The demise of the dollar

[Surf n Turf]

Originally Posted by nmap

In addition, China is working to increase domestic consumption.
Given the size of the market and the pent-up demand, they might be able to do well with that strategy.

I suspect it is partly a threat to prevent the U.S. from weakening the dollar as much (and as quickly) as we would like. And its partly a warning that China is gaining economic power. Lastly, implemented carefully and over time, it could put China in a stronger position while permanently constraining U.S. spending - thus weakening the U.S.

Nmap,
I would strongly suggest that China may be doing us a “service” in preventing the decline of the USD, and constraining our spending.
That, plus some business opportunities at the 1.3 Billion person consumer market that China represents would have most Capitalists salivating.
Not to sound like a “commie-pinko”, but perhaps there is an adult in attendance on the world stage
SnT

[nmap]

On the other hand...

I came across an interesting counter-view which suggests that China may be vulnerable to a sharp economic decline. I cannot help but wonder if the party will be followed by fireworks.

LINK

Gloomy times ahead for China Oct 14, 2009

China: running out of ways to boost growth

China faces a major slowdown in the growth of its economy as investment spending loses its momentum and consumer spending fails to offset that, according to a new report from the Monaco-based investment gurus Pivot Capital Management.

Development in China has been driven primarily by capital spending, but relative to the economy that has now reached unprecedented levels – accounting for almost 90% of growth in the first half of this year. The boom cannot be sustained at current rates and the chances of a hard landing are increasing.

Analysis of industrial capacity, urbanisation and infrastructure development "shows that China's industrialisation and structural modernisation are largely complete" – therefore its future long-term fixed capital formation needs are being grossly over-estimated.

China is "running out of easy ways to boost growth through investment."

• The manufacturing base is increasingly mature and there are few areas where there's an obvious need for capacity expansion. Its current steel production is greater than that of the European Union, Japan, the US and Russia combined. Despite idle capacity of 160 million tons of steel a year, additional capacity of 60 million is under construction.

In cement, having doubled its capacity, China now produces and consumes more than the rest of the world combined.

Because of the way electricity is subsidised, heavy industry is notoriously inefficient in use of energy – which has probably led to over-estimation of future power generation needs, an important area of capital spending in recent years.

• The movement of hundreds of millions of people from rural areas to the cities "is perhaps the most quoted fundamental trend that should drive China's growth for the next few decades," generating demand for construction, real estate and home equipment.

But, the Pivot researchers argue, the "numbers are not what they seem." If the same definitions of what are classified as villages, townships and cities were used by statisticians as in other major countries, China is already one of the world's most urbanised nations.

Potential for future growth in residential property is limited by a very high home ownership level (86% in 2005) and affordability – price-to-income ratios have reached 15 to 20 times in major cities and around ten times in regional cities.

• Infrastructure has been the prime beneficiary of the gigantic stimulus package launched late last year. But the economic justification for many of the projects is increasingly questionable.

China already has a highway system two-thirds to three-quarters the size of America's, despite a vehicle population less than one-fifth the size. It has roughly the same number of bridges as the US, despite one-fifth as many rivers. The only area of infrastructure where further investment clearly makes sense is the rail network.

A lot of infrastructure projects are now in sparsely-populated inland areas ("bridges to nowhere"), or clearly primarily intended to be prestigious, such as the Qinghai-Tibet railway.

The Pivot study expects infrastructure growth to halve next year and go flat or even negative in 2011.

China bulls suggest that private consumption will overtake fixed capital formation as the engine of economic growth. But private consumption only accounts for about one-third of the economy. Even making optimistic assumptions, private consumption would have to grow three to four times faster than in the past decade to compensate for the imminent fall in fixed investment.

The coming decline in the rate of growth
Such expectations are "unrealistic." The latest central bank survey of consumer sentiment shows that a record low 8.6% of households consider their income "adequate," compared to 32% in the first half of 2007. This is "hardly star material" for a consumption boom now in China, say the Pivot researchers.

The labour market is another worry. Urban unemployment is far worse than the politically-manipulated figures suggest – probably more than double the level the government admits to, and perhaps as high as 27% of the work force. Almost a million university graduates who started looking for jobs last year are still unemployed, and about 3.5 million of this year's graduates.

