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WILL CHINA LEAD A STAMPEDE OUT OF THE US DOLLAR? (Very informative charts!)
FinacialSense ^ | November 29, 2006 | Gary Dorsch

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 ...


TOPICS: Business/Economy; Editorial; Foreign Affairs; News/Current Events
KEYWORDS: 1933saintgaudens; aeschinagenerating; cedeco; diversification; dollar; qih; quantum; redchina; sorosfund
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To: WashingtonSource
It goes back to China's REFUSAL to purchase our exports. They still have "most favored nation trading status". We buy "their stuff"; but they don't buy ours. Plus, there's not much room whatsoever for Chinese citizens to purchase/invest on the open market. The government run banks decide WHERE and HOW savings must be directed. Ergo, as the dollar falls (as it was foretold, so the US can move their exports); China feels the competitive heat on a tri-fold level, the third being, will Chinese citizens revolt and stage fury if the government investments decline, ability to sell their own exports rises?

You are right about the European central market. A Cabal to bring down the dollar? No. It's called "planned economy".

Milton Friedman, for one, has proven that inflation is largely a myth. And it is a myth created by those who like to invent hysterical reactionism as a means to "persuade" the investor.

I have happily noticed that our budget deficit has declined; and this ultimately means that while we are moving our exports, our dollar is long-term much stronger.

41 posted on 11/29/2006 6:59:43 PM PST by Alia
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To: GodGunsGuts
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.”

Tough sh!t, Mr. Gang. That's the risk you ran when you decided to peg your worthless currency to the U.S. dollar.

You made your bed -- now go sleep in it.

42 posted on 11/29/2006 7:00:33 PM PST by Alberta's Child (Can money pay for all the days I lived awake but half asleep?)
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To: The Duke

We are not on the brink of it. We are in the middle of it. Inflation is creating money faster than the market can absorb it with a stable price level. We have been explicitly doing that since Clinton's last year. Bush just called it "devaluation" and Adjustment in the exchange rates. What it is is classic definitional INFLATION. Prices have been rising more slowly than the rate of actual inflation would indicate(though faster than the published numbers)because China has been sopping up all the extra dollars. Instead of sending our "trade surplus" right back to us to purchase goods China has been buying government debt to build reserves, effectively taking those dollars out of the market and thus keeping the prices of Chinese goods low. Eventually this puts China in an economically scary position because it has to keep on buying those debt instruments, those excess dollars in order to keep its own economy going. The moment China begins to sell off its dollar reserves the prices of all the goods it sells will skyrocket as the exchange value of the dollar plummets. China will not do that until China is ready to make a major move that renders all the money finagling moot, like launching on Taiwan. If China seriously begins to sell off its dollars the 7th fleet had better be ready and in position and the boomers locked and loaded.


43 posted on 11/29/2006 7:01:27 PM PST by arthurus (Better to fight them over THERE than over HERE)
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To: plain talk
Here's my definition:


44 posted on 11/29/2006 7:02:17 PM PST by GodGunsGuts
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To: GodGunsGuts

Yesterday's news. Gold hasn't done squat over the last year. Compare YTD return China vs Gold and get back to me.


45 posted on 11/29/2006 7:05:30 PM PST by plain talk
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To: GodGunsGuts
"will china lead a stampede out of the dollar?"well, let's see. Will Warren Buffett sell all his Berkshire Hathaway so fast that it goes to zero?

And will the Chinese trounce the very ticket to their wealth? 'Cause, you know, if they do, the dollar won't by as many trinkets. They like a strong dollar. It makee rish.

So, yeah, they've been taking dollars when it's 8 rmb's per. Why would they sell 'em for 3 rmb's?

46 posted on 11/29/2006 7:11:35 PM PST by the invisib1e hand (* nuke * the * jihad *)
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To: plain talk
Actually, even in a bad year, gold still outperforms the major indices. And it will continue to do so for years to come IMO:


47 posted on 11/29/2006 7:12:02 PM PST by GodGunsGuts
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To: arthurus
The President called it "devaluation" because that's exactly what it is. What you are calling "inflation" is exactly what happens whenever we make a big move to export. The unemployment rates have been historically LOW. Which means, production is UP. Production rates cool which is the natural result of "selling" on the open market until dollars return to the US (which can then be invested in expansion, resources, etc.).

