Tag Archives: reserve currency

Further Currency Developments…

Gold hit $1067.00 today, and the dollar has continued to weaken against other currencies, including the Yen and Euro.  In addition to the factors previously mentioned below, I just came across another article that adds a piece to the reserve currency puzzle.  According to an article from the Telegraph, last month the Chinese offered their first issuance of government debt that foreigners are allowed to acquire.

This is a rather important development, because any currency that aspires to fill the role of the World Reserve needs to be “backed” by internationally negotiable government debt.  If a country wants to sell its oil, right now (unless it is Iran, which is taking Euros) it accepts Dollars.  It then uses those Dollars to buy other goods and service that it requires on the world market.  However, what happens if that country has a trade surplus; that is, sells more goods than it buys?  It can put that surplus into commodities and private companies (as middle eastern “sovereign wealth funds” have done), but such strategies are risky and not very liquid should the country need a big wad of buying power in a pinch.  As they are backed by the power of the State to tax its citizens, Dollar denominated government bonds are the easiest place to park a surplus, and are as close to cash as a government can get in terms of liquidity.

Thus, this move by the Chinese government allows a country the option of selling its surplus for Yuan rather than Dollars, as it allows for a liquid, low risk place to park those Yuan.  This will begin to allow China to print more money than its own economy requires (just like the USA does now), meaning high value money enters the world economy in China and then loses value as it filters to the rest of the world.  American prosperity since the 1970s has been built on the rents collected from this system of inflation-exportation, and the Chinese are edging in on our hustle.  I wonder: at what point will the Federal Government be forced to openly acknowledge the economic warfare that they’re waging behind the backs of the American people?  An honest discussion of this inevitably leads to the problems inherent to a monopolized money supply*; this is why Dr. Paul’s Free Competition in Currency Act needs to be passed (but was assiduously ignored).

On the other hand, the Second Vermont Republic has just issued one ounce silver coins; I’m thinking a bit of silver might not be a bad call as a hedge given what the price of the yellow stuff is doing…

[UPDATE] – Looks like the American mainstream media (outside the financial press) is finally picking up on this story![/UPDATE]

* What follows is an excerpt from Kevin Carson’s “The Iron Fist Behind the Invisible Hand” discussing the money monopoly: Continue reading

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More damning dollar news…and perhaps a war brewing?

As the result of a series of meetings between high-level central bank officials (from which the US was excluded), the Independent is reporting that:

Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

The transitionary currency, according to Chinese banking sources, may be gold, (which would explain the recent spike in the price of the yellow metal).

The article also notes that:

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Which makes the recent US preparations for war with Iran make a bit more sense . . . looks like we’re going to be in for a rocky ride.

*UPDATE*

For some background on what is at stake in the reserve currency fight, check out this post.

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Brutalization of the Greenback Continues…

In the last month, the Dollar Index (a measure of the Dollar’s strength when compared to a basket of currencies) has lost almost ten percent of its value.  As an article in Bloomberg today confirms, the talk of a new world reserve currency to replace the Dollar is becoming more and more serious, with direct proposals coming from Russia complementing the more subtle maneuvers of the Chinese government.  For a more in depth analysis of the reserve currency issue, check out this recent post.

For those who’ve been following this issue, the most important new development in this latest artcle is that “smaller reserve banks” may have started today’s sell-off.  If this is true, it means that divestment from the Dollar is becoming an official policy of the governments of small- to mid-size countries; such a reality could force the hand of larger Dollar holders (read: the Chinese government and Persian Gulf states) which would precipitate the long-dreaded crisis.  The possible development of this dynamic will be something to watch for in coming weeks.

*UPDATE*

A recent statement from Chinese central bank advisor Yu Yongding.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds’,” Yu said in an interview yesterday. “The euro is an alternative. And there are lots of raw materials we can still buy.”

Sounds like commodity buying time to me!

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President of the World Bank Refers to Fiscal Stimuli as a “Sugar High”

Check out this article on Bloomberg.  He also mentions the vulnerability of the Dollar’s reserve currency status, although he continue to toe the party line that there is no alternative to the dollar in the near future.  To hear someone as high up in the financial elite as Zoellick discuss these issues and dampen the celebration of the economic “green shoots” is indicative of just how deep the shit we are in truly is.

