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Posts Tagged ‘Reserve currency’

Gold – Will the West buy or kill?

April 5, 2012 4 comments

Even before an old war ends, the Middle East sees the start of a new war. The West needs a few thousand tons of gold. Will they buy – or kill for that gold?

The Middle East has been a war-zone from WWII to now  |  Source & courtesy - McClatchy; cartoonist - Jim Morin in Miami Herald on March 19, 2012  |  Click for image.

The Middle East has been a war-zone from WWII to now | Source & courtesy - McClatchy; cartoonist - Jim Morin in Miami Herald on March 19, 2012 | Click for image.

See Ma … no hands

Under the Bretton Woods agreement, the US dollar became the reserve currency of the world. For getting European support, essential for the implementation of Bretton Woods system, the US flooded Europe with dollars.

Various mechanisms like the Marshall Plan, the IBRD, were used. This flood of US dollars, anchored European currencies – and by proxy, became equally useful. For the last 60 years now, European nations there was no need to maintain any foreign exchange reserves.

Unlike the rest of the world.

Even major economies like Japan, China, India, Brazil, Russia.

Are  things changing now?

In common with most developed countries the U.K. has no reserves worth speaking of. In truth, what is interesting is how low the reserves held by all the developed nations now are. Switzerland is the only European country with significant reserves, with $340 billion squirreled away, whilst Germany has $257 billion, and France has $172 billion. The U.S. only has $148.5 billion, although when you can print the world’s reserve currency maybe that doesn’t matter so much. Overall, however, it is only the emerging nations that have built up significant cash piles.

Central banks in the emerging markets increasing their holdings of gold has been a big part of the bull market in the metal. At the end of last year, official net purchases of gold started to rise dramatically. In the third quarter of 2011, central banks added 148.8 tonnes to their gold stocks, more than double the entire amount of government buying in 2010, according to the World Gold Council. Interestingly, the Greek central bank has been slowly adding to its holdings of gold, which would be sort of handy, should they happen to decide to re-introduce the drachmas one day.

But the next phase will be developed world central banks moving back into precious metal; the U.K., Germany, France, Switzerland and potentially the U.S. as well.

The U.K. has given the first hints that policy makers are at least thinking about it. Actual buying maybe some way off. And if they start, it will be done discreetly, otherwise the price will shoot up.

But when it starts to happen seriously, it will provide the bull market in gold with a whole new impetus. (via Why Gold’s Bull Run Could Continue – SmartMoney.com).

Iraq & Afghanistan out of the way; is it the turn of Iran and Pakistan  |  Source & courtesy - McClatchy; cartoonist - Jim Morin / Miami Herald (March 21, 2012)  |  Click for image.

Iraq & Afghanistan out of the way; is it the turn of Iran and Pakistan | Source & courtesy - McClatchy; cartoonist - Jim Morin / Miami Herald (March 21, 2012) | Click for image.

Permanent war-zone

In the last 60 years, most of these economic strategies have been implemented covertly.

For a 100 years now, the West has waged war against Islāmic economies. These anti-Islāmic wars started with WWI (1914-18), against the Ottoman Empire and Germany. Most recently, the West waged wars against Islāmic economies in Iraq, Afghanistan, Libya – and probably Iran in the near future.

Will Pakistan escape this fate?

If Pakistan falls, will India be far behind?


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.

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