a firm approaches an investment bank to arrange for finance, the modern investment bank immediately puts together two teams. The first team arranges finance on the most favorable terms for the bank that they can manage to push onto their client—maximizing fees and penalties. The second team puts together bets that the client will not be able to service its debt. Since the debt cannot be serviced, it will not be serviced. Heads and tails, the investment bank wins.

Note that this is also true of hedge funds and the half dozen biggest banks that are bank holding companies providing a full range of financial “services”.

In the latest revelations, JPMorgan Chase suckered the Denver public school system into an exotic $750 million transaction that has gone horribly bad. In the spring of 2008, struggling with an underfunded pension system and the need to refinance some loans, it issued floating rate debt with a complicated derivative. Effectively, when rates rose, that derivative locked the school system into a high fixed rate. Morgan had put a huge “greenmail” clause into the deal—the school district is locked into a 30 year contract with a termination fee of $81 million. That, of course, is on top of the high fees Morgan had charged up-front because of the complexity of the deal.

To add insult to injury, the whole fiasco began because the pension fund was short $400 million, and subsequent losses due to bad performance of its portfolio since 2008 wiped out almost $800 million—so even with the financing arranged by Morgan the pension fund is back in the hole where it began but the school district is levered with costly debt that it cannot afford but probably cannot afford to refinance on better terms because of the termination penalties. This experience is repeated all across America—the Service Employees International Union estimates that over the past two years state and local governments have paid $28 billion in termination fees to get out of bad deals sold to them by Wall Street. (See Morgenson www.nytimes.com/2010/08/06/business/...)

Repeat that story thousands of times. Only the names of the cities and counties need to be changed. Analysts say that deals like that pushed onto Denver would never be accepted by for-profit firms. Investment banks preserve such shenanigans to screw the public. Michael Bennet, who was the head of the school district pushing for the deal had worked for the Anschutz Investment Company—so he knew what he was doing. He was rewarded for his efforts—he is now a US senator from Colorado.

Magnetar, a hedge fund, actually sought the very worst tranches of mortgage-backed securities, almost single-handedly propping up the market for toxic waste that it could put into CDOs sold on to “investors” (I use that term loosely because these were suckers to the “nth” degree). It then bought credit default insurance (from, of course, AIG) to bet on failure. By 1998, 96% of the CDO deals arranged by Magnetar were in default—as close to a sure bet as financial markets will ever find. In other words, the financial institution bets against households, firms, and governments—and loads the dice against them—with the bank winning when its customers fail.

In a case recently prosecuted by the SEC, Goldman created synthetic CDOs that placed bets on toxic waste MBSs. Goldman agreed to pay a fine of $550 million, without admitting guilt, although it did admit to a “mistake”. The deal was proposed by John Paulson, who approached Goldman to create toxic synthetic CDOs that he could bet against. Of course, that would require that Goldman could find clients willing to buy junk CDOs. According to the SEC, Goldman let Paulson suggest particularly risky securities to include in the CDOs. Goldman arranged 25 such deals, named Abacus, totaling about $11 billion. Out of 500 CDOs analyzed by UBS, only two did worse than Goldman's Abacus. Just how toxic were these CDOs? Only 5 months after creating one of these Abacus CDOs, the ratings of 84% of the underlying mortgages had been downgraded. By betting against them, Goldman and Paulson won—Paulson pocketed $1 billion on the Abacus deals; he made a total of $5.7 billion shorting mortgage-based instruments in a span of two years. This is not genius work—an extraordinarily high percent of CDOs that are designed to fail will fail.

Previously, Goldman helped Greece to hide its government debt, then bet against the debt—another fairly certain bet since debt ratings would likely fall if the hidden debt was discovered. Goldman took on US states as clients (including California and New Jersey and 9 other states), earning fees for placing their debts, and then encouraged other clients to bet against state debt—using its knowledge of the precariousness of state finances to market the instruments that facilitated the shorts.

To be fair, Goldman is not alone — all of this appears to be common business procedure.

There is a theory that an invisible hand will guide unfettered markets to perform the public interest. In truth, unregulated Wall Street bets against the public and operates to ensure the public loses. Investment banks are now all corporations (and all have bank charters). Corporations and banks are chartered to further the public purpose. Why do we allow them the screw the public?

I don't doubt any of it. What makes you think I do? If it makes you feel better Goldman Sachs isn't doing to well over here lately.

Debt deflation in Greece and Ireland. That is what happens with austerity.

You don't fix a debt problem with more debt.

Malor wrote:
Debt deflation in Greece and Ireland. That is what happens with austerity.

You don't fix a debt problem with more debt.

Those that can pay debts, will, those that can't, won't.

In fact, the Fed encouraged such activity with cheap money.

They didn't just encourage it, Greenspan was out there actively cheerleading, and then flooded the market with liquidity any time the house of cards threatened to collapse. Bernanke did the same thing -- and they're still doing it. They announced 'quantitative easing' this week, which at zero percent, is essentially just printing money.

