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Must Read: When Reality Meets Fiction
Submitted by Nic Lenoir of ICAP
Everyone who grew up watching James Bond must have had a kick reading the news last night or this morning, and finding out about secret meetings between China, Russia, Gulf countries, France, and Brazil, plotting to organize the demise of the US dollar. Unlike in Goldfinger, the villains this time weren't planning to plant a bomb in Fort Knox, but rather stop using the greenback, and instead price currencies against a basket of currencies composed of (drums please): the yuan, the ruble, a newly created Arab currency, the euro, the yen, and gold. I don't remember reading the Brazilian real but we could throw it in there so we don't hurt anybody's feelings.
Let's be serious. Russia was inches from begging the IMF for money last fall. The Yuan is not freely tradable and money supply in China is growing at twice the pace at which it is growing in the US, the UK, or Europe. The Chinese government actually believes the acronym GDP stands for printing money to buy commodities. The Euro has shown how using a single currency for a set of different economies is extremely difficult to manage. Spain and Ireland used the euro to fuel (or extend) bubbles before completely collapsing in near-depression. Setting appropriate rates is very difficult and there is little doubt that if more Eastern European countries get integrated the problem will be magnified, as these countries will jump on the opportunity to become centers of production, and this time they will be protected under the same exchange rate regime as the rest of the EU, unlike last fall where many of them almost went bankrupt. Then comes the Yen, it has been used as part of jokes involving gazillions in several Hollywood comedies over the past 20 years but other than that it has mainly fueled every carry trade before the USD joined it.
Honestly people need to think really hard before they start discussing a new world reserve currency or other options of the sort to replace the USD. Every currency needs to be associated with an interest rate regime, which takes you back to the problem discussed before regarding the Euro. All you will achieve with a unique currency is kill any cost of production differences across the countries adopting the new currency, and align everybody on a single living standard benchmark. With different currencies, if producing abroad is cheaper a country will import, and with a negative balance of payments the currencies will adjust to reflect, thereby smoothing out the process. Eliminate foreign exchange as your equalizer and all you will have is the alignment of everybody's living standard on that of Chinese farmers. That's not even discussing bubbles that could be formed by having a standard rate curve for everybody under that new currency. Imagine if Brazilians could borrow at 0% instead of 10%? Would the Bovespa be only up 4 folds since 2000? I think not. The second issue is liquidity management. While recently it seems the method applied has been a ruthless flooding of the markets with liquidity, it remains that overall the Fed has an unmatched expertise when it comes to managing liquidity. It took all that experience and an incredible arsenal of innovative tools to insure there would not be a run on a bank last year. Managing a central bank on a more global level would be almost impossible.
Certainly many countries are concerned about using the USD as the reserve currency, and when the market for funding became tight last year many of them were afraid of going bankrupt... but it was mainly because they were short USD. Let's be very clear, if you borrow a currency and it suddenly appreciates you are in trouble. That will be true even if you used gold or copper as your benchmark. If suddenly the price of copper rose sharply and a country has some debt to refinance in copper or gold, things will be difficult. It's easy for countries whose currency don't inspire any confidence to borrow in dollars and then complain. Maybe managing their finances and currency differently would allow them to sell bonds in their local currency. After all with Turkey's CDS at an all time low, there is risk appetite for emerging anything so that financing in local currencies should be possible.
And if you decided to use a precious metal as your new currency, wouldn't there be a huge political risk with all the producing countries. Maybe it's worth going through the list of gold producing countries and make sure there are no surprises... Having unstable countries control a vital resource is dangerous, this is nothing new, and that has been a problem with oil in the past, a more serious problem than the USD can potentially be I might add. It is ironical to have countries manipulating their currencies turn around and complain about the dollar because our finances are not in order. It is reminiscent of having Lybia or Iran complain about the lack of democracy at the UN. It certainly is a fair attempt at using our politically correctness against us, but it cannot be answered seriously. Our finances are not in order, we know that, but no one is really in a position of giving lessons on the subject right now. We have an imperfect system for world trade, but it took us far and it's the best option for now, so let's not mistake misplaced malicious regional interests for inevitable future consequences, and let's have a proper open reflection on the subject.
Good luck trading,
Nic
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All this just reinforces the increasingly obvious sense I have that all this money stuff is just mortality in a bill-fold. We should all just make love everyday but pull out at exactly the right time and forget about it. Of course if I applied this mentality to my trading I´d probably have a more consistent P/L.
