Friday, March 13, 2009

The US Dollar savings of China and others

The Chinese Premier said
he was worried about the safety of the huge amount of China's foreign-exchange reserves invested in US government bonds.

"I'd like to take this opportunity here to implore the United States... to honour its words, stay a credible nation and ensure the safety of Chinese assets," he said.

Almost half of China's $2tn in currency reserves is thought to be invested in US treasury bills and other government-affiliated notes.

This is amazing.

It has been known to me from spontaneous news surveying for over 3 years that the Savings of the Far Eastern nations has been financing the wasteful economic consumption of the USA and Western Europe, simply because there is no reliable Bond Market in the Far East.

What is amazing is that in the last 6 months, in the collapse of the Global Financial system, this awareness has not only permeated at last into the minds of ten-a-penny economists, political pundits, and journalists. It has also at last permeated into the official speeches of National politicians.

This is an official appeal to question the role of the US dollar as the basis of global trade. The time lag here is nearly 4 years after the facts were out in the magazines and the internet.

So why has the US dollar become so strong since autumn? The usual glib explanation is that this is because it is THE Global Reserve Currency. Yet here we have China making a public announcement that it is time to question this folly. The message will go out to the Korean, Japanese, Thai, and Malaysian governments and investors. The message is clear. They will now have to develop their own bond markets, and not depend too heavily on US Treasury paper. The Global Banking crisis has proven that their trust in each other should not be any less than their faith in the US dollar. Their trust in each other is the foundation of a bond market.

The recovery in the US dollar since last summer was recently explained by economists as this: Corporations and Institutions based in foreign nations (eg. from Britain and Korea) have in the main been issuing their Corporate debt in US dollars, not in local currencies, eg. Sterling or Korean Won. The money they raised was not kept in US dollars, and so there has been a scramble to cover their long term US dollar debts on their balance sheets. Say Globocorp in Britain raised 500 million US dollars on 5 year paper. Globocorp bought Sterling with its US dollar debt, to use as operating cash, and to spend on capital outlays. This made sense when the US dollar was declining everywhere. As soon as the US dollar became short on the money markets due to the credit crunch, Globocorp had to rush to cover their US dollars, because they would look expensive. They had to buy back US dollar positions, which can be done on the forex markets. Therein lies the recovery of the US dollar.

So the questions to ask yourselves if you are corporate financiers, economists, or politicians are these:

1. In the future, why bother raising debt in US dollars, when even China publicly throws doubt on the US dollar? Those US dollars were not even regulated by the USA Federal Reserve: they were money that was created through creative securitisation in now-defunct global Investment Banks. Even the Bank of England can invent sterling money with more substance behind it.

2. Although the US Dollar recovered as everybody scrambled to cover their long-term debts, why should it rise any more? Why should it stay up, when the money that it represented was as worthless as Dutch Tulips? Why should the US dollar stay up, when it is to the advantage of Globocorp, to raise new debt in the local currency?

The recycling of US dollars around the globe has been a joke since the Seventies game of Spot the Petrodollars. Why should anybody around the globe choose the US dollar as a global reserve currency, when it is no better than their own currency, or another neighbour's currency, or indeed of going back to gold? Why should the Saudis accept US dollars for their oil, when they can easily prefer Japanese Yen, Euros, and will now seriously even consider Chinese Yuan? Why should China hold US dollars, if the Saudis allow them to hold reserves of the Riyal?

Why should the USA provide the basis of international trust, when in fact it is no longer in a position to provide for itself?

Unlinking Oil prices from the US dollar will guarantee reduced global oil consumption. It will permit China to shift away from burning coal, which is much more climate-damaging than burning oil (there are more kilowatts per atom of Carbon in oil than there is in coal). It will permit the world to shift away from the American Dream, which even to lesser minds has at last become more obviously the American Nightmare.

A global shift away from the American Dream would help to save the Planet as much as the Global Financial Collapse. And it will help Americans learn once again how to be thrifty.

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