Thursday, June 18, 2009

A 'run' on the Dollar...

Greetings good citizen,

As the nation that has ‘dominated’ the rest of the world through both our military might as well as our dominance of the financial markets, the people ‘managing’ our collective future have screwed up big time.

The ‘responsibility’ of maintaining the global reserve currency has invariably lead to the defacto establishment of a global ‘empire’ that nobody, to-date, has been able to handle.

Which brings into question the notion that any one ‘national’ currency can serve the economic needs of a growing world.

Until a ‘dollar’ is a dollar, no matter where it is coined, becomes a reality, the ‘manipulators’ among us will continue to exploit the ‘differences’ between currencies to their own advantage.

While the ‘rest of the world’ would benefit greatly from a ‘universal’ dollar (well, it would once we eliminated dictatorial regimes that put the leader’s well-being ahead of the people of those nations.) The above ‘rumblings of the ground’ do not lead in that direction.

So we arrive at a situation where we examine the recent push to ‘marginalize’ the US dollar as the world’s reserve currency.

[Tonight’s offering was ‘lifted’ from Jesse’s Crossroads Café.]

BRIC, SCO Discuss Super-Sovereignty Currency, USD Alternatives

By Scott Zhou
June 16,2009

China continued to consider a “super-sovereignty” currency among the countries of Shanghai Cooperation Organization (SCO), an intergovernmental mutual-security organization that met today in the Russian city of Yekaterinburg, in the Urals at the division of Asia and Europe. Members include China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan, with India as one of its four observers.

Right after the SCO meeting, the BRIC country’s (Brazil, Russia, India and China) leaders met formally for the first time. It is not merely coincident that three of them have expressed a desire to adjust their foreign exchange reserve portfolios by reducing the share or volume of US dollar assets.

China has just halted the increase its holding of US Treasury debt. [Not a good sign.] By the end of April, China held $763.5 billion of it, a fall of $4.4 billion, month on month, the first time China has reduced its Treasury holdings. Since May, 2008, China has increased its holding by $260 billion.

Inside China, USD is a hate-more-than-love story. Analysts have long argued that China should be very cautious on buying US government bonds since dollar is bound to weaken. Others hold that US treasury debts are still the best and first choice for China's near $2 trillion foreign exchange reserve.

In March, Madam Hu Xiaolian, the chief of China's State Administration of Foreign Exchange and a deputy governor of the People's Bank of China, China's central bank, said that investing in US national debt is an essential part of China's reserve management. But while continuing to buy US national debt, China is concerned about the risk of the fluctuation in value of its assets. [With good reason, US ‘five and dime’ stores have morphed into ‘Dollar’ stores…because a single nickel or a dime will buy you precisely squat!]

China has announced that it would buy up to $50 billion in bonds issued by the International Monetary Fund (IMF). Meanwhile, Russia and Brazil have said they are planning to buy up to $10 billion in IMF bonds, which would mean selling Treasury bonds. India has expressed the same interest. In April, China, Russia, and Brazil all reduced their holdings of US treasury debt.

China now believes that a long-term dollar decline is inevitable, and the risk to the value of its $2 trillion foreign exchange reserve has become realistic, if not imminent.

China has been a huge beneficiary of the order of the world economy and a monetary system with the US dollar as the reserve currency. China's economy has been anchored by a stable dollar exchange pegged by China's currency, RMB.

But the financial crisis has given China a wake up call that the present monetary system is not sustainable, and neither is China's foreign exchange regime and mode of economic growth, which has been largely based on relentless exporting.

What, then, is the role RMB can play in the future? Russia has been urging China for years to settle their bi-lateral trade in their respective currencies. Brazil intends to trade with China by RMB and the real. Recently Russia suggested making RMB convertible to become an international reserve currency.

China can not challenge US directly. The BRIC summit is a convenient platform for China and the other BRIC powers, set to become the 4 of the 6 largest economic entities by 2050, [This makes the astounding assumption that the US economy will somehow survive.] to put a bit of pressure on the US. Held before the first China-US Strategic and Economic Dialogue in late July in Washington DC, the BRIC summit may give China some leverage in dealing with the US.

Russia is ready to use its exchange reserve to buy securities issued by BRIC countries. In return, Russia hopes the others will be willing to buy financial instruments issued by Russia. The leaders discussed increasing of the share of settlement currencies for trade among them. They also discussed adjusting their reserve assets portfolio in a coordinated way.

At the SCO meeting held just before the BRIC summit and attended by China, Russia and India, China proposed to research the feasibility of using a super-sovereignty currency among SCO member countries.

Kazakhstan president Nursultan Nazarbayev proposed that trade among SCO countries be settled by currencies of member countries. He also suggested that a super-sovereignty currency used inside the SCO eventually become a SCO reserve currency. Russian President Dmitry Medvedev also supported the idea.

Between the croaks of the ‘de-flationists’ and the renewed shrill cries of the ‘hyper-inflationists’ lies the much forewarned about issue of a ‘run’ on the US dollar.

Even today ‘well-placed’ sources insist that a run on the dollar is ‘impossible’. (Mostly because there isn’t another currency in position to take the dollar’s place…or so these experts think.)

Aside from the issue of other central banks avoiding buying additional US debt, we have a different problem, one that has been brewing for quite some time. One we see has finally surged to the forefront of our collective ‘creditors’ agendas.

Should they sell their dollars for whatever they can get for them in one big rush, or should they slowly try to use them to buy as many ‘hard assets’ as they can before it reaches the point where no one will accept them?

Did any of you notice that these large creditor nations aren’t rushing to convert their dollars into Euros? Why do you suppose that is? Could it be because the Euro-zone consumers are as heavily indebted as US consumers are?

The ‘jig is up’ good citizen, the Bric nations know they won’t be selling very much into either the US or the Euro-zone as long as the consumer is ‘down for the count’.

It’s a fool’s game to keep buying the debt of bankrupt nations when the likelihood of default is looming so very large on the near horizon.

Does anyone remember my warnings of collapsing supply lines? Don’t look now because here it comes!

And no, I’m not talking about tomorrow or next week, they’ll hold off until near the onset of winter…then we’ll get hit with suddenly worthless currency.

Will it happen ‘overnight’? Yep, pretty much. It will be like the gas lines of the mid-Seventies, one-day everything was fine, the next, there was no gas!

For a more recent example, it will be like August 2007 when, just as suddenly, the engine of our economy seized solid after nobody wanted to buy our ‘primary export’ of financial derivatives.

Worse, if the ‘government’ wasn’t buying derivatives via Fannie & Freddie, no one would be buying them now either because they don’t trust us!

Which is another way of saying that our economic engine doesn’t exist and hasn’t been replaced.

What does the US make? Debt. How does the US pay its debts? With more debt!

All so a few could be rich…

Thanks for letting me inside your head,


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