While it would be easy to dismiss this move by the People’s Bank of China to inch away from dollar based invoicing, the fact is that the use of other currencies for denominating trade transactions has been on the rise. We cited this Globe and Mail story back in February:
The chief executive of jewellery giant De Beers SA made waves this week when he suggested the global diamond industry consider pricing the shiny gems in a currency other than the U.S. dollar.
That comment, from the head of the world’s largest diamond company, is the latest in a string of signs that the greenback’s glory days could be fading.
A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.
“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”
The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.
“The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”…
A Financial Times story in March said that Chinese exporters in particular were leery of the greenback:
Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.
According to Alibaba.com, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk.
So one could read the pending PBoC pilot of a yuan-based trade settlement system as a response to realities on the ground. But there have also been US reports of far more fundamental discontent with the dollar, per the New York Times in August:
Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses [on dollar assets].
He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.
“A lot of policy makers in China, at least midlevel policy makers, believe this,” Mr. Shih said.
And Reuters reported a more frontal attack in October in an article that appears likely to have been sanctioned:
The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
The front-page commentary in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies…
The People’s Daily is the official newspaper of China’s ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.
Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.
So seen against this backdrop, the pilot program looks to be part of a more concerted effort to reduce exposure to the dollar, even if it is not very significant in isolation.
From the Shanghai Daily (hat tip reader Bill):
China’s central bank said yesterday that it plans to implement a pilot program that would settle overseas trade with the Chinese currency instead of the US dollar.
The People’s Bank of China will expand financial cooperation with overseas economies and “properly deal with the global financial crisis,” the central bank said.
“We’ll actively join international efforts to tackle the global financial crisis while safeguarding national interests,” the central bank said…
China will allow the yuan to be used for settlement between Guangdong Province and the Yangtze River Delta, China’s two economic powerhouses, and the special administrative regions of Hong Kong and Macau, according to the central bank.
Meanwhile, exporters in the Guangxi Zhuang Autonomous Region and Yunnan Province in southwestern China will be allowed to use the yuan to settle trade payments with members of the Association of Southeast Asian Nations.
Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.
The dollar’s exchange rate has become more volatile since the global financial crisis began.
The central bank said it will make the exchange rate of the yuan more flexible and keep it “basically stable on a reasonable, balanced level.”
There has been speculation that the yuan’s appreciation will slow down, which would help Chinese exports maintain price advantages in overseas markets.
Note that China has been arguing for a fixed currency regime for some time. From their perspective, it makes perfect sense. Currency volatility is a deterrent to trade, since it increases uncertainty.
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I feel the same way about this as I did about oil priced in Euros: probably not particularly consequential.
Those moves are expected to facilitate overseas trade, as Chinese exporters might face losses if they continue to be paid in US dollars, analysts said.
This risk is pretty limited unless the peg is broken or altered somehow. The current range appears to be about 6.80 to 6.88, or around 1% at worst. The flow of dollars into China is also unaltered until the peg changes.
It would shift some of the pain of a revaluation to the central government from the individual exporters, and thus might be a preliminary move towards such a step. But there are many, many other large issues. These actions also don’t change the amount of pain dispensed unto China as a whole.
This article speculates further deceleration of appreciation. The present velocity’s about zero.
But if the RMB is pegged to dollars and Beijing has a policy of depreciation in order to help export their way out of trouble, what difference could it make to the FMOC?
But if the RMB is pegged to dollars and Beijing has a policy of depreciation in order to help export their way out of trouble, what difference could it make to the FMOC?
If you mean the FOMC, freude, the peg makes it basically impossible for them to create meaningful inflation. This particular action doesn’t have any real impact on the Fed.
The RMB was allowed to appreciate for two years in a dirty float, as in it was not permitted to go up as much as it would have had the Chinese government not intervened. It appears to have gone very quietly back to a hard peg.
However, some analysts believe the Chinese want the RMB to fall against the dollar, which in a race to the bottom scenario makes perfect sense. Recall that when the dollar went up in the second half of the year, the yen and RMB also appreciated.
If the authorities plan to let or force the RMB to fall, the RMB invoicing makes sense short term.
And I do think the invoicing issue has psychological importance, per the Globe and Mail. It does signal that private parties are not keen to be exposed to the vagaries of the dollar, It may not make much practical difference now, but it does set the stage for a transition.
If the authorities plan to let or force the RMB to fall, the RMB invoicing makes sense short term.
In that case, it would redistribute the profits from the fall in the RMB to the central bank and away from the corporation. I don’t see why that’s a good thing for the corporation.
And I do think the invoicing issue has psychological importance, per the Globe and Mail. It does signal that private parties are not keen to be exposed to the vagaries of the dollar, It may not make much practical difference now, but it does set the stage for a transition.
I have long thought the Fed and the Treasury should pay more attention to the credibility of the dollar as a currency, and less to pumping their inflationary streak. Nobody doubts the Fed’s credible desire to inflate. People are quite credulous and scared, and disgusted to boot.
