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Posts Tagged ‘dollar’

The dangerous case of the Chinese stumper

The dollar and euro need to be devalued by 25%-50% which means yuan must appreciate another 20%-35% from it record high (update on 26th August, 2011)

Let us call this the Chinese Stumper! (Hambone by Mike Flanagan; Cartoon courtesy - Business Standard; from issue dated 19th May 2010; Copyright - Graphic Syndication, England).

Let us call this the Chinese Stumper! (Hambone by Mike Flanagan; Cartoon courtesy - Business Standard; from issue dated 19th May 2010; Copyright - Graphic Syndication, England).

Siamese’ triplets

The Great Recession is like a case of conjoined triplets.

One is the USA – who has used their Bretton Woods licence to print dollars and flood the world market with excess liquidity. The US has also used their ‘dollar power’ to gain loyalty by favouring their allies, satellites and client states with low exchange rates that boost exports. Europe, Japan, Asian Tigers, (and now) China have all been favored with a ‘beneficial’ exchange rate in the past. At an ‘appropriate’ time, this ‘benefit’ was taken away. The US gained by ‘recruiting’ low-cost labour of these economies.

The US 'out-thunk' the Euro-zone on the Euro-currency strategy!

The US 'out-thunk' the Euro-zone on the Euro-currency strategy!

US imports, were underwritten by an increasing volume of IOUs, denominated in depreciating dollars. By paying for imports with IOU notes, the US could subsidize their high-cost exports, to these ‘semi-captive’ markets.

With dollar IOUs and dollar liquidity, US funded hi-tech R&D, overseas acquisitions (of companies, raw materials, allies), commercialize new technologies and standards (internet, software) space and defense, et al. Last forty-year estimates, show that US obtained funding equal to one full year’s US GDP. At nil cost!

All this due to the US dollar’s reserve currency status!

Can Europe be far behind

The Euro unwinds!

The Euro unwinds!

Post-Plaza Accord, Europe decided to get into ‘reserve-currency’ game, with the launch of the Euro currency in Jan 2002. As an incentive to TT-Note holders, the ECB ‘allowed’ the Euro to appreciate – vis-à-vis the dollar. This gave windfall gains to countries holding Euro as a reserve currency.

From dollar parity in 2002, the EU appreciated by more than 60%. After the introduction of Euro, in the first six years, Euro-bond holders hit a gusher. Anyone who held Euro bonds from January 2002 upto Decemeber 2007, would have made some 80% return during this six years. A return of 15% per annum. Close to junk bond returns.

After the ECB took the bait, the US played a waiting game. After running with the overvaluation bait, for 8 years, the Euro- fish is now tired. It is not able to break free of the over-valuation hook. The US is now reeling in the fish.

With a ‘strong’ currency, the option for Euro-zone is massive and painful deflation. Wages, pensions, prices, welfare state benefits will need to come down – and drastically. Do they have the steel or the hunger to do this. Used to a gold-plated Welfare State, Euro-zone does not have the moral resolve to go on a cold turkey diet of frugality.

500 years ago, a poor and marginal Europe could take the risk – and inflict genocide, slaughter, war, crime on a hapless world. Today’s geriatric Europe, effete and crumbling, cannot repeat their run of ‘success’, confronted as it is, by a militarily prepared Asia. Modern Europe’s problem is compounded by the lack of availability of victims.

Which brings us to China.

Change in US Govt securities by China - which has ranged between 30%-60% of total reserves. (Image source and courtesy - http://usa.chinadaily.com.cn). Click for larger image.

Change in US Govt securities by China - which has ranged between 30%-60% of total reserves. (Image source and courtesy - http://usa.chinadaily.com.cn). Click for larger image.

Doing business with bankrupt customers

China’s currency reserves of some US$2.5 trillion, (Update – US$ 3.2 trillion August 2011) in rapidly depreciating Euros and dollars with manufacturing overcapacity, exports-growth economic model is building into a complicated pressure head. Waiting to blow up. Already under US pressure for a yuan revaluation, add complications like

  1. Empty building blocks combined with inflated real-estate prices
  2. Bloated banks loan ledgers with ballooning bad debts
  3. Low entrepreneurial levels with foreign ownership of Chinese businesses
  4. Aging population with a dominant public sector
  5. Increasing foreign exchange reserves of depreciating currencies

and the Chinese Growth story begins to sputter.

