In case you missed it, ZeroHedge caught the announcement of a non-dollar-denominated energy deal between Russia and China:
Petrodollar Alert: Putin Prepares To Announce "Holy Grail" Gas Deal With China
China will sell US Treasuries to buy Russian oil, and Russia will stop borrowing from Western banks, is the general idea.
From my reading and YouTubing it would seem that the question on the mind's of the Russians and others who resent the dollar's hegemony as a reserve currency is this:
How destabilizing would it be to accept payment in another currency for our oil (Saudis), gas (Russia), or other heavily traded good?
The Chinese stopped accumulating Treasuries a year ago but along with the Japanese still own a bundle, and would like for the purchasing power of those securities not to fall while they're buying up real assets (land, capaital goods) in places like Africa.
My entirely subjective estimate is that if the Russians started asking for gold or Euros for their gas that the dollar would swoon but not collapse. As Yves pointed out the other day, that would technically speaking increase the desirability of our export goods, while dosing those of us stateside with some cost push inflation on our imported goods (oil, i.e., gasoline for most of us and other goods).
Meanwhile the Chinese are letting their yuan swoon a bit within a wider trading band, indicating that they are still in the race to the bottom as far as currency devaluation goes. The Russians are reported to be fighting the decline of the ruble by raising gas prices.
I keep hearing about the currency reset, how the feds will split off an international ("scheiss") dollar that will be about a third less valuable than the current dollar. I really don't know how you do this except through forex market interventions to debase the dollar by flooding the market with them. Could happen by dint of others' interventions as well. But as I say, not everyone abroad wants to see the dollar collapse.
There are some interesting articles on what’s going on in the emerging currency war, as the US struggles to continue to exploit its reserve currency status (and we really want to inflate and devalue, to boost exports don’t we? All the talk of strong dollar is just talk, isn’t it?). I am including a link to Ben Fulford’s update, though I can’t figure out if he is just a loony telling tales or has some inside knowledge of what’s going on in Asia. Certainly the American MSM keep us as wool-blind as they can.
I’m a little late to just how far the dumping of the dollar as a transactions currency has gone:
Via: www.zerohedge.com
Two weeks ago we wrote a post that should have made it all too clear that while the US and Europe continue to pretend that all is well, and they are, somehow, solvent, Asia has been smelling the coffee. To wit: "For anyone wondering how the abandonment of the dollar reserve status would look like we have a Hollow Men reference: not with a bang, but a whimper... Or in this case a whole series of bilateral agreements that quietly seeks to remove the US currency as an intermediate. Such as these: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", and now this: "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says."" Today we add the latest country to join the Asian dollar exclusion zone: "India and Iran have agreed to settle some of their $12 billion annual oil trade in rupees, a government source said on Friday, resorting to the restricted currency after more than a year of payment problems in the face of fresh, tougher U.S. sanctions." To summarize: Japan, China, Russia, India and Iran: the countries which together account for the bulk of the world's productivity and combined are among the biggest explorers and producers of energy. And now they all have partial bilateral arrangements, and all of which will very likely expand their bilateral arrangements to multilateral, courtesy of Obama's foreign relations stance which by pushing the countries into a corner has forced them to find alternative, USD-exclusive, arrangements. But yes, aside from all of the above, the dollar still is the reserve currency... if only in which to make calculations of how many imaginary money one pays in exchange for imaginary 'developed world' collateral.
Only Ron Paul, of all the candidates in either mainstream party, is speaking anything remotely resembling the truth about America’s status in the world.
George Washington has a nice piece on China’s recent insult to the credit quality of American sovereign debt, while Calculated Risk hosts a series on sovereign debt default risk worldwide, estimating the chances of default over the next five years in a really scary scenario.
Let’s hope that when the debt bombs begin to go off that Washington resists the temptation to start setting off the real bombs. The problem is, many other countries—including Japan—are likely to default before we are. That’s the bad news—it means that America participation in what I have called the Supernova of Bretton Woods II (fiat money) will not include outright American debt default and forgiveness, implying that an inflation will be necessary to depreciate the value of the debt (and we’ve got lots of consumer and business debt to inflate out, too; we’re near record levels of total debt/GDP).
In a deflationary environment like we’re in now, history shows that about the only way to get an inflation going is to go to war.
The two links above suggest to me that the risk of unprovoked or false flag “justified” attacks by the American eagle is very high right now. My research on the sinking of the South Korean submarine leads me to believe that someone other than the North Koreans did it; the North Koreans denied it, and the torpedo used was available on international black markets. the international commission was a sham. My guess is that the Israelis did it to get a war going somewhere, so they could pile on with their intensely desired bombing of Iran in a general attack on the “axis of evil.”
Resist Stupid Wars that are bankrupting our country and making us weaker as a people. Let your elected representatives know how you feel.
Via: Newsweek Big picture stuff worth reading.
First-rate video journalism. China has seen 20 million migrant workers from the countryside lose their jobs in the past year and slip away back into the countryside. Factory owners seem typically to run away leaving only a paper notice that the business has closed. Stratfor has opined that disparities between city and countryside are the Achilles heel of the Chinese polity, and this video confirms that social unrest may be rising in the form of greater demands for “human rights.” Workers from the countryside are alleged to “forfeit their civil rights” when they migrate to the cities. As with America, the problem of collapse of effective demand is distributional in the near term. How is Chinese capitalism any different from the American variant, and why should the tendency toward neo-feudalism be any less--if not pronouncedly greater? This is the problem posed by “the end of history,” or the “triumph” of neo-liberal-conservative sometimes “democratic” capitalism.
