Posted on 11/29/2006 5:30:58 PM PST by GodGunsGuts
WILL CHINA LEAD A STAMPEDE OUT OF THE US DOLLAR?
by Gary Dorsch
Editor, Global Money Trends Magazine
November 29, 2006
The $2 trillion per day foreign exchange market never sleeps. Yet for the past six months, the big-3 central banks, the Federal Reserve, the European Central Bank, and the Bank of Japan managed to lull the currency markets into a deep trance. Since last May, the big-3 central banks corralled the US dollar to within a 3% to 5% trading range against the British pound, the Euro and Japanese yen.
The big-3 central banks utilized their three major weapons, (1) relentless jawboning, (2) Japanese threats of intervention, and (3) coordinated rate hikes, telegraphed far in advance to avoid any nasty surprises in the markets. But the big-3’s spell-binding magic act began to wind down on November 25th, when Chinese deputy central banker Wu Xialong jolted the foreign currency markets, warning other Asian central bankers of the future risk of a US dollar devaluation.
Beijing is having second thoughts about the composition of its $1 trillion portfolio of FX reserves, with 70% held in low yielding US fixed income securities. “Firstly, long-term US interest rates are falling. Secondly, the exchange rate of the US dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for east Asian reserve assets,” Wu said.
On October 10th, Fan Gang, another member of People’s Bank of China’s policy committee, made similar comments, “China risks an erosion of its holdings because the US dollar will probably decline.” On August 29th, Gang wrote, “The US dollar is no longer a stable anchor in the global financial system, nor is it likely to become one, therefore it is time to look for alternatives.”...
(Excerpt) Read more at financialsense.com ...
You have the answer there but one cannot speak the word without being forever after discredited. People will not abandon the idea that the expert with the right ideas can make the economy into anything he desires, bring Utopia to reality just by manipulating things.
Where is your answer?
Are you a free-market purist?
Are you therefore suggesting the Fed Reserve is a branch of government??? It isn't. And I pray it never IS under the "wing" of the executive branch.
It responds to the policy desires of the president even though it is not actually controlled by the president.
It [Fed Reserve] responds to the policy desires of the president even though it is not actually controlled by the president.
The Federal Reserve is a separate entity. It is not a "special" branch of any President sitting in office.
Monetary and fiscal policy is set by a central bank operating free of most political pressures.
"Don't Tread on the Fed" by Martin and Kathleen Feldstein, The Boston Goobe, November 12, 1996:
The Fed is an independent agency that reports to Congress but doesn't take orders from anyone. Monetary and fiscal policy and short-term interest rates are determined by te Federal Open Market Committee (the FOMC) which consists of the 7 governors of Fed plus the 12 presidents of the regional Federal Reserve Banks.
But fools like D-Paul Sarbanes and D-Henry Gonzales, during the 1990s, kept trying to pass bills to make the FED accountable to one or the other of the branches of congress.
It really peeves Democrats that they can't force an independent entity, the Fed Reserve, to do whatever the hell Democrats demand.
Par usual for control freak, passing out favors for votes, Dems.
Who are you and what have you done with Mase?
Maybe arthurus misses America's golden (hehe) days when we were on the gold standard and had perfect price stability.
What do you say, arthurus, is that it?
Per Friedman, inflation is "always and everywhere a monetary phenomenon." Congress' macro act was the 2003 marginal tax rate cuts, allowing the economy to grow faster by keeping more of its earned capital. The Fed always holds the key to stable money by draining liquidity to prevent the dollar from losing value. But the Fed has to act rationally, which it fails to do repeatedly.
I suspect you ignore the actual flexibility of the value of the dollar. Real GDP versus nominal GDP tends to show that variance. Are you arguing for a "board" with no rules, then?
You appear to admire the dollar's "flexibility" in changing value. I do not, because every change in the dollar's value burdens individuals and businesses with the task of adjusting prices and wages to maintain value. This is a great drag on economic growth. I am not arguing for a Fed with no rules. To the contrary, a money rule ought to be imposed on the Fed if it will not adopt one (presently the Fed uses what amounts to intuition to determine when it feels like the funds rate target has reached its "natural" level). The money rule ought to require the FOMC to drain liquidity by selling its Treasury securities until the gold price reaches $400/oz, and then add or drain liquidity as necessary to keep it there on a continuing basis.
If you've gotten that impression [that the Fed is intentionally weakening the dollar as a "temporary inflation measure"], it's wrong. The Fed is not "intentionally weaking the dollar for the sole purpose as a hedge against "temporary inflation".
Here is what you stated in a previous post: "Fed Chairman Bernanke made clear months back that this move FOR US exports would be occurring. For this to "occur", the dollar must drop, making our produced goods more attractive to the buyer." Are you saying the dollar "must drop" unintentionally?
This [higher funds rate targets are weakening the dollar and causing more inflation] is, in fact, a true assessment. But will it result in the horrid inflation of the 60s? Not necessarily. Long term, these actions are strengthening the dollar in real terms across all market sectors. Which ultimately results in the dollar buying more rather than less.
Respectfully, weakening the dollar as we have done since 1971 (the dollar is now worth a little more than five cents of the 1970 dollar) is not a recipe for strengthening the dollar over the long term. Particularly this is so when the Fed really does not understand the consequences of its actions.
