Trade imbalances and the US$

Wookster

The demise of the dollar

The dollar: on its way out?
Currency markets were shocked to hear the Fed announce its intention to purchase $300bn of US treasuries and follow Switzerland, Japan and Great Britain into the murky territory of quantitative easing – the purchase of government bonds with money created for that purpose that previously did not exist. It triggered an immediate sharp fall of the dollar by 3.1% on a trade weighted basis, the biggest single move since 1985.

A glance at the chart below suggests a decisive top has now formed and the expected deterioration of the dollar is underway. Happily for portfolios, as the dollar fell sharply, gold rose significantly. The willingness of the US authorities to create as many dollars as they think necessary, irrespective of the consequence, is finally weighing on the currency as we would expect and driving investors to gold.

Not surprising, China, who hold $739bn of US treasuries are concerned that Washington puts its domestic economy needs before its creditors; inflation, should it occur, would cost them dear. The Governor of the Chinese central bank, Zhou Xiauchuan, has said that a reserve super currency could be created to replace the dollar's role as the reserve currency of the world. This would take the form of further issuance of International Monetary Fund's Special Drawing Rights. The SDR is a reserve asset that was created by the IMF in 1969 and has the potential to act as a reserve currency. To everyone's surprise, Tim Geithner then put his head above the parapet and said that Washington was open to China's proposals. He clearly got his bottom slapped and went back on his statement.

The point is this, the dollar's future is subject to growing uncertainty; Washington, as China realise, will just do what they have to do to save its banks and stop a deflationary depression from developing, they will worry about the status of the dollar later. They have decided that any risk is worth taking, the die is cast and it can't be stopped. Greenspan cut interest rates and held them too low, too long to put off what would have only been a bad recession. The very consequences of that policy encouraged the banks to stuff their balance sheets with colossal amounts of rotten lending. Now, endeavouring to save those banks and the economy from a deflationary depression America has put the dollar, as the reserve currency of the world, at risk.

For some time, we have been suggesting that not only has the dollar's run of strength ended but pound weakness would probably reverse. Two weeks ago we said that the yen was on the edge of delivering an important signal of weakness against the pound. As the chart below signifies, that signal has been forthcoming. It certainly seems that the pound's decline has ended and probably reversed. This has important implications for future inflation as costs of imports stabilise, not cheapen.

http://www.moneyweek.com/investments/the-demise-of-the-dollar-14701.aspx

One of the things that worries me most about the current crisis is the pressure it puts on trade balances. If any of the large holders of US reserves sold in bulk - like perhaps China will have to do to fund its own internal stimulus package there could be a run on the dollar and economic chaos.

Thought this article might be interesting in this context.

setmefree2

Wookster wrote: »

http://www.moneyweek.com/investments/the-demise-of-the-dollar-14701.aspx

One of the things that worries me most about the current crisis is the pressure it puts on trade balances. If any of the large holders of US reserves sold in bulk - like perhaps China will have to do to fund its own internal stimulus package there could be a run on the dollar and economic chaos.

Thought this article might be interesting in this context.

Why would China do that? They are making good money on US Treasuries at the mo.

It seems to me that it is a mystery to everyone of any note as to why China have such massive reserves. What on earth are they planning to do with them?

*MF*

setmefree2 wrote: »

Why would China do that? They are making good money on US Treasuries at the mo.

It seems to me that it is a mystery to everyone of any note as to why China have such massive reserves. What on earth are they planning to do with them?

The link below (which won't work on here (? because it links to China?) unless I use "dotcn" - change that) and it leads to an interview with Wu Xiaoling, vice-president of the National People's Congress financial and economic affairs committee.

She was also the ex-deputy governor of China's central bank, and former chief of the State Administration of Foreign Exchanges (SAFE).

Gives an insight into how the reserves are actually established, and howChina views their use - which, inter alia, may well explain why they recently called for a new reserve currency and away from the $.

Link here: (If you alter "dotcn and paste in your browser)

http://www.eeo.com"dotcn" /ens/finance_investment/2009/03/13/132204.shtml



Is it worth the hassle, lol - only you can decide - but if you have an interest in this, I think you will find it worth reading. How China acts, and why, is going to be high on the world's agenda (imho).


