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 ...
I'm not waiting for the end of the world. I'm profiting form a dollar bear. When things turn around, you will find that I have completely changed sides. I don't place any stock in the idea that we should be either permanent bulls or permanent bears.
When gold gets to $1350? I don't think anyone of us will live that long.
I suspect Bush's refusal to stanch the Latin flood is because he is a globalist.
The only way he will prevent a revolution in Mexico is by letting them have it here.
P.79
I don't quite understand what you said. What would be the specific actions?
Most folks think inflation is the increased nominal cost of the coke in the convenience store.
Once the dollar falls low enough, the european economies will begin to hurt...forcing their banks to lower interest rates and dropping the value of the euro vs dollar.
The same can be said of the Pound...and ESPECIALLY the yen.
Rubles and Yuan are irrelevent. However, gold may still have a play as these reserve currencies become less attractive...what else to hold as a FX reserve?
Remember, currencies and reserves are not capital, they just represent capital for as long as the issuer is trusted to pay.
And, the US still owns and produces the lions share of the worlds capital...and has the biggest market to boot. Combine that with a DOMINANT military and the dollar is safe in the long term. Any flight is temporary.
Perhaps he thinks he is directing the grand flow of History, Kissinger redux.
Their gravy train is going to come to an end and they are gonna have to figure out something new pretty damn soon here.
Loan someone a few hundred thousand dollars and you own them.
Loan someone a few hundred billion dollars and they own you.
The Chinese have loaned us a tremendous amount. They have a lot of reasons to want to keep the dollar strong vs the yuan.
The revolution's over. They won California.
"Very well put. Has anyone ever considered the fact that Red China may someday do just that ON PURPOSE?
"
Oh they no doubt will but only if there is no threat of something like a complete American embargo of all Chinese trade which would knock their entire economy for a loop.
Ditto.
Gary Dorsch has informative charts and quotes of central banking figures, but he errs in a fundamental respect. He accepts the Keynesian-based theory of the Fed that raising the funds rate target strengthens the dollar, while lowering the rate target weakens the dollar. The reverse is the case.
Raising the funds rate target weakens the economy by reducing demand, reducing production and reducing employment with the objective of reducing labor's leverage for higher wages. This is to no avail because, as Milton Friedman informed us, "inflation is always and everywhere a monetary event." When inflation occurs, it is in the dollar's loss of value, not in the worker's loss of earning power or in the producer's loss of pricing power when costs rise.
Raising the funds rate target reduces the willingness of producers to invest in production, because the margin of profit will be less due to the increased cost of capital. That means dollars already in the economy will be less in demand, so some dollars will become excess liquidity. This excess liquidity is inflation, because the Fed does not drain it from the economy. In fact, the Fed has been injecting more liquidity by buying T-bonds, even while raising the funds rate target since June, 2004.
The dollar crisis is serious, but it can be fixed. The requires policy change at the Fed, which will be hard to achieve, short of a run on the dollar. There is no assurance that the Fed would respond as it should.
FYI, if the chinese currencey is pegged to the dollar and the chinese currency is worthless, that would mean THE US DOLLARS ARE WORTHLESS TOO.
Exactly what do we export that china is refusing to buy ?
"Oh we have these really bad investments that are only going to get worse, buy them from us". The Chinese are far better merchants then that.
Cheap, plentiful oil is the answer to many of our woe's. I understand it doesn't have to be oil but can be any energy form that we can substitute, but we have oil also. Our dependence on oil and cheap labor will be our downfall. Bush should just DO IT, for national security. If Clinton could stop a coal mine with a stroke of a pen, then Bush could drill ANWAR the same way. Our country's freedom depends on it. I'll bet the country would support him if he presented it as a matter of national security. We do not want to be under the heel of the ragheads forever. I don't think I can pull my boat with a mo ped and that's what's coming if we don't snap out of it soon. Cheap, plentiful energy is the ticket.
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