I think I'll stop in responding to your previous post at this point and see whether this has been helpful. Thank you for commenting.
Ah-- my error, I was tweaking my browser settings and by accident I left the unchecked the sarcasm tag (screenshot at right).
Anyway I'm all rebooted and I can see what's going on; I'm just lucky today isn't a trading day-- who know's what I might've done without realizing it...
Sorry about that guys...
I'm still here - the goldbugs haven't converted me yet - but in the future I'll remember the sarcasm tag to remove any doubt. I've heard so many times now about how all this cheap money Greenspan foisted upon us has created the so called housing bubble that's going to destroy our economy.........someday. Anyway, just yesterday Greenspan came out and claimed that the worst of the housing decline was over and that we should see a recovery in 2007.
Now, the goldbugs will howl about this and claim that Greenspan has lost his marbles but, in the very next post, they'll show us quotes from Greenspan supporting a return to the gold standard. I guess Greenspan is only right in the head when he supports their ideas and he's just plain crazy when he doesn't. No one ever accused goldbugs, or protectionists for that matter, of being consistent.
Maybe not accused, but I'll confess that I keep hoping. It's like over on this thread how Todd and I keep trying to explain to Ross how the fact that our factories are making more is not cancelled by how much we import.
You are talking about menu costs. The value of the dollar does NOT vary to the degree which leads you to bring up menu costs, and hopefully you really DO know this.
Here is what you stated in a previous post: "Fed Chairman Bernanke made clear months back that this move FOR US exports would be occurring. For this to "occur", the dollar must drop, making our produced goods more attractive to the buyer." Are you saying the dollar "must drop" unintentionally?
Intention or unintentional -- is irrelevant to what the market bears and the purchasing mentality of buyers.
Exit gold and put the proceeds into 18%, 30 year Treasuries !
BUMP
If this were true then Aregentina could have just thumbed their nose at the World Bank.
But their currency was devalued and their bonds downrated.
This is what is happening to the dollar.
We are following Argentina down the rathole.
BUMP
The answer: Yes of course China will panic and sell all dollar demoninated investments in stocks, bonds, real estate and tax deferred annituities to mention a few. Then they will either buy PESOs(Philippine/Mexican/Tahitian) in quest of beach-front properties for conversion to fish farms or Saudi dinars suitable for framing.
The decision to buy Francs (Swiss & Barney)was rejected because of a troublesome splinter group/minority of Tibetan monks on the investment commitee and their loud demands for fish oil. As there is no fish oil futures on the CBOE or Heng Seng commodity floors, their petition was honored. The dollar was doomed at that critical moment.
Teach you children to speak Mandarin, not Cantonese or Fukien. Everything in "White Lotus" is unfolding.
It fits you once again.
I'm not familiar with the "menu costs" phrase. From 1996 to 1999, the dollar gained nearly 50% in value relative to gold. It remained deflated to 2002, reached equilibrium in 2003, and has lost about 50% since then. Plenty of change in value to do a great deal of damage all over the world.
Intention or unintentional [changing of the dollar's value] -- is irrelevant to what the market bears and the purchasing mentality of buyers.
Whether the change in the dollar's value is intentional is very relevant, because it tells us whether the Fed can actually achieve what it is attempting to do with its monetary "instrument," the funds rate target. If it is unintentional, then the Fed is unable to do what it argues its funds rate instrument is intended to do. I think the dollar's weakened condition is unintentional, and that the funds rate target policy is doing the opposite of what the Fed intends it to do. If there is a run on the dollar, a jump in the funds rate would be precisely the opposite of what should be done.
After looking at your profile, we seem to agree on a number of things regarding foreign policy. But I'm surprised that you would be comfortable with the Fed managing what the markets will bear and the purchasing mentality of Americans.
No. A pure gold standard would put gold way beyond the reach of all but the wealthiest who would like to have jewelry. However a Fed policy that targeted gold to keep the price stable would do wonders for inflation and for foreign investment in the American economy. Specifically maintaining the price of gold is not cecessary to attain sound money butt that method is much easier than any other method and does not invite chicanery as "basket of goods" does. With guaranteed noninflation we would have a safer steadier economy to invest in. The Fed can do that with the same type of open market trading that it does now, or by other means. There are NO benefits to inflation. Manipulators have political objectives and the manipulation is always deleterious to the economy because manipulators cannot wait for the results of their manipulation to become apparent. They have a much shorter horizon than necessary to even know what the economy is going to do and the answer is not to simply wait an appropriate amount of time to see the results of the "adjustment" because it is the very nature of manipulators, however august their academic reputations, to be working on a political agenda and such agendas always have political horizons i.e. very short. Inflation is always resorted to for the purpose of repudiating a portion of the Debt. If you do it to eliminate some of your credit card liability you will shortly be a defendant. When the government does it it is still theft even though neither Bernanke nor Bush will be carted off to jail for it. And it is economically bad, morally wrong, and just plain sleazy. The government is trying to delude the rest of the world about the value of its money. Technological sophistication in the methods of inflation do not make the practice any more honorable than the shaving of silver and gold coins as once was the method of inflation.
As long as the US government spends more dollars than it takes in, the dollar will be vulnerable because there are only three ways to finance the deficit - taxation now, borrow and tax later, or print more dollars.
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