The Article wrote:

By contrast, the investment bank always wins, and its customers always lose.

One might be compelled to ask how that happens - and continues to happen. Why would customers sign up to always lose?

Investment banks are “self-regulated” (meaning, of course, they do whatever they want—sort of like leaving your 15 year old at home alone all summer with the admonition to “behave yourself” and keys to the liquor cabinet and the Porsche). Top management rakes off all the funds it wants with impunity. And then the CEOs go run the Treasury to bailout the investment banks should anything go wrong.

I highlighted the part which causes the previously mentioned unrestrained behavior.

This summer I was lunching with a trader who works for one of these investment banks (hint: there are not many left, and he was not with Goldman). Speaking of Goldman he said “those guys are good”. Indeed they are so good, he said, “I don’t know why anyone would do business with them.”

Good question. Why is that?

There is a theory that an invisible hand will guide unfettered markets to perform the public interest.

There is such a theory, strangely enough. Also, strangely, it requires the ability for companies and organizations to fail, and go out of business. Isn't it odd that the theory doesn't work when its conditions are not met?

In truth, unregulated Wall Street bets against the public and operates to ensure the public loses.

Unregulated? Perhaps he should check his sources again. We just bailed them out for a trillion dollars, and there are literally stacks of regulations - all of which did nothing to stop or even mitigate this activity. In fact, the Fed encouraged such activity with cheap money.

Investment banks are now all corporations (and all have bank charters). Corporations and banks are chartered to further the public purpose. Why do we allow them the screw the public?

We didn't allow it. We did it willingly and intentionally. There's a really big difference there.

Also, he misses a crucial argument - if these companies are not serving the public interest, or their customer's interests, then clearly they produce no social good, and letting them go out of business due to their bad decisions would be an unequivocally good thing, right?

Malor wrote:
In fact, the Fed encouraged such activity with cheap money.

They didn't just encourage it, Greenspan was out there actively cheerleading, and then flooded the market with liquidity any time the house of cards threatened to collapse. Bernanke did the same thing -- and they're still doing it. They announced 'quantitative easing' this week, which at zero percent, is essentially just printing money.

Liquidity is not the problem anymore. Sure it was the problem back in Greenspan's time but that was because Derivatives were not regulated, Credit agencies were giving AAA ratings and the sort. People were buying homes with no money down. These practices have stopped. (Most of it self-regulated, too bad self regulation comes after the mess.)

The problem now is solvency and debt-deflation. What Bernanke is doing now is neutral. Not a problem and not a solution either. Especially now that taxes are still too high.

People getting back into job market now want to pay back debts. This does not help the economy as a whole but rather keeps aggregate demand down. Unless as Richard Weiner has mentioned, credit starts expanding at a greater pace. Economy will not grow without that. In an economic sense this is why austerity is bad and government deficits is good.

The other side is government deficit is non-governmental surplus. (This is where corporate profits are going.)

When you issue debt, you have to repay it. You can't expand debt forever, because you have to pay interest on that debt. Each additional dollar in debt has a reduced stimulative effect on the economy, and eventually the interest payments overwhelm the economy and wreck it.

That's what happening now. A 'solvency problem' means that people took on too much debt; the economy already can't handle what it's issued. Putting more out there makes the problem WORSE, not better. It FEELS good, just like meth feels good to the meth addict, but it worsens the addiction. Do that long enough, and you will overdose and die.

Malor wrote:

When you issue debt, you have to repay it. You can't expand debt forever, because you have to pay interest on that debt. Each additional dollar in debt has a reduced stimulative effect on the economy, and eventually the interest payments overwhelm the economy and wreck it.

That's what happening now. A 'solvency problem' means that people took on too much debt; the economy already can't handle what it's issued. Putting more out there makes the problem WORSE, not better. It FEELS good, just like meth feels good to the meth addict, but it worsens the addiction. Do that long enough, and you will overdose and die.

No there are other solutions to debt besides just paying it back.

1. Bankruptcies.
2. Credit write-downs.
3. Renegotiation of terms.

Sure you can say that this is the same as paying it back but when it can't be paid back it won't be paid back.

The way the economy can handle the solvency issue is let governments run deficits until the economy gets back. Governments that issue their own currency cannot go bankrupt.

Governments that issue their own currency cannot go bankrupt.

A line straight from the Robert Mugabe economics handbook. The government won't, but the economy will be ruined.

Malor wrote:
Governments that issue their own currency cannot go bankrupt.

A line straight from the Robert Mugabe economics handbook. The government won't, but the economy will be ruined.

They did not go bankrupt. Like I said. They had a hyperinflation problem instead. Why? Because their money was not productive and not taxed and the printing of that money was used to pay back foreign loans in another currency.

What is the world's reserve currency? The Euro?, the Yen?, the Renminbi?, Gold?