Maybe we’re trying to engineer capital flight for some ungodly reason, but I think creating further distrust and fear in the face of inflation being literally not possible is not a brilliant strategy.
ndk,
There is a lot of political unhappiness about China having been “suckered” into buying dollars. So there might be a weak plus to the PBoC faring better this way.
Exporters are risk averse. They would almost certainly rather not worry about currency exposures. I NEVER quote my services in a foreign currency, even though I know my clients do not like eating the FX risk. Now I can get away with it because that is convention. But small fry are simply not well positioned to absorb or manage FX risk. And most Chinese exporters are small by global standards.
In contrast to you, ndk, I do see this move as significant. That is substantially due to the fact that my perspective is long-term: specifically what I do [when I do it] is to look at a policy set/problem set in year x; then in year x+1; then in year x+2 . . . x+30 . . . x+200; and so on. I have for decades had an interst in the dynamics of long-term trajectory change for historical vectors. Invariably, major changes are indicated well in advance by significant prior deflections; this is true most of the time even when major changes appear to be explosive or sudden bifurcations. I stress the word 'appear' therefore. I call the whole phenomenon "the natural signature of an event." We have had now the leading deflections indicative of an environment prepared for a major bifurcation in international currency regimes.
Let me pull in some of Yves entirely relevant source quotes in this post in pursuing this position. Globe and Mail:
"The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.
The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world's central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice."
The first paragraph gets the situation wrong; the second paragraph says _why_ the first was wrong, and how. Most estimates of any systemic projection are made on present conditions compared with the recent past. This makes for an inherent bias of preexisting conditions, a problem which is known but never adequately controlled for. The first paragraph says, in effect, 'There will be only minor shifts from The Way Things Are because that's the way things are.' Yes, a systemic complexity like dollar reserve currency has considerable inertia, it doesn't 'just shift,' but you see the tautology.
And there is a further, and major, misperception embedded in the first paragraph. There, it frames the assumption that "persistant policy error" is a _future_ potential, i.e. that it has not already happened. Because The Way Things Are is still in effect, right? so it couldn't have already happend. But in fact, US currency policy has been persistently in error at least since the Plaza Accords, and really since 1980: we needed a moderate devaluation and an industrial policy to realign after the end of 70s period where we reached decreased marginal utility of existing industrial production—and we DID NOT get this. Instead, we had currency manipulation, first by us, then by our partner foreign central banks in coordination. So we have had a generation of embedded currency error: that 'event' _has long since happened_, and we see the effects now. Our serial bubbles are direct consequences, and there are many others as well. So my point, here, is that we have had a long cumulation of error creating pressure on the dollar reserve system. But this condition is missed in the article due to the perceptual distortions of 'temporal continuance,' if you follow me. There are inumerable historical examples of this phenomena; this is just the one we are living. (Another, for example, is the 'inevitable military superiority of Israel.')
The second paragraph of this Globe and Mail extract says, quite clearly, that large numbers of private businesses outside the US -WANT BADLY TO CHANGE THEIR CURRENCY OF ACCOUNT. Yves' quote says more, and it is highly relevant. This urge on the part of private non-US business is _the consequence_ of thirty years of accumulated policy error on the US $. Central banks have enforced dollar supremacy on _their own_ currencies, but private commerce and manufacturing is increasingly hurt by this, does not see the situation getting better, and wants an alternative. As the G & M says, private transactions far exceed in volume public ones. So long as the systemic order of private interactions is organized by propagation from public policy as directed by public exchange, the inertia makes it very hard for individual private parties/nodes to change their alignment, to maximize another currency flow in this instance. Instead, all private business can do is hedge, which is both expensive and can go wrong on them. Now, though, many private nodes _are already biased toward currency realignment_. That is the simple conclusion from this article, and others. So the underlying bias in private, non-US commerce is pro-shift. We only see dollar supremacy as The Way Things Are because public policy overseas continues to be wedged uncomfortably into an anti-shift alignment. See the whole, not just the most visible part: the whole says that a reseve currency shift is an avalanche waiting for a noisy pop or some snowshoein' fool.
Further quote from Yves' post, Financial Times:
"Rising numbers of Chinese exporters are shunning the US dollar or devising ways to offset the impact of the falling currency as they confront rising labour and raw material costs at home.
According to Alibaba.com, the online company that matches Chinese suppliers with international buyers, the vast majority of their almost 700,000 Chinese suppliers no longer use dollars to settle non-US transactions in order to minimise foreign exchange risk."
That is such a huge statement. The vast majority of Chinese suppliers _already have abandoned the $ for non-US exchanges_. In short, the shift AWAY from the $ has gone from a private bias to a private realized potential: the shift HAS ALREADY begun, we just haven't seen it because it has begun at what, from our perspective, is peripheral flows. The further quotes in Yves' post re: Chinese suppliers being greenlighted to use the yuan for transactions in their 'near abroad' is another systemic re-ordering interaction, to me. The volume is much less important than the _function_ of such behavior. We see a FUNCTIONAL divergence of flows that is both away from the $ and sustainable, indeed likely to grow because those commercial participants in China's near abroad would already find holding yuan far more useful for their commercial involvement _in China_ than having to use dollars for same: these commercial flows won't go back to the dollar, period. Their success and volume will only encourage others to make the same shift.