PS: It is in English

purch

If any of the large holders of US reserves sold in bulk

A very big IF !!!!

Your 'hero' :A Schiffidiot has been predicting this for years....

IF this doesn't happen of course, just about everything he has written (blogged) can be consigned to the scrapheap !!!!

............but of course he'll still be predicting stuff....and getting angrier and angrier :mad: as none of it actually happens :rotfl:

Wookster

purch wrote: »

A very big IF !!!!

Your 'hero' :A Schiffidiot has been predicting this for years....

:rolleyes:

The US has lived on credit for the last 50 years. Both the US & UK economy are crashing due to a withdrawal of that credit so too will the US$ status as a reserve currency come into question.

It simply cannot go on indefinitely. Furthermore nations such as China will need to sell some of their reserves in order to fund internal stimulus packages. That will surely exert downward pressure on the dollar.

Or perhaps you don't think so?

purch

Or perhaps you don't think so?

Who am I to dare doubt the words of the "Great Schiff" ????

The Dollar is finished !!!! Sterling will fold into the EUR !!!! and we deserve everything we are getting (even those who aren't getting it)



P.S. I'm not holding my breath either !!!!

setmefree2

Wookster wrote: »

Furthermore nations such as China will need to sell some of their reserves in order to fund internal stimulus packages. That will surely exert downward pressure on the dollar.

China is showing no desire to deplete its reserves though is it? China holds $1.5 trillion in foreign currency reserves. And they just keep growing them. This is despite the fact that China's people are poor - 800 million. 800 million poor people yet they consume less than half of their GDP and export capital to the rest of the (Rich) world. Go figure?

Nobody seems to understand why they are doing this. (Since the Asian financial crisis most Asian countries have kept large reserves of foreign currency of course but China have gone well beyond what is necessary to prevent a currency crisis.)....It makes no sense on any level.

Why are they loaning so much money abroad at low nominal returns? ...it makes no sense - yet they keep on doing it, there is no signs of a shift in strategy. Even if they did shift all their reserves to a new world currency it still would not explain why they are hanging on to such large amounts of money? Why aren't they spending on health, education, infrastructure and welfare?

The Chinese seem quite happy to talk about what currency their massive reserves are or "might be" held in, but unwillingly to explain why they are holding such vast amounts, which are creating imbalances, in the first place.

They don't look like they about to start spending their money so I should imagine the dollar is quite safe.

Look at this though:-

http://www.bloomberg.com/apps/news?pid=20601109&sid=awowbC9RbZiQ&refer=home
China to Boost Yuan Swaps, Payments on Dollar Concern

Is China up to no good?

purch

Is China up to no good?

Almost certainly.

Over time the Yuan will become a fully convertible/tradable currency, and the Currency Swaps will become fully deliverable, and no doubt the Yuan will become the reserve currency of choice thoughout SE Asia, and maybe beyond.

But it ain't gonna happen soon, and you'll grow old fast sitting around waiting/dreading for it to happen !!!

*MF*

For those who may find it difficult (or, lol, just can't be bothered) here are some extracts from the link I posted above - they may inform the debate, and they may (stresses may) answer some of the questions being raised..

The source for that link is - The Economic Observer Online (The EO). The article is from Mid-March 2009.

Extracts:

Source of some of the Reserves:

In 2003, the corporate sector's total balance in foreign currencies amounted to 51.9 billion US dollars; by year-end 2008, the balance was 98.8 billion US dollars. The growth rate was 13.7%, far behind China's exports and imports growth rate of 24.7% for the same period. This shows the corporate sector was not keen to keep foreign currency. In recent years, China has been recording surpluses in both its current and capital accounts.

When companies and individuals exchanged foreign currency at banks into Renminbi-denominated savings and cash, the commercial banks may not have enough Renminbi supply, so they would have to sell the incoming foreign currency to the Chinese central bank, which in turn build-up its foreign reserves.