I agree with you. It has also once been clear that the yen would replace the dollar. I never bought that. How can a country with a surplus become a reserve currency?
I also think that gold is in full bubble modus. It's just the dollar-carry-trade, buy everything-trade. the fact that people get mad when you talk about a gold bubble only confirms my view.
I could be wrong but I do believe the US had a surplus coming out of WWII, making it a reserve currency of a country with a surplus.
Not mad, just perturbed that you won't protect your wealth by trading to gold. It sucks for you. But this is not a bubble. This is the death of a currency with no viable alternative but the one that has served as money for millennia.
I am Chumbawamba.
Quite a weak article. Obviously emotional, sounds like Nic is personally hurting about the notion of anyone dumping the greenback.
To summarize the article:
- Yes, our Great Country and Great Currency ain't healthy, but look who is speaking (btw, some minor inconsistencies --Russia was not planning to be begging IMF for cash -- it has simply spent $200Bn of own money and is still sitting on $400Bn+ now, not unlike to China)
- Then Nic talks about some sort of Global Central Bank to regulate interest rates... not clear why -- the British article was about the "basket" of currencies, NOT a Global Common Currency, Nic. What does it have to do with many convoluted paragraphs about the cost of production? Each country -- BRICs, Saudis - will continue to happily set their own interest rates. The difference would be they will not depend on the wims (or stupidity, criminality, [fill the blanks]) of the corrupt US financial system and the folks like Bernanke, Paulson, Geithner, et al.
- Nic, again, the last paragraph was some sort of diatribe against Gold as a reserve currency (got it, you are in love and in pain about beloved Greenback). But not quite sure, AGAIN, what it has anything to do with the premise of the article (which I assume was a reaction to the article from yesterday). Gold was named as one of the elements of the new "index" or basket based on which the oil would be traded... Makes total sense to me, it is called "diversification of currency risk" if you ask smart folks at GS -- away from stupidity of a single government -- one could argue to the stupidity of multiple, but, hey, hopefully their stupidity will offset each other at different times... And as for the paragraph itself, not quite sure what the "unstable countries controlling a vital resource" danger you are talking about? Gold mining countries? What does it have anything to do with the Market Basket? Or even Gold as a reserve? "Unstable countries" (I assume you are talking about South Africa, Russia, that mine most of the gold) produce something like 3,000 tons per year. Overall, the World has accumulated about 160,000 tons of gold since the beginning of times. So, 3/160=2% -- even the Gold production stops for a year, the impact on the Gold value (barring any major non-Gold related disruptions) will be close to nil. So, calm down, take a step back, think about it -- you piled up a whole bunch of stuff into this article that makes absolutely no sense, dude.
Our finances are not in order...
Our? What are you, a mouse in Bernanke's pants? Our? You can't be serious. The maggot's finances are in perfect working order, they steal with impunity. I lay claim to no ownership of that financial baggage. As far as I'm concerned I owe the rest of the world exactly jack squat. They made their deal with the maggots, let the maggots make good on all those dollar promises.
ok nic...
maybe you should go rent this movie
1981 Movie Rollover Predicts Today's News
http://www.youtube.com/watch?v=KUsj7EdZigM
Nicely put, F*** lie.
FED screwed up. Debt inflating game is plain readable by everyone.
Hey, Bill Tatro just hijacked this thread for his radio show. If you dont believe me you can replay today's archived show once it becomes avail. His opening was almost verbatim to Tyler's post. Unless Tyler = Bill Tatro?
Tyler, you can check this rss link prob in an hour or so for the replay: http://bit.ly/1yl6yo
According to Marla's last tirade (against the Hagan hit piece), "Tyler" is many people (up to 40). So maybe Tatro is one "Tyler"?
I am Chumbawamba.
Like we stated in another of today's posts regarding the Dollar: The world should be careful what they wish for. Admittedly, the dollar and the U.S. has problems (big problems). However, if one really wants, and enjoys instability -- as Nic alludes to -- then ask China, Iran, Russia and a few others to set the standard for a newly minted International SDR to replace the dollar, all managed of course by the completely neutral, IMF. While we're on the topic, why stop there, why not ask the United Nations to take a shot at it? Maybe we can call this new world currency the "Communist Currency of the World" [the "CCW"].
Silver worked well for several millenia. There is nothing new under the sun.
I am Chumbawamba.
Maybe we should buy a barrel of oil with a basket of oil?
Eventually the best unit of currency will be in energy units (joules/calories), but that's a long way off.