The only thing which has held the US dollar up for, oh, fifteen years is that there has been no real alternative. But this situation masks the underlying biases, which as discussed above, are HEAVILY AGAINST FURTHER DOLLAR SUPREMACY. This situation is why the shift away from the dollar will appear abrubt when it comes. Indeed, past major reserve currency shifts have 'appeared' similarly precipitous bifurcations but in fact simply realized the underlying bias potentials of several prior generations in their respective contexts. That is how I read this history on this anyway.
I don't expect the $ shift to happen in 2009—but it certainly could. I do expect it within five years; I doubt that it will take five years. With our banking system dead, domestic demand in a nosedive, and our domestic fisc being steered straight toward spontaneous combustion, we are in NO position to defend the dollar: it only continues as the reserve currency, as of today, because foreign central banks prop the dollar up; that's it; that's ALL of it. When boiled to cartledge and backteeth, that has been the consistent analytic observation in information presented by Yves on this blog, and in many other areas as well. Private commerce is edging away from the dollar platform at the margins of the crowd, and will bolt in a body at any major precipitating event . . . or even a minor precipitating event which simply crosses an unseen critical parameter.
We are ready for a fall, and evey twig swirling on the stream is going the same way. I call these movements at the margins 'significant' accordingly, because the indicate the background trajectories. No one of them is determinative of course, but they show just how near systemic shift on the $ is to happening.
Richard, I consider your arguments and emotions exhibit A for why the Fed’s communication strategy is almost comically bad.
So ndk, the substance of your comment of 4:17 is completely opaque to me. And I’m not slow on the uptake.
Just as a point of reference, almost any even semi-routine statement out of the FED in our near term is of trivial consequence and effect in relation to the trajectories I discuss in my comment. The only statement I can think of in the last two years of any real scale of impact to these trends was in the indirect implication this last Autumn that the Fed ‘would issue whatever volume it took,’ an announcement with only _confirmed_ the erosion of our currencies leverage propagation in the international financial system over the long-term.
—But I don’t think your comment had anything to do with the FED or its actions.
all,
I am going to admit from the outset that I am a bit of a sinophile, having lived there for a while.
“Currency volatility is a deterrent to trade, since it increases uncertainty. “
This is actually a bit of an understatement. You would be shocked at how thin margins are out how much leverage there is in China. Even if we had the same labor costs, most Americans wouldn’t touch this business.
Currency valuations often fluctuate beyone the margin of an underlying transaction.
And yes, the Chinese are frustrated with their place in the food chain, and live with large state run beauracracies, so I am sure there is a lot of blaming going on. However any rational country would do as your article points out if they could. Perhaps now the urgency is greater, but more because volatility is so bad, rather than an idealogical break.
All the articles I see on Chinese treasury purchases all start with the headline “Chinese getting wary”, but if you read the articles, there is always a tacit admission that the stronger forces at play have to do with keeping their currency weaker for competiveness, and have other needs for their cash.
I am guessing they are guessing like everyone else.
BTW. I hope your face plant was complete and you feel well.
I see this as China trying to set up a trading bloc through ASEAN. With the Yuan as the dominant currency. Sort of a mini E.U. It’s only partly about knocking off the dollar, it’s about China expanding and controlling new markets in the future.
So ndk, the substance of your comment of 4:17 is completely opaque to me. And I’m not slow on the uptake.
I’m sorry, Richard. I was being a little too cute.
The Fed truly believes that the “theoretically correct response to a deflationary liquidity trap is to get everyone to believe the Fed wants inflation. The Fed is trying to scare you out of dollars and into other assets.
Instead, deflation has persisted, and they decided to crank up the rhetoric further. Now I see posts everywhere from people who think the dollar is worthless and the Fed is batshit crazy.
Richard:
Your argument sounds very persuasive. If(when) there is going to be a currency shift, what do you think will be the new dominant currency, and what will it be backed by?
@nanute:
The strongest currency in the last years was gold. The shift is indirectly heading that way at the moment.
Euro would be a good alternative, but due too uncompetitive member states (Italy, France, Spain,…) a risk of break up of the euro zone persists.
Pound has no chance, as it’s not in much better shape than the dollar.
Swiss Francs might be an option. But Switzerland has also a large banking system compared with its GDP. Not very sound either.
So ndk, that’s kinda sorta what I thought you meant, but I wanted to hear it from you rather than assume. Thanks for the clarity. I know that the FED wants inflation; what I don’t know is what will happen, as I said in recent remarks on pushing in an open economy. From a long-term perspective, though, it’s one more piece of short-term thinking on the part of the FED, and I fear more short-term thinking when we are this close to ‘criticality.’