On the central bank's balance sheet, foreign reserves were recorded as assets, which corresponded to the deposits and commercial papers that commercial banks deposited in the central bank. Foreign reserves thus reflected the Renminbi-denominated savings held by companies and individuals. To safeguard the interest of depositors, the central bank must strive to maintain and even add value to its foreign reserves.

How China views Reserves:

Though the foreign currency reserves are an asset of the central bank, they are also a liability--the central bank is indebted to society, and must be safeguarded.

Since it is a liability, the central bank must pay interest to savings and commercial papers held by commercial banks, and to do so, the reserves must be profitable.

Increasing public consumption:

The EO: Some have suggested distributing foreign currency reserves to the public to stimulate consumption. Is that feasible?

Wu: As I explained earlier about the source and makeup of the foreign reserves, they cannot be distributed freely nor used for public welfare spending.

The EO: How may the reserves be use for spurring domestic demand then?

Wu: In a broader sense, it is possible. For instance, the Ministry of Commerce recently led a procurement delegation to Europe to buy some 13 billion US dollars worth of high-tech products. If the purchases comes through, the payments will be settled in foreign reserves.

Risk Control: Reducing the Reserves

The EO: In 2008, China's current account surplus declined by 27% year-on-year, which slowed the growth of foreign reserves. How will this impact China? What are the risk-control measures?

Wu: The best way to minimize risk is to scale down the size of foreign currency reserves.

At present, China's foreign currency reserves tops the world. However, with the global financial crisis aggravating, we face greater risk. It is not as simple as the more, the better. The flow and ebbs of foreign reserves reflected the intensity of economic activities, and the flow of capital is a natural outcome of a globalized economy.

So, we need not panic over a slower growth in foreign reserves. This is in fact the direction to follow, to adjust the economic structure of the country, to reduce dependency on external demand. The way forward is to expand trade and foreign investment, and to reasonably reduce the size of the reserves.

Wookster

purch wrote: »

Who am I to dare doubt the words of the "Great Schiff" ????

The Dollar is finished !!!! Sterling will fold into the EUR !!!! and we deserve everything we are getting (even those who aren't getting it)

Is that the sum total of your argument? I'm sure if you look a bit closer you'll see that more than your Schiff mate see trade imbalances as a real problem.

setmefree2 wrote: »

Why are they loaning so much money abroad at low nominal returns? ...it makes no sense - yet they keep on doing it, there is no signs of a shift in strategy. Even if they did shift all their reserves to a new world currency it still would not explain why they are hanging on to such large amounts of money? Why aren't they spending on health, education, infrastructure and welfare?

The reason they can't spend on health, education etc is because they would need to sell their reserves, which are all US$ denominated, in order to fund such spending. Significant sales of their reserves will lower the value of the remaining reserves through devaluation of the US$. Interestingly China will need to embark on a stimulus package at some point and they will be forced to sell some US$ denominated reserves.

If you were Wen Jiabao, sitting on all those dollars, what do you think you could buy with them in the light of your own economy's growth staggering to a halt?

setmefree2 wrote: »

The Chinese seem quite happy to talk about what currency their massive reserves are or "might be" held in, but unwillingly to explain why they are holding such vast amounts, which are creating imbalances, in the first place.

As the single largest holder of US$ reserves how do you think the best way to protect your 'investment' would be? Would you take the Crash approach and announce your intention to sell before you do, or if you had decided to sell would you keep it quiet until you actually sold?

*MF*

Wookster wrote: »

One of the things that worries me most about the current crisis is the pressure it puts on trade balances. If any of the large holders of US reserves sold in bulk - like perhaps China will have to do to fund its own internal stimulus package there could be a run on the dollar and economic chaos.

Thought this article might be interesting in this context.

Leading on from your original post Wookster - one of the things I think history tells us is to anticipate social unrest in situations like this.

Think for a moment about the possible consquences, not just socially but politically, if GM and Chrsyler et al (the main US motor manufacturers) start to lay off workers - as seems likely.

Meanwhile this article appears in today's New York Times:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

Full story here:

http://www.nytimes.com/2009/04/02/business/global/02electric.html?th&emc=th

We live in interesting times - and "times they are a changing".