If we care about our specie's survival then it should come sooner rather than later. We are on pace to reach a point where it would be impossible to feed everyone with the current energy dynamics and efficiency trends in ten to fifteen years time.
monetary orgy
Monetary orgy
After reading this I am convinced that Fisk and his cadre of conspirators might be on to something. American hubris knows no bounds. As we all know the bigger they are ...
By the way NIC -- very well written piece above. Like tyler and ZH, you do good work.
Russia alone exports 10 million barrels of oil a day.
As oil is traded in USD, at let's say $70, that's of course $700 million, EVERY DAY.
If gold was $5,000 an ounce, that would be 140,000 ounces.
Look, I'll just keep it here on account for you until you need it.
Money is an illusion. Nothing is traded in money. It's traded in numbers and symbols on computers and spreadsheets. It's based on a theoretical concept that in a fire sale, if that's what it took, if that's what it came down to, just like in a bankruptcy, all the amount owed could be paid in assets.
Obviously, anyone that even entertains an idea that anything but the USD could be used has no idea of what is meant by "asset" or "capital".
The "Invisible Hand" knows how much everything is intrinsically worth even though we as mere humans have no clue. America has an absolute abundance of all the capital that anyone could ever want or need. Name something America doesn't have that some other country would want?
Gold? Please. What we don't pull out of the ground on our own soil we own elsewhere. Can you say that of the EU?
Oil? We may import 40%, but we still pull 60% of it from our own soil with no end in site. Can you say that of Japan?
Knowledge, Expertise, Education? What we lack we easily import. Hell, people are willing to die to get here. Doctor's in other countries still are unfortunate enough to drive cabs here for just the chance to raise their children. Did that all just change because the dollar got devalued?
How long do I have to go on? There is no end.
A dollar is a promise. What if the promise is broke?
This is another invisible hand element.
Would the rest of the world stand a chance in attempting to collect by force if America decided to just renege on the promise? How many countries maintain a military presence on our soil? How about in the reverse?
Please, enough of this childish nonsense, better we really should discuss weather Superman could spin the world backward to go back in time and right all the world's wrongs.
No. Dont pull numbers out of your ass. The US imports between 2/3 and 3/4 of its oil. And there is an end in sight, since US oil production peaked in the early 70's.
Other than that you are an utter moron in so many ways.
Hm, tell us how you really feel.
I am Chumbawamba.
this appears to be the type of news event that would cause the fed to all of a sudden ramp up the value of the dollar to prove that it is still the global reserve currency.
Isn't the point about "SDRs" or similar instruments/currencies that they consist of a basket of other currencies, which by themselves will still exist as before and float in whatever fashion they floated before they got basketed?
That kinda nullifies the argument comparing this to Euro, doesn't it?
Only problem with SDR's is that the biggest source of funds for the IMF is the US. Sort of the tail wagging the dog.
The US is broke, it is funding IMF with other countries' money that it had to borrow in the first place.
I thought debt was the US's major export?
If you think about the real underlying commentary one should realize that we are really talking of protectionism here when we speak of a new bundled currency. Sounds like the 1920/30s to me.This is nothing but a tariff or tax one way or the other.
Its spelled Libya, and is ironical a word?
Good thinking NIC.
"new Arab currency":
http://en.wikipedia.org/wiki/Khaleeji_(currency)
Sorry Nic, I have to go with the critique - your reasons to keep the dollar standard are not substantive. Yes, other currencies are not particularly stable, but a basket system will easily be more stable than the crappy dollar. Once oil is traded successfully with the new basket currency, other commodities will follow.
Some believe that Desert Storm part I started because Saddam started selling oil for Euros.
Whatever your position on this issue you have to observe this simple fact: 1945 - everybody loved the dollar, because no other Messiah was believable, 2009 - now there are more than one, and most of them educated in US, but working for somebody else than US.
What we are facing here is a realignment of the disparity in the standards of living between the West and the Developing Economies. There is no question that the term "reserve currency" will have to be redefined, the question is how. And however that process takes place, the journal entry will be a debit to the West and a credit to the Developing Economies.
Put that in your freaking pipe and smoke it.....
Ciao,
Econolicious
no yuan for me, thanks
With Fiat currencies, sometimes the fear of the offending currency becomes a self fulfilling prophecy. Read a Fekete essay, there is no fever like gold fever.
Its a shame when did this country go to hell? after reagan or was it before during the great society?