So nanute, I’m a jackleg historian not a trader, so my opinion on ‘what next?’ is of the lay variety. I have thought for some time, and expressed here from time to time, that we would get an attempt at a managed currency basket which would collapse into a euro regime. I say that only because it makes the most sense structurally, and because I think that it is the most likely outcome, but not because I think it is by any means the certain outcome. It is possible that we might see a restored Dollar II reserve regime pasted back together in, say, 10-15 years, with a much less dominant dollar managed ‘collaboratively’ at a significant level with a few key allies. I’m skeptical on that because I doubt that the US would be sufficiently cooperative to make that work for any extended period of time, but it could happen.
I do think we’ll get a dollar blowout, though. Or to put it another way, as I have before, it will take a highly concerted effort _not_ to have a dollar blowout, and I see nothing of the sort being put together in a timeframe that would matter. Nor, for that matter, is does the US economic matrix for the next five years give us the kind of fulcrum to avoid a blowout as I see it. The world won’t end if that happens, but our price structure _will_ change.
Thanks to all for this very enlightening discussion, particularly to Yves and Richard Kline.
Even a financially uneducated reader like myself can understand the significance of these situations, with these articulate discussions.
I read this site daily, and manage my own money. With help like this, I’ve done reasonably well this year.
very appreciative……..
Richard@ 8:16AM.
Thanks for the response. Your modesty is admirable; your insight is much more than a “jackleg historian.”
I’m not a gold bug, but I do wonder what would the outcome be, if say, the US considered going back to a gold standard? Both in terms of the stabilizing of the dollar and the value of the “commoditiy.”
I think what’s needed is a fractional reserve (10 gm) gold franc backed by a consortium of oil exporters led by Norway and managed by Swiss gnomes.
I think Bretton Woods II (exporters unilaterally fixing their currency to the $) is in its death throes, but no one has any real idea of how to replace it.
Maybe it’s time for Keynes’ Bancor:
“Fundamental to Keynes’ thinking was the importance of fostering a balance of trade between nations and avoiding the scenario in which some nations become ‘creditors’ and others ‘debtors’ through their trade accounts. Creditor nations were those who had exported more than they imported and thereby ended up with surplus revenues from an imbalance of trade. Debtor nations were those whose imports had exceeded their exports, and so suffered a monetary loss through trading — a trade deficit …”
http://www.prosperityuk.com/articles_and_reviews/articles/bancor.php
If the dollar is no longer king, which currency will be number one? The circumstances that led to the US dollar as the world’s reserve currency are not to be duplicated any time soon. What might be the bridge between the current system and the infamous Bancor is probably a regional approach. Try thinking in terms of an uneasy power sharing agreement between Asia, the Americas and Europe with the oil arabs, Russia and India going it alone or aligning with one of the above.
Balanced trade. What a concept.
It is not particularly becoming for the Chinese, Japanese, Arabs, or Germans to be whining about the effects from the global trade imbalance. In fact, it seems downright silly.
If anyone was duped, it is the American people. Then again, being stupid has always been an occupational hazard. Actually, being stupid on the international front is a hazard that can lead to being occupied.
Richard Cline,
I really enjoy your utilization of ideas in nonlinear dynamics and think finance and economics would benefit greatly from their incorporation. The economy is a dynamical system like all living things and, importantly, these systems are history dependent and sometimes very sensitive to changes in conditions (making prediction difficult).
I too think we have settled onto a trajectory leading to a “bifurcation.” And there is no turning back. A ~25 year credit expansion. Boy oh boy.
Instead, deflation has persisted, and they decided to crank up the rhetoric further. Now I see posts everywhere from people who think the dollar is worthless and the Fed is batshit crazy.
Well, then they’re succeeding, right? Perhaps not the optimal way to arouse inflation expectations, but it’s an option.
Whether and when we get a dollar blowout is in the hands of the Asian Central Banks now. The US needs to inflate, which they will do by printing money (they seem to be finally noticing that’s how to do it – maybe Bernanke finally read Friedman’s 50 year old papers?). The ACBs need to maintain their official and unofficial pegs, so they will have to buy those dollars – minimizing the inflation. The process will continue, with the USG receiving hundreds of billions, until the ACBs can’t or won’t continue.
I think the ACBs will continue until they can’t, because to stop is Depression for them, and I capitalize intentionally. Their internal demand, especially in China, includes lots of multiplier effect consumption or investment for their massive surpluses. A partial currency revaluation in the Yen at the end of 2008 produced a one month decline of 8.1 percent in industrial production. China would probably be even worse.
I should sit down and work out what would end this, but my intuition is that that will require a political crisis brought on by inflation and declining living standards in the Asian exporters. So the opening move of a dollar collapse will likely be a massive crisis in China.
It’s hard to say when that will happen – China is very ancien regime fragile at this point – powerful, moderately repressive, but not totalitarian and with little legitimacy. Such regimes can last a very long time, but collapses tend to be rapid and surprising. Still, I think that’s where to look for the next move.
the new guy will be running a $2t deficit next year and promised trillion dollar deficits for years to come which puts the cost of his ‘plan’ to at least $5t. helicopter ben can print on the side as much as he wants as well.
all net exporters cannot accomodate this money mass even if trade does not deteriorate. as they said it in bejing this summer: let the games begin!