Growth theory tells us that a dollar or Yuan saved is not necessarily lost to final demand—it may be spent on capital formation. The Chinese need only to use their savings internally instead of loaning them to us to achieve massive amounts of capital formation. The government is firing up big infrastructure programs to do just that, while blowing some of its other bucks on energy and resource deals worldwide while the greenback is still worth anything.
I taught in Taiwan about a dozen years ago in an executive MBA program. The buzz in that part of the world then was incredible. I was surprised at the attitude of the Taiwanese toward the mainland, which at that time was beating up on Taiwan verbally pretty badly, with all kinds of threats of taking them over.
“We are all Chinese,” they said.
Tim Duy offers some dyspeptic comments on confidence and consumption similar to my own a few days ago. However, he (and the rest of mainstream economics) continue to ignore research (however obscure) indicating the adaptation level theoretic foundations of confidence determination (reference). Duy’s nice graph of year-over-year real consumption spending against the University of Michigan sentiment series inspired a similar effort with the “animal spirits” indicator that shows that real consumption spending is about to enter a growth phase. The contemporaneous correlation of YOY real C and “animal spirits” is about 0.63; the regression with constant has an adjusted R^2 of about 0.33. But the “animal spirits” indicator has proven extremely sensitive to turning points and trends, more so than the Michigan series.
This is consistent with my general view that the U.S. economy is entering a relatively brief “anti-deflationary” reflationary bubble that will resemble an ordinary business cycle except for the elephant in the room, namely, a growing national debt-to-GDP ratio coming on top of record levels of the ratio. If I had to bet on whether private sector deleveraging will outrun public sector leveraging, I would bet not. Not enough private debt is being written off. The U.S. has more debt than it can service now (see Comstock’s piece). In 1933 we were the world’s greatest creditor and could borrow easily. Today our currency is at risk of substantial depreciation. Our social contract is broken, with extreme inequality in incomes and wealth and a general self-defeating distrust of government by the disenfranchised. Our deflationary collapse has only stalled. The tragedy is that the rising “animal spirits” of the next several years will probably guarantee that no meaningful reform takes place—of the financial sector, of the government’s priorities and budget, perhaps even of health care. In this environment both fiscal stimulus and quantitative easing are fool’s games. The government should provide health care and livable workfare to the unemployed and limit any increase in spending. America is a basket case but the government won’t admit it.
Real consumption should grow 2.0-2.5 percent over the coming year, and may accelerate to about 5 percent YOY growth over the next four years, before the next downturn. Here’s the chart:
Forecasted “animal spirits” in blue, real YOY consumption percentage in red.
Via: www.nuwireinvestor.com h/t www.orlingrabbe.com
What Happens If The Yuan Replaces The Dollar As The Main Reserve Currency
Published on:
Wednesday, September 09, 2009
Written by:
Keith Fitz-Gerald
The chance that the dollar will be replaced by the Chinese yuan seems to be growing, as is China's determination to make it happen. With China's banking system holding 25 times the reserves of the US Federal Reserve, and the US adding trillions more to their debt, the days of the dollar's dominance may be nearing an end.
[snip]
The list of potential implications is very long, and includes several scenarios that are almost apocalyptic. But most of the outcomes raise as many questions as they answer.
Let’s consider the Top Five:
- Global Gloom Leads to U.S. Doom: The U.S. dollar goes into freefall for the simple reason that if no country has to hold dollars any longer, they won’t. Instead – thanks to the ragged state of the U.S. government’s finances – many countries will dump greenbacks fast as they can, which will only put additional pressure on an already-strained U.S. financial system, which in turn will further damage our economy.
- Inflation Inflates: Inflation will strike here with a vengeance, as anything bought, sold or priced in dollars will instantly rise in price to offset this fall.
- Repatriation Risk: With the dollar serving as the world’s de facto currency, U.S. companies bear very little exchange rate risk when the time comes to repatriate assets or make currency-related adjustments. That would change overnight and prices throughout the value chains would rise sharply to compensate.
- Money Costs More: The cost of money itself would rise. If the dollar falls, not only will there be massive selling pressure against it, but the cost of borrowing it will rise dramatically as lenders raise rates to cope with the increased risk of dollar-based transactions.
- Death By Debt: And finally, if there is another reserve currency, other countries will no longer have to buy our debt, and you can guess where that will leave us – especially given the fact that we’ve taken on trillions in new debt to help finance our way out of our current mess.
My best guess is that we won’t see any one of these things in isolation, but will instead experience a blending of several or all of them. To the extent that China continues to absorb our inflationary influences, buy our debt in measured doses and maintain its reserves, we’ll probably have a measured decline in the value of the dollar – but not the catastrophic fall many in the doom, gloom and boom crowd are predicting. At the same time, I also see the IMF change course in the next few years to reflect China’s increasingly substantial influence and monetary power.[…]
Data monthly to July. With Total Capacity Utilization at 69 percent and still very high levels of uncertainty in the financial markets, it is difficult to see investment spending adding much of a kicker to aggregate demand. The political will for much additional government stimulus spending appears to be lacking. Net exports are constrained by economic weakness abroad. Consumption spending will continue to be depressed by increased saving and additions to the ranks of the unemployed, especially those not covered by unemployment insurance, and shrinking overall employment. Hence, an L-shaped recovery appears likely in the intermediate term. A further debt-deflationary collapse may follow in about five years.
As measured by the BLS, inflation appears to have returned to an Oh-Oh Decade trend rate of ~2.5 percent. Declining value of the dollar will put pressure on inflation through import prices, constraining physical demands and further discouraging investment.
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