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 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.
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.
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.
Yesterday's news. Gold hasn't done squat over the last year. Compare YTD return China vs Gold and get back to me.
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?
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.
See post #44 and #47
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.
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.
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.
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.
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.
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%
You're going to be so disppointed when the end of the world is postponed yet again.
Interesting and well noted.
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