Well, then they’re succeeding, right? Perhaps not the optimal way to arouse inflation expectations, but it’s an option.
At creating inflation expectations, you bet. But I question the value of these expectations when there are fundamental forces (REER and deflation in Japan/China, particularly) preventing inflation from occurring.
Yves also stresses the importance of confidence and certainty in a currency and its value for trade. I think that’s key for the dollar even moreso than for the RMB. If everyone is convinced the USD will soon be floating upside down somewhere in the Pacific, doesn’t that have strong inhibitory effects on trade?
The ACBs need to maintain their official and unofficial pegs, so they will have to buy those dollars – minimizing the inflation…. I think the ACBs will continue until they can’t, because to stop is Depression for them, and I capitalize intentionally.
Very well put.
I should sit down and work out what would end this, but my intuition is that that will require a political crisis brought on by inflation and declining living standards in the Asian exporters. So the opening move of a dollar collapse will likely be a massive crisis in China.
Also totally agreed. Until we see major inflation and/or instability in China, the rest of the world will by definition be stuck in deflation. I don’t see inflation, because China’s got strong structural deflationary tendencies, and lived happily through deflation in much of the recent past.
In a sense, then, to bet in favor of US inflation is to bet the Chinese government will encounter major difficulties.
I personally think from my experiences that the CCP is stronger and more stable, for better or worse, than most believe. It’s also not immediately apparent to me that political crisis in China would lead to inflationary economic crisis. I’m curious whether bg feels the same.
purple said…
I see this as China trying to set up a trading bloc through ASEAN. With the Yuan as the dominant currency. Sort of a mini E.U. It’s only partly about knocking off the dollar, it’s about China expanding and controlling new markets in the future.”
Tading blog between China and Asean is a done deal. They already sign fairly elaborate framework. (infrastructure, export/import standard, investment rules, etc) It will take sometimes for everything to flow, but the set up is largely done.
Second item is the formation of Asia Monetary Fund. I think it will become far more important in the future than people like to believe when combined with free trade and Yuan and main currency in asia.
Lastly, the biggest deal about Yuan instead of Dollar, Asian trade with China will turn largely invisible to US monitoring instrument. It will become harder and harder to calculate global dollar influence and standing, specially if people can simply skip dollar banking system. Which is nearly impossible right now.
A decade from now, calculating macroeconomic will be infinitely more complicated than current single currency set up.
ndk@2:57: What is the nexus between a devaluing USD and a contiuation of China’s effort to export out of recession? (I’m not an economist, and I’m thinking out loud here). The demand for exports from China to the US will be diminished greatly, for the forseeable future. If China has to lower the cost to continue exporting, while the dollar is tanking, what is the net result?
Well, you know what they say… if you’re gonna be dumb you gotta be tough.
ndk@2:57: What is the nexus between a devaluing USD and a contiuation of China’s effort to export out of recession? (I’m not an economist, and I’m thinking out loud here). The demand for exports from China to the US will be diminished greatly, for the forseeable future. If China has to lower the cost to continue exporting, while the dollar is tanking, what is the net result?
If that were to occur, nanute, there would simply be a massive increase in exports from China to the rest of the world, particularly Europe.
Definitely pricing diamonds in Euros is a smart move… After all, isn’t the Euro the strongest currency in the world?… as long as the elusive perception of the superiority of German vehicles over truly superior Japanese Lexus models continues, and as long as there are enough Americans willing to fly across an ocean to spend their vacations on rocky and dirty (Euro zone) Spanish or Greek beaches, when they could instead just fly to Florida (which, last I checked, still has a lock on most top 10 beaches in the world).
I think I’ll drive my Lexus to Clearwater Beach now… and, for comic relief, I’ll try pay for my hotel room in Yuan…
Vinny Goldberg is waving good bye…
May I bring the Delian League into discussion. Here was an early Greek States EU attempt (more or less). Except that at some point Athens took it over. So is their near abroad more likely to put there economy in the hands of the Chinese or the US?
We certainly have shown our ability to change by evolution not revolution.
Some how the US economy took a licking from the Bushies but has kept on ticking. What would have happened in China? Another Gang of Four?
An oil dollar based on say a future Gulf dollar? Are you sure there wont be in the Saudi an AQ putsch?
To paraphrase Churchill: a currency backed by a democracy is the worst form of currency except for those backed by any other political system
plschwartz
anonymous@4:10:
I assume you were responding to my “dumb” question?
I keep hearing people saying that the world won’t run to Sterling, the Euro, the Yuan for currency, because of various, but similiar reasons.
I would think that wealthy agencies, with the capability to move away from the dollar, with the belief that they should move from the dollar, would already be moving away from the dollar.
This movement, were it happening, should be obvious by observing which currency is deflating faster than the dollar, due to increased demand.
Is there some particular reason the Yen couldn’t be the next reserve currency? Since WW-II, they have stayed far out of world politics. Their economy, which is on the week side, has been predictably consistant over a couple decades. They even have a popular reputation of “death before dishonor”, etc.