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Reserve Currency Watch

The Chinese currency’s challenge to the dollar is finally hitting mainstream media outlets, thanks to a recent editorial by Nouriel “Dr. Doom” Roubini in the NY Times. We at ASR have been watching this unfold for a few months now with growing consternation; hopefully Roubini’s editorial will mean our public officials will have to begin confronting the reality that our Dollar based hegemony is crumbling, and that soon we’ll be as bound by the same economic laws as every other country. We’ve gotten used to diluting our inflation in the ever-growing pool of foreign held dollars; without that outlet, we’re going to have to totally rethink the fiscal policies of the Federal government. Soon, we’re going to have to confront the hard choice: live within our means or experience hyperinflation. We’ve gotten used to having our cake and eating it too; this is going to be a very rude wake-up call for many, many people.

*UPDATE*

The story has also been picked up by the London Telegraph!  Keep the meme spreading!

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The Dollar, the Yuan, and Global Hegemony

I’ve been watching China’s brilliant maneuvering of its currency into position to seize the US dollar’s place as the world’s major trading currency for some time now, but up until now most of the discussions around the topic have been fairly general.

This state of affairs has been changing quickly, however.  At the beginning of April, I noted that China had initiated a currency swap with about half a dozen of its trading partners that was worth $95 billion.  This essentially meant that those countries would be able to buy Chinese goods in Yuan rather than dollars, which in turn would mean that the Chinese Government would have $95 billion less that it would need to roll over into US Treasury Bills (at a time when the Government will be attempting to fund a record deficit).

Shortly after reading the article, Thomas Naylor of SVR mailed me a copy of a recent issuer of the American Conservative.  In it was an amazing article that first lays out a very believeable worst case scenario, but then backpeddles to accept the conventional wisdom that the Chinese are as codependent on the Sino-American economic system as America is.  The assumption is this: if either breaks the status quo of Chinese savings subsidizing American overconsumption, the whole world economy goes down in flames.

I don’t fully buy this viewpoint.  Yes, China would lose a metric fuckton of wealth if the dollar crashed, wiping out the value of its T-bill holdings (which presently stand at around a cool $1 trillion).  However, everyone seems to forget the magnitude of the rent that possessing the world’s reserve currency allows a sovereign government to extract from the rest of the world.  We as Americans seem especially apt to forget about it, seeing as we’re its primary beneficiaries.  Politicians like to cloak post-WWII American economic dominance in terms of American Exceptionalism: we’re the greatest country in the world, have the most innovative people, yada yada yada.

The real reason for our prosperity is far less grand and ego inflating: since everyone else in the world uses dollars to trade amongst each other, we can export our inflation.  We can print money at a rate that would cause hyperinflation in any other nation, but in our case the pool of money in circulation is much larger than our own economy would ever require, as every country that wants to buy foreign goods must have dollars.  The newly created money enters into the American economy first, when it has the most value, and by the time it trickles to the rest of the world its value has begun to decline.  This process transfers real wealth (in trans-monetary terms) from the countries that use dollars to the United States.

I don’t know the exact figures for how much this rent translates to each year, but it must be enormous, and I’m going to do some research in the coming weeks to see if I can find a hard figure.  However, understanding this process casts the Sino-American relationship in a wholly different light; one that leaves China with a strategy with which to make an end run around the supposed economic mutually assured destruction that protects both American hegemony and the “American Way of Life”.

Essentially, I envision in my mind’s eye a very simple spreadsheet somewhere in a bland concrete office building nestled in an obscure suburb of Bejing.  In one column is the total losses China would incur if the dollar crashed.  In the second column is the total losses they’d incur if they instigated the dollar crash (column two would be substantially less than column one).  And in the final column would be the yearly inflation-export rents that China would accrue should the world substitute the Yuan for the Dollar as the reserve currency.  Unrest and unemployment is increasing in the Middle Kingdom as the government fails to meet its growth targets; that column 3 subsidy is starting to look more and more appealing.

This would functionally work out because the Chinese government has kept the Yuan artificially below the value that a free market would bear.  As such, if the dollar crashed it would make sense for the Chinese government to stop subsidizing the Yuan.  In a world where most wealth is stored in dollars, people would be desperate for some safe haven from the T-Bills that turned into time bombs.  A rising Yuan would fit the bill, and as more people fled to it, the value would further increase, letting the Chinese government export its inflation in EXACTLY the same way that we have been for the last thirty years.

