Reserve Currency

The speculative excesses and political power of Wall Street pose a strategic threat to the Deep State, and as a result a showdown between the Deep State and the surface machinery of governance that has been captured by Wall Street is looming. Put another way: we've reached Peak Wall Street and it's all downhill from here. This crisis is simple to summarize: the paper claims on wealth so far exceed actual wealth that something's gotta give. Simply put, the vast majority of these claims will have to be zeroed out, i.e. these phantom-claim "assets" will be voided and declared worthless. This leads to the key question: who will the Deep State throw under the bus to preserve itself and the nation-state?

Yuan volatility is part of a major rebalancing of global trade. The next phase of EM turmoil will involve banking crises in several countries including China. 

What others describe as the Deep State we term the National Security State which enables the American Empire, a vast structure that incorporates hard and soft power--military, diplomatic, intelligence, finance, commercial, energy, media, higher education--in a system of global domination and influence. One key feature of the Deep State is that it makes decisions behind closed doors and the surface government simply ratifies or approves the decisions. A second key feature is that the Deep State decision-makers have access to an entire world of secret intelligence. What would best serve the Deep State is a dollar that increases in purchasing power and extends the Deep State's power.

Celente again warned of the economic parallels with the 1930’s and said that we are again seeing recession and depressions, currency wars, trade wars and that this would lead to actual wars. His free webinar and Q & A tomorrow will look at ways to protect yourself from these risks in 2014 and beyond.

When it comes to complex systems and unintended consequences, the key phrase is "be careful what you wish for." A lot of people are remarkably certain that their understanding of how systems will respond in the future is correct. Alan Greenspan was certain there was no housing bubble in 2007, for example (or he did a great job acting certain). Some are certain the U.S. stock market is going to crash this year, while others are equally certain that stocks will continue lofting higher on central bank tailwinds. Being wrong about the way systems responded in the past doesn't seem to deter people from being certain about the future. Complex systems don't act in the linear way our minds tend to work.

Disaster.

The Likeness of God is to Create not Consume.  Ingenuity and innovation are hallmarks of our human creativity. Curiously, those marvelous characteristics unique to mankind, which have delivered the most astoundingly advanced technological productivity gains ever conceived, are now fast displacing a multitude of relatively menial jobs previously attended to by human beings, who having been anchored to unsatisfying and unfulfilling laborious routines, were less able to enjoy the free time and space certainly required to become more creative enlightened beings themselves.

Triffin’s Dilemma is that the country that issues the world’s reserve currency will have to choose between:

1 ) running a trade deficit in perpetuity - risking of a loss of confidence in its currency and solvency while the rest of the world enjoys an adequate supply of USDs.

or

2) running a trade surplus and enjoying an appreciation in the value of the dollar while the rest of the world suffers from a lack of liquidity and collateral.

Either way, there are negative implications for world growth. In the first example – in which the US runs a trade deficit in perpetuity – the US continues to add to its debt and risks undermining its ability to pay off that debt. In the second example – in which the US runs a trade surplus – emerging market currencies are put under pressure by the USD potentially leading to capital outflows, a higher cost of debt, and global financial instability.

We’ve all done it, haven’t we? Chucked something in the wash and turned it on too high, only to see it pop out at the end of the cycle and it ends up the size of your hamster. Well, Obama has been doing the same. Except this time it’s not your winter woollies that he’s shrinking, it’s the greenback.

There are two major concerns that everyone should be concerned about that we see taking this sell-off further and faster than anyone else expects...

Why would the central bank of Nigeria decide to sell dollars and buy Yuan? At first glance it might not seem the most interesting or pressing question for you to consider. But we think it is one of those little loose threads that if pulled upon carefully begins to unravel the hints and traces of a much larger story.

...Zimbabwe!

(Just yesterday, the government there announced that the Chinese renminbi (among other currencies) will become legal tender in Zimbabwe.)

In the past we have discussed at length the inevitable demise of the USD as the world's reserve currency noting that nothing lasts forever. However, when former World Bank chief economist Justin Yifu Lin warns that "the dominance of the greenback is the root cause of global financial and economic crises," we suspect the world will begin to listen (especially the Chinese. Lin, now - notably - an adviser to the Chinese government, concludes that internationalizing the Chinese currency is not the answer (preferring a basket approach) but ominously concludes, "the solution to this is to replace the national currency with a global currency," as it will create more stable global financial system.

It seems the "dollar is a reserve currency for ever and ever" propaganda has not reached Africa, also known as Southern China as explained here two years ago, where moments ago the Central Bank of Nigeria issued the following surprise announcement:

• NIGERIA CENTRAL BANK TO RAISE SHARE OF YUAN TO 7% FROM 2%
• NIGERIA CENTRAL BANK TO DIVERSIFY RESERVES INTO YUAN

But why would anyone buy Yuan when there are so many ever-more diluted dollars available?

There appears to be a somewhat interesting controversy afoot in explaining the reason for the emerging markets panic and in establishing a solution for it. The approach of Gavekal would simply like to keep the Ponzi scheme of past years rolling forward.