The Pivot study concludes that China's economic growth is soon going to decline to 5%-6% a year, "and probably slowing down even more later on."

This will have "enormous consequences on what China imports from the rest of the world as it shifts from commodity and capital goods into (most likely locally-produced) consumer goods and services."

Gloomy stuff for bulls of the Middle Kingdom like myself. It suggests that if we want to invest in China, we need to be particularly selective and concentrate on the best-connected as well as the best-managed companies focused on future domestic demand opportunities.

• This article was written by Martin Spring in On Target, a private newsletter on investment and global strategy. Email Afrodyn@aol.com to be included on the recipient list.

[Books]

Originally Posted by afchic

I would be interested to see which nations in the world have more disposable income than the US does. It seems to me that even though folks here in the states live below the poverty line, they can still find a way to purchase a tv, cellphones, nike sneakers. Do the working class of these other nations have the same kind of disposable income? Can they support this kind of change in international currency?

Actually, the US does not have disposable income to any great degree. Just a couple of years ago, we went from having a positive savings to debt ratio to the opposite. What we have is credit, something which is both an incredible tool for growth but which has also put us in this pickle.

Further bad news. . .

http://www.nypost.com/p/news/busines...70F8D6530791C5

Ben Bernanke's dollar crisis went into a wider mode yesterday as the greenback was shockingly upstaged by the euro and yen, both of which can lay claim to the world title as the currency favored by central banks as their reserve currency.

Over the last three months, banks put 63 percent of their new cash into euros and yen -- not the greenbacks -- a nearly complete reversal of the dollar's onetime dominance for reserves, according to Barclays Capital. The dollar's share of new cash in the central banks was down to 37 percent -- compared with two-thirds a decade ago.
Fed boss Ben Bernanke may be forced to raise rates in order to restore faith in the dollar — and help bring the euro and the yen back to earth.
Getty Images
Fed boss Ben Bernanke may be forced to raise rates in order to restore faith in the dollar — and help bring the euro and the yen back to earth.

Currently, dollars account for about 62 percent of the currency reserve at central banks -- the lowest on record, said the International Monetary Fund.

Bernanke could go down in economic history as the man who killed the greenback on the operating table.

After printing up trillions of new dollars and new bonds to stimulate the US economy, the Federal Reserve chief is now boxed into a corner battling two separate monsters that could devour the economy -- ravenous inflation on one hand, and a perilous recession on the other.

"He's in a crisis worse than the meltdown ever was," said Peter Schiff, president of Euro Pacific Capital. "I fear that he could be the Fed chairman who brought down the whole thing."

Investors and central banks are snubbing dollars because the greenback is kept too weak by zero interest rates and a flood of greenbacks in the global economy.

They grumble that they've loaned the US record amounts to cover its mounting debt, but are getting paid back by a currency that's worth 10 percent less in the past three months alone. In a decade, it's down nearly one-third.

Yesterday, the dollar had a mixed performance, falling slightly against the British pound to $1.5801 from $1.5846 Friday, but rising against the euro to $1.4779 from $1.4709 and against the yen to 89.85 yen from 89.78.

Economists believe the market rebellion against the dollar will spread until Bernanke starts raising interest rates from around zero to the high single digits, and pulls back the flood of currency spewed from US printing presses.

"That's a cure, but it's also going to stifle any US economic growth," said Schiff. "The economy is addicted to the cheap interest and liquidity."

Economists warn that a jump in rates will clobber stocks and cripple the already stalled housing market.

"Bernanke's other choice is to keep rates at zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it.

"The stimulus is what's toxic -- we're poisoning ourselves and the global economy with it."


And so it goes.

[Slantwire]

Originally Posted by Brush Okie

At one point they will have a bunch of old people with one son, no grandkids and the end of the family tree with an ageging population.

I've said for years, half-jokingly, that a Chinese war of conquest was coming, with the only purpose being to provide war brides to China's sons.

[6.8SPC_DUMP]

Broad international pressure to supplant the USD as reserve currency has escalated recently...

Iran's Trade Promotion Organization has announced a future plan to completely exclude the US dollar from the country's foreign revenues and reserves.

Since October 2007, Iran has received 85 percent of its oil revenues in currencies other than the US dollar and Tehran is determined to find a substitute for the US dollar for the rest of its 15 percent of oil revenues.