The dollar keeps trending up against the Yuan, Euro and Pound Sterling, but keeps trending down against the Yen.
So, comparatively speaking, the rate of Yen hoarding must be higher than the rate of USD hoarding. No?
Is there some particular reason the Yen couldn’t be the next reserve currency? Since WW-II, they have stayed far out of world politics. Their economy, which is on the week side, has been predictably consistant over a couple decades. They even have a popular reputation of “death before dishonor”, etc.
Well, Japan is facing a lot of problems. They have always had a fairly closed economy and society, and recently have relied on exports for their only real growth. Demographically, the workforce is shrinking, and immigration is difficult. There are economic issues tied into their freeters and social changes. Japan also has essentially no natural resources at all.
Sakakibara revived these thoughts with some support for an endaka policy, which would be very beneficial to aging Japan importing services and goods from abroad.
I worked in the center of Tokyo for awhile and met some of the most amazing folks in the world. I had an office far nicer than I’ll ever have again. The yen definitely felt undervalued on a PPP basis, but I can’t see it acting as a reserve currency any day soon.
So, comparatively speaking, the rate of Yen hoarding must be higher than the rate of USD hoarding. No?
I think this is reflecting unwinding of carry trades and adjustment to the new deflationary USD, but there could be some safety seekers in there too.
You guys are missing the point on the Yuan here.
China and the rest of the world have seen a total evaporation of dollars. So are they going to just stop trading because nobody can get any dollar credit?
No! They are going to give other countries credit in Yuan. Why import our deflation when they don’t have to?
ndk wrote:
“Instead, deflation has persisted, and they decided to crank up the rhetoric further. Now I see posts everywhere from people who think the dollar is worthless and the Fed is batshit crazy.”
This an amusing sort of conspiracy theory that has as its centerpiece the idea that the Fed is playing a game of maufacturing opinion or playing a game of disinformation. Perhaps, since they are fast moving toward the point when that is all they have left.
The dollar IS worthless; it has so many present and future liabilities against it that it hasn’t a prayer of maintaining its global position. Confidence is waning markedly all across the globe;- confidence is the name of the game with this most fiat of fiat currencies- this is not conjecture anymore as per the information in the referenced story.
The proof is in the pudding, private businessmen in the nation where business has been most robust for the last generation are doing their level best to operate outside the reserve currencies constraints and penalties.
ndk,
Thanks for the link to “N.I.N.E.” I’d never seen it before. It’s a great blog. Got any more blog links of this calibre (Yves, you’re still my favorite!)?
What a farce. The Chinese will not appreciate their currency in the current fiscal environment. We know the artificially low peg was of their creation, at our dismay (by some), to encourage exports. At this point in time, given already weak demand for Chinese goods, it would be suicide for the government to initiate any moves that would dry up demand further. While migrant workers do not have power, cohesion or arms, they are at the brink of revolution. If conditions further deteriorate, which they shall, we may see many more riots by this lower class. Who knows where desperation will lead these people.
Whats incredibly interesting is to me, anyways, is the fate of all the exported dollars. At what point during our inflation do our dollar holders realize the future depreciation of our currency and rush to liquidate their holdings? How much cash returns to the US and adds to our self created inflation in our system? Given the tremendous burden of our internal, dollar denominated debt is this necessarily bad? I guess like a Free Silver policy there will be winners and losers within the US economy.
Resultantly, are we going to see a “price revolution” parallel to that of Spain in the 16th century? Obviously, this weak reference leaves out much, but our current situation likens closely to that faced by Spain during the height of its empire. Anyone, perhaps who have studied the phenonmenon, have anyway to elaborate?
So nanute at 8:16, no country is going to go back to the gold standard _EVER_. No country is going to go back to crowned kings who inherit the right to political sovereignty, either, having gotten rid of same. The gold standard is a function of past historical conditions. It is disfunctional at best in modern commerical economies. It is nonfunctional of a certainty in modern international commerce: this is why it was junked. You can quote me.
Gold monetarism is, to me, somewhere between a creed and a cult, but it has nothing whatsoever to do with macroeconomics. Even in conditions where governments collapse into tyranarchy (warlordism), no one goes to a gold standard; instead barter in high-value commodities sets in: oil, diamonds, weapons, food. Gold is at best just one more such, and then only if it is locally available. Gold is dead; long live the digit. (Or something). I mean that in complete seriousness.
I just read in WSJ that as of next month, China will be demanding payment in gold bars and gold coins for all its cheap, substandard plastic products.
Vinny Goldberg out.
interesting comments, thanks to all!!
This an amusing sort of conspiracy theory that has as its centerpiece the idea that the Fed is playing a game of maufacturing opinion or playing a game of disinformation. Perhaps, since they are fast moving toward the point when that is all they have left.
It’s not a conspiracy theory, Eduardo. It’s exactly what they said they were going to do. I didn’t think they would be so persistent in acting psychotic, but here we are.
