China Flunks 4 out of 5 Currency Tests

Townhall.com ^ | June 1, 2011 | Mike Shedlock

[Kaslin]

An interesting article in the Financial Times got me thinking once again about the popular notion that the Yuan is about to replace the dollar as the global reserve currency.

Please consider a couple brief snips from Beijing in fresh TV censorship move

The Chinese government has stepped up censorship of local television in a sign of the broadening of a political crackdown that has landed many dissidents in jail.

China has severely clamped down on activists since February when an anonymous online appeal called for demonstrations along the lines of the “jasmine revolution” sweeping north Africa and the Middle East.

Authorities have detained scores of human rights lawyers, activists, and writers. They have also arrested Ai Weiwei, the contemporary artist.

Reserve Currency Requirements

So what does this political crackdown say about the likelihood that the Yuan will soon replace the US dollar as the world's reserve currency? First consider what it takes to be the world's reserve currency.

1. Deep, liquid, open bond markets
2. Floating currency
3. Property rights, civil rights
4. Political stability
5. Political freedom

China flunks on at least 4 of 5 points, and arguably all 5. It may be a decade before China even floats the Yuan. How long before China has a deep, liquid, bond market? You tell me, because I don't know, but I assure you it is not in the next three years.

For further discussion please see Bogus Threats to US Reserve Currency Status: No Country Really Wants It!

Yet somehow hyperinflationists persist in spreading nonsense that the Yuan is somehow on the verge of replacing the dollar as a global reserve currency and that may cause hyperinflation.

There certainly may be more local trading in the Yuan. In fact, it is likely. That does not imply the death of the dollar or the loss of reserve currency status and it certainly does not portend hyperinflation.

Hyperinflation is the complete loss of faith in a currency. Should that happen to the US, the entire global banking system blows up. Global trade blows ups. If China refuses US dollars, then China's exports to the US stop, overnight. So do Japan's.

So what does that do to the economies of Japan and China? What would that do to the economies of Canada and Australia? Think about Chinese and Japanese exports and the demand for commodities.

Whether they realize it or not, that is the story hyperinflationists peddle. It simply is not a credible story as noted in Hyperinflation Nonsense.

Hype Sells

No Virginia, the US Dollar is Not Headed to Zero any time soon. Might the dollar slowly decay over decades? Sure why not? It already has. However, that is not hyperinflation.

Yes, the US has problems, so does Japan, so does China, so does the Euro-Zone, and so does the UK. Indeed global currency problems and insolvent banks are everywhere one looks.

However, myopic eyes are primarily focused on the US. Here's the deal. The US dollar is not suddenly going to zero vs. the Pound, the Yen, the Yuan, or the Euro, yet that is what hyperinflation implies.

Why does is the "hyperinflation is imminent" scare everywhere you look? The answer is simple: Hype Sells.

The bigger the hype, the sexier the story, and the more people are attracted by it.

[OB1kNOb]

Shedlock seems to think that the dollar is “too big to fail”. History would say otherwise.

[bkepley]

Hyperinflation is the complete loss of faith in a currency.

1) Is it an inflation or not?

2) Is there nothing at all apparent right now that might lead to a complete loss of faith in the US Dollar?

[RinaseaofDs]

The primary test of a market economy is whether a private party has the ability to enforce a contract in that country.

If a market cannot pass this test, then the other two tests, which are 2) Freedom of Speech and 3) Ability to own your own property are moot.

Nice to haves are, 4) Freedom of Assembly and 6) 4th Amendment rights, but not essential.

When people started talking about China being the next economic leader, superpower, and new reserve currency back in 2008, I just laughed at the idiots. Without an ability to protect intellectual property in a market, there is no incentive to participate in that market. I don’t care how many people or what’s involved.

It’s hilarious watching Huawiea trying to argue for IP rights when their R&D plan for at least 10 years was stealing IP. Going to court and settling after getting caught was PART OF THE CORPORATE STRATEGY!

I don’t blame them either - spend billions reinventing the wheel or steal the original design for the wheel, pay off when you get caught, and then issue patents on the improvements to the art. It’s not an honest strategy, but that’s not a Chinese virtue either it appears.

[WellyP]

I was working in Venezuela when hyerflation hit. You would always pay got your dinner and drinks on the way into a restaurant. I was in Argentina a few years when the idiots there had tied their Peso to the Dollar and just kept printing more Pesos until the bond market wouldn't but any more Pesos (other than Chavez) and the whole place crashed.

Don't accept the government tell you lies. Hyperinflation is real. Hyperinflation is the FED’s way of covering our debt with inflated Dollars.

[businessprofessor]

The dollar is not too big to fail. I cannot make any predictions about the nature of the failure. It may fall suddenly, gradually, or some mixture. The world will not accept $100 trillion new dollars dumped onto world markets. Many governments and traders are plotting to attack the dollar.

Our government bond markets are not transparent. Unfunded pension liabilities are deliberately hidden. Uncertainty over government bond markets has increased leading to predictions of major defaults. Phony government accounting has justified reckless spending. Federal government borrowing is by fiat. Despite inflationary pressures, government bond yields are almost nil and falling. Government bond yields have created another asset bubble since there is no reasonable place to park funds.

[WellyP]

Get this!
“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “...Once again, the United States will step up as the marginal buyer of bonds, said Maughn.

“One more big injection of cash into the bond market should take you through at least the summer season into the beginning of the fourth quarter...”

http://www.cnbc.com/id/43233866