Of course, "gold" is a good investment. It usually is; but over the past few years it hasn't been so big and because the fast dollars have been in production of goods and services.

For months now, some posters in FR have been in the "RUN FER YER LIFE, INFLATION IS COMING, BRING OUT YOUR DEAD -- but Buy Gold First" Binge. It's nonsense.

48 posted on 11/29/2006 7:12:24 PM PST by Alia
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To: Alia

See post #44 and #47


49 posted on 11/29/2006 7:14:42 PM PST by GodGunsGuts
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To: plain talk
Come to think of it, gold even beats them on the monthly:


50 posted on 11/29/2006 7:20:52 PM PST by GodGunsGuts
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To: Alia
It goes back to China's REFUSAL to purchase our exports. They still have "most favored nation trading status". We buy "their stuff"; but they don't buy ours.

It all returns to the structure of the Chinese economy.

"It's my understanding that about 60 percent of China's exports are coming from foreign invested companies rather than Chinese companies."
(Page 28-congressional hearing...)

We are buying a lot of our own exports from China.

51 posted on 11/29/2006 7:21:36 PM PST by maui_hawaii (kamakazees only do it once)
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To: GodGunsGuts
LOL! Here's some of my favorites tidbits.

Korean exports gained 14.9% year-on-year to US$238.62 billion. Bilateral trade between China and Korea was $61.9 billion last year, up 24% from the previous year, as Seoul started to wean itself off the US market.

The trade between China and Korea totaled $61.9 billion. So if if the trade is roughly half imports and half exports, then Korea exported about 31 billion to China.

However, according to this guy, Korea weaned itself off of exporting to the US with increase of about $31 billion.

Apparently he thinks that an increase in exports to the US about the same size of the total exports to China represents South Korea's weaning itself off of selling to the US.

“Our reliance on China and other nations to finance our debt is the result of a deliberate policy by the Bush administration, one that reversed course from the Clinton administration, and has favored deficit financing of tax cuts and federal spending over a prudent fiscal policy. It will take years of sound fiscal policy to reduce our reliance on foreign lenders and return the federal debt to a prudent level,” the Congressional Democrats concluded.

He feels the need to quote Democratic politicians making such obviously politically motivated but generally unsound statements in his economic analysis?

Our government wasn't doing deficit spending during Clinton's time in office, because Clinton inherited a quickly growing economy from the previous administration. Despite the skyrocketing tax revenues from the quickly growing economy, Clinton enacted the largest peacetime tax increases in history. Despite the incredible growth in the economy, Clinton's policies returned us to a recession and deficit spending before he left office.

Clinton left Bush with a shrinking economy, a military gutted and ineffective, and a considerable number of big businesses that were cooking the books under the lax oversight of the Clinton administration which would result in scandals and revaluations of some huge companies. That caused yet another serious blow to the economy.

Despite the mess that Clinton left as a legacy, Bush's tax cuts and skillful handling of the corporate accounting scandals has left us with a growing economy despite the largest terror attack on American soil occurring.

Bush is far from a fiscal conservative, but the amount of deficit spending has been decreasing due to sound fiscal policy despite having to clean up Clinton's messes.

There are some valid concerns about the size of our debt and it's potential to cause inflation. However, at the same time, China has been purposefully devaluing their currency to stimulate their economy with a trade surplus to the US. Their currency rising versus the dollar means that they aren't going to be able to price their products as low to American consumers. China is itself sitting on a pile of debt larger than their cash reserves. People are investing in China's economy because of it's strong exports which are primarily to the US.

Meanwhile the value of the Euro is rising. European countries are seeing almost stagnant economies, rising unemployment, and increasing costs for all their socialist programs.

The rising value of the Euro means they can buy more imports for their money, but it also means that their exports are considerably more expensive for other countries to buy. This is being particularly damaging for Airbus, but I'm sure it's having the same effect on other parts of their economy as well.

Their stagnant economy is going to become depresses as their exports drop and unemployment increases as a result.

So why are people putting their money in the Euro? It doesn't make economic sense, so it's likely political.