Thanks for the link to “N.I.N.E.” I’d never seen it before. It’s a great blog. Got any more blog links of this calibre (Yves, you’re still my favorite!)?
Not off-hand, but you can catch Daryl Guppy on CNBC Asia every once in awhile. I think TA is voodoo, but the man puts on a wonderful show and has a friggin’ awesome mustache.
Whats incredibly interesting is to me, anyways, is the fate of all the exported dollars.
It really is a good question. At some point, if and when the peg breaks or the U.S. can offer competitive and desirable goods and services, you’ll probably see a heck of a whoosh, RPB.
Anyone care to comment on the following from Peter Schiff?
http://news.goldseek.com/EuroCapital/1231524773.php
So ndk, in agreement with you on poltical stability in China, and (regretably contra FairEconomist), I do not see high probability of ‘revolution’ or mass political instability in China. I’ve gone over this in some detail in the past, so I won’t bore anyone with a rehash. Consider, though: in 1989 the central government had much _less_ legitimacy, and faced an active popular mass dissent (not that 99.9% of those in the west understand the 89 event, but). And the government had NO trouble maintaining control. In China, the focus of popular discontent are notably corrupt and tuggish _local_ authorities, over which the central government has less and less control but which the central government will not develop an effective judiciary to control for them because of the risk of falling afoul of them themselves. Discontent NOW in China is focused, rightfully, on local grievances . . . which the central government boosts _its_ legitimacy by addressing.
Yes, if China sees its trade with the US contract sharply that will hurt. For _some_ parts of China’s economy. Migrant labor has been more employed in construction, however, an construction is going to be down—oh right, the _stimulus!_ in China, of course. And as we’ve seen in comments here at NC, stimulus _in China_ is likely to be more effective at stimulating employment and supporting demand than stimulus in the US as a domestic support.
And further more, as said by anon of 3:34: “Second item is the formation of Asia Monetary Fund. I think it will become far more important in the future than people like to believe when combined with free trade and Yuan and main currency in asia.” Look, China has been seeking to diversify from export dependency to the US for some time. Losing US trade _entirely_ cannot be effective replaced presently from other sources, but a _reduction_ in US trade, or a change in its value can be to a degree offset by boosting diverse other export markets. Exactly like a regional trade market, which as I concur with anon of 3:34 is highly important.
Right now, ACBs, per FairEconomist, control the fate of the dollar. That is, China and Japan mostly, as Korea and Hong Kong are completely captured by the larger bloc. China cannot make this bloc work without _close_ coordination with Japan. —Which is exactly what we have seen over the last 18 mo. . . . Which is one more major deflection point on transition from dollar supremacy. I have no solid idea on what the precipitating indicator of a collapse in ACB support for the dollar will be. I think that this will happen _before_ riots and etc., though. I would expect that a _REAL_ financial summit sponsored by China _and_ Japan. We had an attempt at this in November, but Our Village Idiot blustered and waved his crumpet dismissively, so when the next one comes we will have to act from an even weaker position.
RPB: ” . . . [A]re we going to see a ‘price revolution’ parallel to that of Spain in the 16th Century?” Yes. That is my best read, and the best historical parallel, even though international trade flows were organized with significant differences then. A prolonged inflationary vector, with in this case quasi-defaults (crypto or overt devaluations) with concurrent imperial adventures which are ill-conceived, interminable, ulcers. We are too big to ignore, in trade and military arrogance, but too badly positioned to enforce a solution, so we’ll thrash around for a couple of decades knocking everyones’ laundry into their trampled kitchen middens until we finally tangle in the wreckage and plant our face in the nearest manure pile. Not pretty, but it looks to be locked in.
But in another perspective, the dollar is _not_ worthless; just worth less. We still have a large population, we are well-educated compared to most other macroeconomic zones in local aggregates, substantial manufacturing, a comparatively rich resource base, etc., etc. Are potentials are large, real, and continuing. But we have so mismanaged our industrial policy and permitted unprecedented parasitism in our financial structures that we have negated those potentials _temporarily_. The longer we spend clinging to this failed superstructure and its architects, to use a semi-relevant term, rather than replacing it, the longer our recovery will take, and the lower amplitude relative to potential it will achieve. The US and our currency isn’t through, but both are being incompetently managed, so we will get the consequence which usually follows this sort of thing. And this isn’t something that “China will do to us,” or anyone else: it is something we have allowed a few amongst us to do to and for all of us. We made this bed; ergo . . . .
“…What is the nexus between a devaluing USD and a continuation of China’s effort to export out of recession?
If that were to occur, nanute, there would simply be a massive increase in exports from China to the rest of the world, particularly Europe.”
No, Chinese exports to the EU are tanking as well.
China is export platform to the world and they will suffer the biggest hit in the current downturn, because that is where the over-capacity is located.
Richard Kline wrote:
“But in another perspective, the dollar is _not_ worthless; just worth less.
We still have a large population”
Worth less. I like that, but a large population, most of whom are in debt above the level of their eyeballs, with ZERO prospects to change their economic circumstances, but with relatively high expectations for quality of life, bodes ill on several levels.