The constant declining value of the dollar and persisting economic crisis in the US has forced many countries to drop the currency in favor of a more stable and valuable one.

Saudi Arabia, South Korea, China, Venezuela, Sudan and Russia have taken steps to replace the US dollar in their foreign exchange reserves.

http://www.presstv.ir/detail.aspx?id...tionid=3510213

In line with this plan, Iran has informed Japan that it should use the yen instead of dollars to pay for the oil it buys from the Islamic Republic.

http://www.tehrantimes.com/index_View.asp?code=205640

BEIJING, October 14 (RIA Novosti) - Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.

The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis.

"Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

http://en.rian.ru/russia/20091014/156468599.html

Leftist Latin American leaders have agreed on using a new intra- regional trading currency, dubbed as Sucre, instead of the US dollar.

Bolivian President Evo Morales, who hosted leaders of the Bolivarian Alternative for Latin America and the Caribbean (ALBA), said that the “document is approved.”

During the seventh ALBA summit, the leaders agreed on the currency reform as well as approving plans to impose economic sanctions against the coup leaders in Honduras, AFP reported.

The currency, Sucre, is named after Jose Antonio de Sucre who fought for Spain's independence alongside Venezuelan hero Simon Bolivar in the early 19th century.

Sucre is scheduled to be rolled out in 2010 in a non-paper form.

The nine members of ALBA, conceived by Venezuelan President Hugo Chavez, are Cuba, Dominica, Venezuela, Ecuador, Nicaragua, Honduras, Saint Vincent and Antigua, Bolivia and Barbuda.

http://www.presstv.ir/detail.aspx?id...onid=351020706

Originally Posted by The Reaper

Silver is up significantly since last week, but stocks are up as well.

TR

Tricky situation, but US stocks are being artificially inflated by the Gov., while gold/silver are being artificially deflated. Where it gets crazy is that there really is no surefire way to value gold because the only currency that it backs is 15% of the Euro (many are skeptical that the reserves actually hold 15%). So it's all speculation that if there is a new reserve currency (aside from the IMF SDR) that they will use gold as a partial "backing".

On the other hand, even though the World Bank is going to be selling a large amount of gold (once a year over the next five years), many Central Banks are now buying more gold then they sell for the first time in years. China is buying up mines like crazy, and has made it illegal to export silver, while also publicly encouraging their citizens to buy it. The US won't be minting silver coins this year and adjusted for inflation gold reached over $2000 in the 80's. Gold is also a great way to manipulate the valuation of currency so the wealth "power centers" love it. I look at gold as a longer term investment, 5-10 years, but some foreign bonds could outperform (particularly those that are inflation adjusted). If gold falls 10-25% I would be buying more not selling what you have on fears it will keep falling.

Originally Posted by Brush Okie

another thought on this. China, due to their laws of one child, that is mostly boys being born will result in a sharp decline in population in the future. At one point they will have a bunch of old people with one son, no grandkids and the end of the family tree with an ageging population. Similar to what we are seening here with the baby boomers retiriing but much more drastic. It will be intresting to see what happens then and how that will affect their economy etc. In the mean time the US and west is growing in population barring any major kill offs like the plague. Anyone have any thoughts?

China has been talking about ending/modifying its one child limit for almost two years now. It's something that they will have to do IMO; to avoid that one child having to potentially provide for 4 grandparents and set up the desired future work force/consumer base.

For the first time in 30 years, the authorities of the China’s largest city, Shanghai have launched a campaign which goal is to urge parents, who are themselves only children, to have a second child.
...
Technically, the couples living in Shanghai, and have no siblings, have been allowed to have a second child even before this campaign has started. Nevertheless, the city authorities now have started with home visits and handing over leaflets to promote the benefits of a second child and encourage families to actually have another child.

http://www.taurillon.org/Beginning-o...of-China-s-One

[6.8SPC_DUMP]

Rumors of Japan selling our Treasuries are out. Don't know how much

Not a total shock b/c our Treasury Supplemental Financing Program is being tapered off b/c we hit our debt ceiling. Once the SFP money gets taken off the balance sheet and the Fed gives it to who ever they want to, it is multiplied by 20-80x; inflasion. The thing is that it would take a while for inflation to set in from that so maybe there's more to it than giving Japan a head start.