It means we might be facing some inflation, but at the same time it means that making things in the US may also become more profitable again, resulting in reduced unemployment and an even faster growing economy.

As long as liberals (and fiscally liberal Republicans) don't screw things up with socialist policies and increased taxes, I have faith that the US will come out on top even if the dollar continues to slide.

Not buying as many imported goods isn't always a bad thing. America has always been able to produce what it really needs, and inflation should be offset with economic growth.

52 posted on 11/29/2006 7:25:51 PM PST by untrained skeptic
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To: Alia
You have your cause and effect all bassackwards. Inflation is and only is the creation of money at a higher rate than the market can absorb. All the buying and selling n the world has nothing to do with inflation. Central bank hoarding of money can mask inflation by sucking the excess money out of the market instead of letting it bid up prices but eventually that money has to get put back into the market and the result is the price rises that were avoided by the hoarding. You sound like you took Economics as a required course for a finance degree. Those courses are taught by, at best, Keynesians, and at worst by financiers. They are not Economics. For the best primer(short) from which to learn economic reasoning read Henry Hazlitt's Economics In One Lesson or Conquest of Poverty. If you are then still interested in Economics, read Ludwig von Mises's Human Action. If you are really interested then go for Ricardo and Adam Smith, etc, but they are all pretty well condensed in von Mises. If your prof wrote Greek-looking algebra-seeing formulae on the board he is at best ignorant of economics or at worst a charlatan.
53 posted on 11/29/2006 7:27:24 PM PST by arthurus (Better to fight them over THERE than over HERE)
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To: maui_hawaii

I concur with your points in post. These aren't Chinese "owned" companies. But China is getting a glimpse into how low unemployment boosts their economy. And, of course, learning how the modern world "manufactures". US firms are losing some money on these deals; but picking it up under filing credits, balancing the ledgers of these companies.


54 posted on 11/29/2006 7:27:55 PM PST by Alia
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To: the invisib1e hand

The point is, they're not going to hold onto a falling dollar forever. They are exploring ways to diversify in a way that hedges against a falling dollar. I just read an article by a Red Chinese "economist" the other day. He was suggesting that they should just buy oil with their reserves. He was estimating that they have enough dollar reserves to supply their energy needs for 15 months. I have no clue if he's correct, but they are most certainly exploring ways to get out from underneath their depreciating dollar reserves.


55 posted on 11/29/2006 7:28:44 PM PST by GodGunsGuts
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To: untrained skeptic
We are not facing inflation. It is on us. China is just sucking the excess dollars into their banks. When they finally have to release it into the markets we will have general price rises. Price rises are NOT inflation. They are a result of the creation of more money than is called for by the functioning of the market. You either get the price rises gradually as the money is pumped out at the FED or more precipitously as the money is released by the banks that sucked it up as it was being created.
56 posted on 11/29/2006 7:32:34 PM PST by arthurus (Better to fight them over THERE than over HERE)
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To: arthurus
While I appreciate your lecture, your post led me to presume you were an "inflation" fanatic, meaning, a hysteric. Obviously, I stepped on your toes, and for that I ask your pardon.

I, too, use the term "inflation" as exactly as you have described; and in that specific, concise meaning: "Inflation is and only is the creation of money at a higher rate than the market can absorb."

I've witnessed far too many wrongful attachments of meaning to the term "inflation" on FR posts.

57 posted on 11/29/2006 7:32:37 PM PST by Alia
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To: GodGunsGuts

My comments were comparing Gold to China, not the Dow or S&P. BTW I had eyeballed your 5 year chart as the basis for my earlier comment about Gold return. Actually Gold has done well on a YTD basis. So I retract my earlier comment. But it is still half the return of China.

S&P 12%
Gold 24%
China 51%


58 posted on 11/29/2006 7:34:15 PM PST by plain talk
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To: GodGunsGuts

You're going to be so disppointed when the end of the world is postponed yet again.


59 posted on 11/29/2006 7:36:47 PM PST by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)
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To: maui_hawaii
If there were to be a financial crisis in China--let me rephrase that--when there is a financial crisis in China, the value of its renminbi debt as expressed in foreign currency will undoubtedly decline.

Interesting and well noted.

60 posted on 11/29/2006 7:39:47 PM PST by Orange1998
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