“we are well-educated compared to most other macroeconomic zones in local aggregates.”
I submit that being well educated doesn’t necessarily translate into a happy economic circumstance. In fact, I’d say we’ve shot our wad with our educational value ad. That’s all we’ve really
had to offer over the last generation in exchange for exporting manufacture abroad, and now the gambit (where we exchange all that we once had to become the expert advisors to those that now possess what we once had), has been unmasked as utterly unworkable.
What’s more, our educational infrastructure at all levels, but particularly the university level is in the early stages of taking a massive hit. You see, the bubbles haven’t just been in the well advertised areas of stocks, real estate, commodities, (and now) treasuries, but in education and health care as well, and they are well and truly popped.
“substantial manufacturing, a comparatively rich resource base, etc., etc. Are potentials are large, real, and continuing. But we have so mismanaged our industrial policy and permitted unprecedented parasitism in our financial structures that we have negated those potentials _temporarily_. “
Substantial manufacturing? No, we don’t have substantial manufacturing. We’ll see how temporary it is going forward.
“The longer we spend clinging to this failed superstructure and its architects, to use a semi-relevant term, rather than replacing it, the longer our recovery will take, and the lower amplitude relative to potential it will achieve. The US and our currency isn’t through, but both are being incompetently managed, so we will get the consequence which usually follows this sort of thing. And this isn’t something that “China will do to us,” or anyone else: it is something we have allowed a few amongst us to do to and for all of us. We made this bed; ergo . . . .”
Yes, we did. We killed our own golden goose and now one must own gold.
Edwardo said,
“Anyone care to comment on the following from Peter Schiff?
http://news.goldseek.com/EuroCapital/1231524773.php“
I’m no expert, but am rapidly wrapping my head around all this and want to thank everything for their insights and discussion. I feel like I’m getting a master’s education in how the real world of economics works by reading this blog!
I respect Schiff, but he’s been completely blind-sided by deflation and refuses to acknowledge how deep this rabbit hole goes. His thesis is that Treasuries are in a bubble, and because of new issuance (supply), demand will dry up.
Mish argues otherwise on his blog, and I agree with him. U.S. banks will be, and already are, massive buyers of U.S. Treasuries as they attempt to re-cap their balance sheets. Add to that the process of de-leveraging bringing back dollars to the U.S. from abroad, and you have a massive “whoosh” of liquidity coming back home. This, combined with an economy that looks to be mired in recession for a few years, thus adding more demand for “safe” investments, will underpin Treasuries for the foreseeable future. (evidence A: In the first week of January, the U.S. Treasury sold $16 billion in 10-year treasuries, and it was over-subscribed by almost 3:1. Contrast that with weak demand for Indian, Turkish, and Brazilian debt over the last week).
Again, not an expert here, but I think the “Treasuries are in a bubble” argument is a little simplistic. Also remember that Schiff really does have an axe to grind with the U.S. government due to past personal history (his father went to prison for not paying taxes).
Am I missing something?
I hate to sound simplistic, but Schiff is a rabid libertarian. The reason it matters is that he lets it color his investment advice.
Interesting anecdote about Shiff’s family history with the U.S. Government. They say the sins of the father are visited on the children, but they don’t mention the very deep rooted phenomenon of children fighting battles on behalf of one or more of their parents.
All that aside, I don’t agree with your following assertion due to what I view as a flawed premise:
“This, combined with an economy that looks to be mired in recession for a few years, thus adding more demand for “safe” investments, will underpin Treasuries for the foreseeable future. “
There is nothing safe about Treasuries, for the simple reason that unbridled fiscal stimulus on the part of a nation with our financial/economic profile entails enormous risk. Let’s just suppose, for a moment, that we are, in fact, looking at a deflationary event akin to The Great Depression,
imagine what is going to happen to tax revenues going forward? Long story short, none of this sounds like recipe for Treasuries acting as a safe haven for one’s cash. In fact it sounds more like the result of a massive failure of imagination on the part of those piling in, who, in my view, are assuming that the U.S. government will, no matter what, be buying its own debt with few if any consequences.
Edwardo,
I completely agree with you. In reality Treasuries are extremely dangerous, or perhaps what is most dangerous is the gross trade imbalances between the U.S. and the rest of the world. Clearly this can not continue, and we are in the beginning stages of a massive re-ordering of the global economic picture. Perhaps it simply comes down to the “perception” of “safety” on the part of people buying them.
There is another line of thought that doesn’t get much consideration, although ndk has done some nice writing on this – the Chinese, who are in the midst of their own path towards recession desperately want to continue to export their way to prosperity. If they want to export to the U.S., they have to receive Treasuries.
This, along with demand from U.S. banks (as well as European banks), could underpin Treasuries (and probably the dollar) longer than people think, despite the extremely fragile nature of the underlying value of the asset. Again, it’s perception (or if you prefer, confidence), as well as the general framework/structure of the global economic system, that underpins all of this. This framework is changing. It’s shape 3-5 years from now is anyone’s guess.
Thanks for the reply.