As for the Rest of the world

The real challenge for the rest of the world, will be, one, wealth protection. Easily done. Buy gold.

Two, how do we let events unfold – safely. Insulating ourselves from the cycle of calamity, catastrophe, chaos, confrontation, confusion, crises – and then finally a crash.

A cycle that a 86-year young, mentally active, Gujju stock-broker, in Mumbai, shivering with Parkinson’s, explained to me, a few days ago.

Fears of German exit from EMU

EU's having a difficult time!

EU's having a difficult time!

weak states cannot easily leave EMU because they would pay a stiff penalty in higher rates, would be stuck with euro debt contracts, and might need controls to stem capital flight. It is a different calculus for Germany, which would see lower rates and might view EMU exit as the only way to ensure monetary stability.”Obviously, we have not reached the end game yet. However, with the latest developments, such a break-up scenario has clearly become more likely. The risk is far from negligible and the consequences for financial markets would be very severe. Investors ignore the break-up risk at their peril,” he said. (via Morgan Stanley fears German exit from EMU – Telegraph).

How many Euro-currencies …

A super-dense, power-currency, union between France, Germany, Italy and UK may have a chance of survival. At least, Joachim Starbatty, a professor emeritus of economics at the University of Tübingen, seriously proposes that Germany withdraw from the EMU. In which case what happens to the Euro? Will it become a 2nd-class currency of the Euro-zone?Will Europe splinter into another 20 currencies?

Idle minds?

Turning the clock back, to recreate a German Deutschmarks, surely the Germans realize, is the last resort. A en flambé Europe  may justify such a last step. Europe is at least a few decades away from such a situation. Unless the gentle decline of Europe gathers significant pace, such thinking will be defeatist. Europe has invested too much and gone too far down the road to turn back. In a stressed financial sector, mandates are difficult and far in between.

One way to draw attention is to give out such reports.

Europe ain’t crying about the Yuan

April 5, 2010 5 comments

Euro-zone is not sniffling? What is the secret?

Euro-zone is not sniffling? What is the secret?

No-one shouts louder than American politicians over the value of China’s currency. But other countries may be ready to speak up too. Five G20 leaders this week called for a more “consistent” approach to exchange rates — with fingers implicitly pointing at China. The yuan is a matter of global concern. But widening the debate might not help the US cause.The euro zone is China’s largest trading partner and the yuan is pegged to the dollar, so euro companies should have more reasons to complain than their American competitors. One dollar, and thus one yuan, is worth quarter less in euros now than in November 2008. (via Group-think needed).

Europe ain’t complaining about the Yuan

Greece, Ireland, Italy, Portugal, Spain, are on the verge of a sovereign default. Eurozone is upto its gills in debt. The Euro is being called names. And they are not snivelling about the Yuan and China.

Very un-European!

China and U.S. soften tone on yuan

The poor will pay a price ... as usual.

The poor will pay a price ... as usual.

Amid harsh rhetoric, Chinese Vice Commerce Minister Zhong Shan and U.S. Treasury Secretary Timothy Geithner sounded some conciliatory notes on Wednesday.Mr. Zhong, making a 30-hour visit to the U.S. to try to ease bilateral tensions, expressed confidence that politicians from the two countries “have the wisdom and ability to resolve existing problems.“Mr. Geithner said he be- lieved China would allow its currency to appreciate over time, according to a CNN interview transcript. While the U.S. “can’t force them to make that change…I think we can work through the tough things we have together,“ Mr. Geithner said.The stakes are high for both sides. The U.S. and China are among each other’s biggest trading partners, and numerous U.S. companies have investments in China. The U.S. is increasingly looking to China to cooperate on international strategic issues, such as nuclear nonproliferation and the fight against terrorism. (via WSJ ON YUAN – China and U.S. soften tone on yuan).

Let the games begin!

Rousing 'macho' WASP voters!

Rousing 'macho' WASP voters!

The Dragon and the Eagle are squaring off! An experienced US stalks China, waiting behind high walls of US$2500 billion foreign exchange reserves.