Now, the fact that this hasn’t happened yet means that there are still barriers to the Yuan effectively functioning as a global reserve currency.  However, some of China’s best economic minds are hard at work, as this article from the Asia Times demonstrates.  They have started a pilot program for certain export regions to settle their trade balances in Yuan rather than dollars.  While this program is limited in scale, when combined with the PRC Government’s currency swaps with other countries, it seems the prototype for a Sino-Centric economic order is becoming quite robust.  Let’s just say I’m glad I have some very trustworthy friends who speak Mandarin.

Update: The Chinese Government just released their gold reserve numbers for the first time since 2003, and they’ve been buying.

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One more step towards the demise of dollar hegemony

I’ve been talking about the potential for the replacement of the US Dollar with the Yuan as the world’s reserve currency for a while now, but even I’m shocked with the brazenness of the latest development.  I’d recommend reading the whole article, but basically the Chinese central bank has provided $95 billion dollars worth of Yuan to Argentina, Belarus, Hong Kong, Indonesia, Malaysia and South Korea in currency swaps so that those nations can buy from China directly in Chinese currency rather than first converting their own Currencies to Dollars.  When a nation buys from China in Dollars, China then needs to do something with that money.  It uses some of it to purchase goods from overseas, but, as it is running a trade surplus, China is left sitting on billions of surplus US Dollars each year.  The traditional thing they’ve done with these dollars is buy US government debt; however, that $95 billion worth of Yuan is $95B that they won’t need to roll into T-Bills.  And this in happening at a time when the largest deficit in recent history needs financing.  Time to warm up those printin’ presses, I smell some hyperinflation on the horizon!

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What’s behind your dollar?

"okay, it's your turn"

"okay, it's your turn"

The dollar is ‘good as gold’ is an assumption that everyone who is alive in America today has held since they were born, because the saying used to have some truth behind it.  We were a nation that did substantially more producing than consuming, which coincidentally, was at the same time when the other developed countries of the world were wiped out by WWII, so leaders representing these industrialized nations got together and decided to peg their currencies to ours.  A key element to this original agreement was that at any time, the US would acknowledge a country’s request to convert their dollar holdings into gold, which did back our currency then.  Fleeting gold reserves from the US was not a concern for our policy makers, because with such a high demand for dollars, who would want to convert them into the cumbersome metal?  So even though every ounce of gold represented a specific number of dollar bills, the value of convenience is what drives people to paper money. 

The scenario changed substantially when President Nixon officially took the dollar off the gold standard in 1971.  Foreign nations were no longer guaranteed a fixed weight of gold for their dollars, but the demand for dollars continued because it retained the purchasing power accrued from our industrious past.  So now, with no immediate foreign obligations, Americans were able to gorge themselves with nearly four decades of consumption, like a Beverly Hills teen taking her daddy’s credit card to the mall.  Well China has had enough and is making official proposals that the world find an alternative reserve.

Whether it be the Yuan, or a new currency created by the IMF, it would change the image of America in a drastic way, because currency control is the highest power human beings know how to attain.  We do have some time, because unravelling the holdings of US dollars around the world would be an arduous process, but it will certainly happen if the people we have elected to office continue to walk blindly down the road of inflation, thus perpetuating our loss of global credibility.

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Chinese Government: Commodities Investor?

A friend of mine recently emailed me a Reuters article that notes that China’s strategic oil reserves have reached 100% capacity, and they’re considering building giant floating tanks so they can keep stocking up @ $40 a barrel.  They’re able to do this thanks to their enormous dollar reserves; in addition to hoovering up enormous amounts of oil, China is “us[ing] its massive foreign exchange reserve to stock up key commodities from grain to metals to crude oil, and last week Beijing announced that it would boost its budget for stockpiling resources by $10 billion.”

I have to wonder if this is the first stage of China’s attempt to recenter the world currency system on the Yuan; all of those dollars that are being dumped into commodities are not being recycled into T-Bills as they’d been in years past.  This is especially troubling as the massive Federal deficits under the bailout regime will need to be funded by unprecedented bond sales.  If the Chinese stop subsidizing our bonds’ interest rates, we’ll need to start paying a premium to fund our deficit and refinance massive old debts.  Our economy would go “thud” as the government was forced to fall back on the already weakened domestic capital markets, thus sucking any of the capital that’s left for private enterprise into the twin black holes of the “stimulus” and the zombie banks.  In the event of a dollar crash; what looks like a safe haven?  Perhaps a currency that is backed by enormous commodity reserves?  I just might look into getting me some Yuan… This has been an idea I’ve been ruminating on for a while; I’ll go more into it in a future post, but for now I’m worried to say the least.

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