Added:

General article on SFP
http://www.zerohedge.com/article/upc...-pump-calendar

More in depth board
http://www.newsneconomics.com/2009/0...financing.html

All boring **ssy stuff

[nmap]

Originally Posted by 6.8SPC_DUMP

Rumors of Japan selling our Treasuries are out. Don't know how much

But as Japan sells, the price goes down. Now - could that cause China to start edging toward the exit? And if they do, just how much damage does the exit cause?

Ahh, yes, boring money...which also happens to be a measure of the life and death of nations and empires...

[6.8SPC_DUMP]

Well at least they didn't announce the sale via Italian LE at the Swiss boarder

Added:
I think China is going to stay pegged to us for the time being w/ the euro getting the squeeze.

I haven't bet on it though and the next couple of weeks could be interesting.
just my .000002

[6.8SPC_DUMP]

Because of deflation Japan is injecting $115 billion into there banks they said yesterday. It would make sense that the rumor is that it would be our Treasuries they sell.

Also Geithner is also selling $135 billion worth of Treasuries next week...

I have a lot to learn, but one thing I know for damn sure: it's not a crashed stock market that put a country in a depression - it's not being able to pay your debts.

-------

The Federal Reserve Becomes the ‘Buyer of Last Resort’
November 29, 2009 – While the debate continues whether inflation or deflation will be the dollar’s eventual fate, the Federal Reserve is pursuing a pernicious policy that is insidiously debasing the dollar. This policy has generally been met with indifference, if it has even been noticed at all.

The inflation/deflation debate focuses only on the ‘quantity’ of dollars and completely fails to address an equally important monetary facet, the ‘quality’ of the dollar. The Federal Reserve is debasing the dollar by purchasing inferior assets of poor quality. These assets are mortgage-backed securities issued by federal agencies like the insolvent and for all practical purposes bankrupt, Fannie Mae.

These are assets neither the banks nor other investors want. If there was a demand for these assets, the Federal Reserve would not need to buy them. Instead of acting in its historical role as the ‘lender of last resort’, the Federal Reserve has on its own expanded its mandate to become the ‘buyer of last resort’.

By purchasing mortgage-backed securities, the Federal Reserve is debasing the dollar. Just how pervasive – and therefore serious – this debasement has become is apparent from the following chart prepared by BusinessInsider.com.

According to its latest report, the Federal Reserve now owns over $1 trillion of mortgage-backed securities, which is 45.6% of all assets owned by it. One year ago mortgage-backed securities were only 0.6% of the Federal Reserve’s total assets.

The Federal Reserve is very highly leveraged, much more than most banks. It is carrying $2,157.0 billion of debt on $52.8 billion of capital, giving it a leverage of 40.8-times more debt than capital. The mortgage-backed securities it owns are 19-times greater than the Federal Reserve’s capital, meaning that if the true value of these assets is 5.3% less than their book value, the Federal Reserve’s capital is depleted, effectively making it another insolvent institution.

Given that Fannie Mae is itself insolvent and most other mortgage generating federal agencies are not far from perilously sliding down to that same dire financial condition, it is reasonable to assume that the true value of these mortgage-backed securities is less than 94.7% of their book value. Consequently, the Federal Reserve is therefore – on a strict accounting basis – insolvent. It remains liquid because banks continue to provide it with funding and because people continue to accept in commerce and use without question the Federal Reserve’s liabilities, i.e., the paper currency it issues. But for how much longer?

On December 3rd, Federal Reserve chairman Ben Bernanke will be center-stage at the Senate for his re-confirmation hearing for another term. What should be center-stage and examined closely, however, are this professor’s chalk-board theories that he is using in his untried and untested experiments to solve the ongoing financial crisis.

One doesn’t even have to read a book on monetary history to know what the Federal Reserve should be doing. We only have to recall what Paul Volcker did when he was Federal Reserve chairman at the end of the last boom-bust cycle. He kept raising interest rates to defend the dollar.

Mr. Bernanke of course is doing the exact opposite with his zero interest rate policy, on the theory that he can save the economy without damaging the dollar. However, it is becoming clear – and the above chart is only one example – that the dollar is being irreparably damaged. Consequently, rather than saving the economy, Mr. Bernanke is hastening the further downfall of the economy and the dollar’s inevitable collapse.

http://www.fgmr.com/federal-reserve-...he-dollar.html