The US-China game has started in earnest. US, egged on by ‘macho’ voters and a cheering media, will:-

  1. Act tough
  2. Behave in a morally outraged and indignant manner
  3. Commentators will prescribe a trade war and sanctions

In parallel, analysts, academics, think-tanks, journalists will talk-up China. Like Greenspan talking-up the US dollar or Dow Jones. They will: -

  1. Hold up China an nation-exemplar
  2. Write books analysing on China. Such books will start pour out of our ears
  3. Make movies and novels about the ‘dominant’ Chinese in the US
  4. Study, extol Chinese culture /tradition /history, and hold forth as a shining example.

And China will be ‘uncompromising’! Act as though, they have a choice.

A certainty

The change in dollar-yuan exchange ratio will happen. Peacefully, or with violent side shows. Assuming that the dollar-yuan revaluation will happen smoothly, is fraught with risk. That it will happen, without any significant disruption, is one, big, huge, slippery assumption. What will follow the Chinese moment in the sun?

Economic mayhem?

What remains to be seen

What could set off economic mayhem in China? Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario)?

Will the Chinese Government be able to ride this storm? Without a war with India? Which side of the fence will China fall? Answers to these questions will be worth waiting for! And prepared with!

Last time …

It would do well to remember that last time when China had a problem, it resulted in the India China War of 1962. Just after the disastrous Great Leap Forward and before the equally disastrous Cultural Revolution.

The Great Leap Forward began in 1957-58, saw famine and hunger across China. After the Communist takeover of China, land seized from land owners, was given to peasants in 1949. Ten years later, in 1959, the Chinese State took away the same land from the same peasant. Food shortages, starvation followed. Western (questionable) estimates are that 30 million people died during this period. War with India followed in 1962 – a diversion from the domestic Chinese catastrophe.

What will it be this time?

The looming Yuan-Dollar currency crisis

No dearth of pretenders - EU, Japan ... and now China!

No dearth of pretenders - EU, Japan ... and now China!

There are three separate reasons for this … The reasons refer to the broad determinants of economic growth — capital, labour and productivity.

On the first, India is investing at the same rate as China (approximately 40 per cent of GDP), on the second, India’s labour force growth is about 1.8 per cent per year faster than China, and on the third, China has outpaced India by about 2 per cent per annum (for the last five years).

Most of this outpacing has had to do with the deep and deeper currency undervaluation practised by the Chinese authorities which led to two unsatisfactory outcomes: the great financial crisis of 2008, and now the largest and fastest growing polluter of the world.

For how long will the international community stand idly by? Not very, and this is the first big forecast for the ensuing decade: China’s exchange rate will appreciate significantly starting 2010. How significantly? A first year appreciation to about 6 yuan per dollar from the present 6.8 level. (via Surjit S Bhalla: India’s Shining Decade).

Plausible! Probable … Possible?

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

'Get to heaven by climbing the terraced fields'. Great Leap Forward poster, Artist - Yang Wenxiu, Published - 1958, September, © Stefan R. Landsberger

Surjit Bhalla outlines a plausible scenario – with China needing to adjusting their exchange rate upwards – much like other US client-states had to! Europe had to in the 70s, Japan in the 90s, Asian Tigers in last 10 years. As examined earlier in some detail by 2ndlook. One question is settled. There will be economic mayhem.

However, Bhalla assumes that the Dollar-Yuan revaluation will happen smoothly – without any significant disruption. And that is one, big, huge assumption – which is based on really, really slippery slope.

Bhalla would do well to remember that last time when China had a problem, it resulted in the India China War of 1962. Just after the disastrous Great Leap Forward and before the equally disastrous Cultural Revolution.

The Great Leap Forward began in 1957-58, saw famine and hunger across China. After the Communist takeover of China, land seized from land owners, was given to peasants in 1949. Ten years later, in 1959, the Chinese State took away the same land from the same peasant. Food shortages, starvation followed. Western (questionable) estimates are that 30 million people died during this period. War with India followed in 1962 – a diversion from the domestic Chinese catastrophe.

What will it be this time?

The approaching mayhem

The next few years will be tumultuous for China.

Much like, when Europe was weaned off the low exchange rate crutch in 1967-1974 period. Stagflation, oil shock, the Nixon Chop followed. How Japan had to live with endaka, the Plaza accord, with S&L crisis in the US.  Or the Asian Tigers had to reset to a higher exchange rate and higher foreign reserves, that accompanied the 1997 (Asian Crisis) to 2000 (The Tech meltdown).