During Reagan.
http://www.facebook.com/sarahpalin?v=app_2347471856&ref=s
Energy indepdence, debt, and the dollar!
nice job, NIC
I wondered about this secret meeting. I mean, first of all, who caters the thing? Borscht, Kung Pao chicken, pate, and waraq 'aineb? And that's the easy part.
I suspect the most that could come out of this is merely a continuation or expansion of the kind of currency swaps China has done with Argentina, Indonesia and a few other countries. The OPEC states might do something similar with natural trading partners, but for these terribly diverse countries, cultures and economies to get together to produce a common currency or basket is fantasy. The dollar may well suffer nonetheless, but for the moment inertia is the dollar's best friend.
Go back and watch the last few scenes in Lawrence of Arabia where the Arab Council is meeting in Damascus. Now throw in Communist Chinese and Russian oligarchs and try to imagine it all working out. Oh yea, and sprinkle a few French in for good measure. ("We Are The World" plays softly in the background.)
when nic writes a letter advising to buy gold i will be selling mine...
Cheers TD for posting this. Fisk is well-known to be a pretender (search Abu Muquawama from a couple of years ago regarding his reporting from Lebanon). Nic's opinions go counter to the ZH groupthink (you really should do a tee-shirt with DITTO (ZH logo) HEAD), which is an even better reason for posting this.
No one addressed the liquidity issue. Who the fuck is going to manage interest rates and money supply with this Star Trek type currency? The EURO is a clusterfuck already-and their economies are worse than ours. Luckily no one worked in Europe in the first place, so 15% unemployment means you get to drink espressos all day.
And all the gold bugs are talking their book. 50,000 an ounce gold for all the FIAT that exists. There's a deflationary depression that will have hoards of people breaking your door down
This "meeting" was denied by every party.
So they are either lying, which would defeat it's purpose(getting the US to support it's currency) or SOME ENTITY that has the initials G and S is manipulating the oil market to shore up the price of all that sludge sitting in the USS Contango.
Someone tell me why, if oil was the "problem", that it closed only 60 cents up on the barrel?
Someone gonna tell me why crude oil raced up 2 bucks a barrel and SOME ENTITY sold off enough to drive it down 1.50 a barrel by end of day.
As another article states, The SEC and the COMEX are totally corrupt, colluding and full of shyt. GS,JPM or anyone can rumormonger all they want. It's OK under Bush, and it's 2x better under Mr. Disappointment, Barack Obama
Brilliant article. Finally someone who does not have an emotional bias on anti-dollar/pro-gold.
Gold is up on inflation CONCERNS. There is no inflation,
but even if there was Bernanke could raise rates 300% in weeks like Volcker and we would see the mother of all dollar rallies.
Gold is up on SPECULATION that a volatile group of broken economies will breakaway in 9 years? Dont make me laugh. The U.S. is the reserve currency for a reason. They have the largest military.
The Soviet Union had more or less equal military strenght and it took it about 6 years to collapse.
"All you will achieve with a unique currency is kill any cost of production differences across the countries adopting the new currency, and align everybody on a single living standard benchmark."
From the mouths of babes - You are on to something here !! Isn't this the grand goal , to align everyone on the same living standard ? Worldwide? huge pay cut for us ? Just sayin?
As a not so well informed observer of the current mess I have one big question to the people who say China is printing money.
How can you say that? As far as I know China owns about 2.3 trillion in foreign currencies, bonds etc. All paper, nothing real. It’s known they like to diversify out of fiatholdings, especially dollar holdings. As I see it they swap their fiatholdings into real holdings, mostly commodities and real money (PM’s). A side effect of this is that they create more Yuan. They need to pay the people who import, handle etc all these commodities. The result is that they have more Yuan. But these Yuan are now backed by real money and commodities instead of nothing. To me it is not printing money.
If someone can elaborate where I’am wrong, please enlighten me. Till then I do the same as the Chinese minus the commodities bying (me is just small potatoes).
As a European I can confirm that the Euro sucks. It enforces a 1 size fits none policy. My country is (also) suffering from that ?
Thanx in advance for explaining and Ill keep reading this site to learn more about this mess!
Get a screen name like, oh, I don't know, how about, The Euro Sucks. Then folks can talk to you. It is pretty easy to do. I would like to hear people talk about your question too. Welcome aboard.
They can change it to the let's gangrape germany union.
http://www.econbrowser.com/archives/2009/09/the_dollar_in_d.html
an interesting read on situations where the dollar would cease to be the world reserve currency.