What will follow the Chinese moment in the sun? What will set off economic mayhem in China?

Crime in China (a simmering threat), terrorism in Xinjiang (remote possibility), real estate bubble (a real scenario), dollar-yuan exchange ratio (significant risk)?

Will the Chinese Government be able to ride this storm? Without a war with India? Which side of the fence will China fall? Answers to these questions will be worth waiting for! And prepared with!

Signs of coming troubles?

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化,行动战斗化,生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

Great Leap Forward © Stefan R. Landsberger; Source - Zhongguo meishuguan (ed.), 中国美术年鉴 1949-1989 (Guilin: Guangxi meishu chubanshe, 1993). Designer: Zhang Xin'guo (张辛国); Liu Duan (刘端); 1958, October; Put organizations on a military footing, put actions on a war footing, put life on a collective footing; Zuzhi junshihua, xingdong zhandouhua, shenghuo jitihua (组织军事化,行动战斗化,生活集体化); Publisher: Hebei renmin meishu chubanshe (河北人民美术出版社).

When the Soviet Union imploded, one of the unexpected fall out was the Russian mafia. Recent troubles in China, with the underworld creates a spectre of yet another mafia creating global disturbances. One more element in global trouble spots. To understand this better, turn to Chinese cinema.

Most films that have any Chinese element in it, (actors, directors, characters, locations) end up having the Chinese underworld as an important part of the storyline. Is it that the Chinese are morbidly fascinated by criminals and the underworld – much like Europe was with English pirates and murdering Spanish Conquistadors.

Ranging from Jet Li in Kiss of the Dragon, (Jet Li takes on the French mafia) or Chow Yun-Fat in The Corrupter (exposing police-underworld nexus and corruption in the USA), or Jackie Chan in Rush Hour series or the Chinese Ric Young in The Transporter, Jet Li in Lethal Weapon 4.

All have two elements in common.One is the pervasive Chinese underworld. Across Europe, in the USA. In drugs, fake currency, in smuggling boat people, the Chinese are there – everywhere. Many of these movies have Chinese stars, directed by Chinese directors or even partly funded by Chinese studios .

The second is the absence of the Buddhist monk.

India – the loose cannon!

What kind of ending will we see ...?

What kind of ending will we see ...?

Now, India is one box which defies description. By any global and historical standards, the country should not even exist – much less prosper, or be a significant global player. Too many languages, too much poverty, too much freedom, too many political parties, too many languages, too many religions, too many racial types are the common factors going against India (so goes the Desert Bloc narrative).

In such a situation, even in India, for the Westernized types or the remnants of the Desert Bloc admirers, India remains a failure waiting to happen.

Unfortunately, for these doubting Cassandra’s, India has proven them wrong for more than 5000 years now!

equally

Ask Unca Ben …

October 31, 2008 Leave a comment

mint COLUMN MARK TO MARKET – ShouldweaskUncleBenfordollars?:

“U S Federal Reserve chairman Ben Bernanke’s helicopter has been sighted for the first time in emerging markets, raining dollars in South Korea, Mexico, Brazil and Singapore. The currency swap lines of $30 billion (Rs1.5 trillion) arranged by the Fed for each of these markets led to a drop in dollar borrowing costs in Asia on Thursday, strengthened Asian currencies (the Korean won was up 14% against the dollar) and, together with the cut in the fed funds rate, led to a polevault in stocks in the region.

The global dollar shortage has played havoc with emerging market currencies, which have been plummeting.”

Don’t Ask … Demand

It is more like US responsibility …

The US has been evading transparency by not revealing M3 figures (on dubious grounds), printing money 24x7x365 and creating toxic assets. Now when the muck has hit the fan, they are acting coy.

China was right that the US is now looking after its own – and not bothered about the problems the US has created for other countries. Like this news article shows, India is unlikely to get seriously affected – which is possibly creating complacency in India about what needs to be done.

Announcement

The 2ndlook model for a Third currency Bloc is ready. Join in to review, participate, critique and develop the First Cut. While the need for a new global reserve currency has been evident, there is very little in the public sphere. The speed of events has clearly caught the BRICS and Third World napping – and unprepared. But, not 2ndlook – who, from the very beginning, proposed that the world should stop clinging to the Dollar-Euro skirts.

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