Alternate to US dollar: China gives up

[GoFlyKiteNow]

Two weeks ago the Russians gave up the idea of an alternate currency to the US dollar.

China says dollar to remain leading world currency
6 Jul 2009, 0049 hrs IST, REUTER

ROME: Chinese Deputy Foreign Minister He Yafei said on Sunday the U.S. dollar would continue to be the world's leading reserve currency for years
to come.

"The U.S. dollar is still the most important and major reserve currency of the day, and we believe that that situation will continue for many years to come," He told a news briefing in Rome before this week's Group of Eight summit.

Beijing has floated the idea of an alternative to the dollar as world reserve currency and wants the topic broached at the summit starting in Italy on Wednesday.

 

[longbow]

I think you miss the point. Chinese are looking into the future - 20 to 30 year time frame. That is when the Chinese economy will become bigger than that of the US. So they are planting that idea into the global community. Why not have an international alternative? This is an excellent time to raise the issue because many countries have concerns with the US currency. Remember that the Chinese hold close to 1.5 Trillion in US debt so any loss of US$ position as a reserve currency overnight will affect this holding.

But if you were to look 30 years out. For example, the Chinese buy up 60% of all Russian and Saudi energy output, 60% of Brazil's and Australia's mineral resource output and in return Russia, Saudi, Brazil and Australia's 60% of imports (manufactured goods)come from China then why would they need the US as a reserve currency.

This is especially true should the US's military capability be reduced due to budget issues. Part of US $ reserve status is because of it being the world largest economy and also because of its position as a military super power.

If you were to look at current US deficits, factor in aging baby boomers and health care and then project US's military commitment in Iraq and Afghanistan for another 10 years, it is entirely possible to see the US disengage from international arena.

The Chinese are putting together the foundation for a new reserve currency under IMF where the Chinese will have a say in things (understandable since they will be the world's largest economy by then). Now many of the other players (Russia, Japan) have concerns with this supposed new reserve currency because of Chinese influence and they are jostling for a say in how this is going to happen. Remember that any such new currency will be underpinned by a country's reserves - something which the Chinese have lots of.

Two weeks ago the Russians gave up the idea of an alternate currency to the US dollar.

China says dollar to remain leading world currency
6 Jul 2009, 0049 hrs IST, REUTER

ROME: Chinese Deputy Foreign Minister He Yafei said on Sunday the U.S. dollar would continue to be the world's leading reserve currency for years
to come.

"The U.S. dollar is still the most important and major reserve currency of the day, and we believe that that situation will continue for many years to come," He told a news briefing in Rome before this week's Group of Eight summit.

Beijing has floated the idea of an alternative to the dollar as world reserve currency and wants the topic broached at the summit starting in Italy on Wednesday.

 

[hockbeng]

They are not that stupid.

Publicly declare their faith in the USD and secretly dump the USD in private.

Everyone knows the USD is on the way down.

 

[GoFlyKiteNow]

I think you miss the point. Chinese are looking into the future - 20 to 30 year time frame. That is when the Chinese economy will become bigger than that of the US. So they are planting that idea into the global community. Why not have an international alternative? This is an excellent time to raise the issue because many countries have concerns with the US currency. Remember that the Chinese hold close to 1.5 Trillion in US debt so any loss of US$ position as a reserve currency overnight will affect this holding.

But if you were to look 30 years out. For example, the Chinese buy up 60% of all Russian and Saudi energy output, 60% of Brazil's and Australia's mineral resource output and in return Russia, Saudi, Brazil and Australia's 60% of imports (manufactured goods)come from China then why would they need the US as a reserve currency.

I have said this many a time. If you go by text book economics and what the financial analysts harp daily, then the dollar days ought to be over when other economies play catch up with the USA.

However, it is not GDP figures that essentially determine whether the dollar currency is the global reserve currency. No doubt the USA as the largest economy by far has the sole to absorb large amount of global funds into its treasury without upsetting its economic equilibrium.

But more importantly, it is the software that backs the hardware (GDP) that decides which will be the reserve currency of choice. By software I mean the independent financial institutions, regulatory authorities, the independent legal system, the rigid constitutional obligations and the political accountability via a matured democratic electoral process..these are the factors that underline the real strength and inspire confidence worldwide - to park capital in the safest haven with iron clad guarantees provided by constitutional and legal foundations.

It too the USA nearly 150 years to arrive at this matured status. China is right now at level zero in this context. And nobody knows if or when it will start to transform..and from there how many decades before it can reach the USA status.

In short, the intangibles factors matter more than the tangibles.

 

[longbow]

As I had mentioned dollars days are not over because US is still largest economy in the world as well as military super power. But in 30 years time .....

As far as software is concerned, I do not think the current bailouts and scams within the US financial bodes well. They even adjusted how Tier 3 assets are to be valued.

You should not look at how long it took the US to become economic superpower. Instead you should see how quick it took Brits to lose that status to the Americans.

The Chinese cannot be at ground zero in economic development because if so how would we categorize countries like Pakistan, India, Vietnam, Burma etc etc etc

 

[hockbeng]

I have said this many a time. If you go by text book economics and what the financial analysts harp daily, then the dollar days ought to be over when other economies play catch up with the USA.

However, it is not GDP figures that essentially determine whether the dollar currency is the global reserve currency. No doubt the USA as the largest economy by far has the sole to absorb large amount of global funds into its treasury without upsetting its economic equilibrium.

But more importantly, it is the software that backs the hardware (GDP) that decides which will be the reserve currency of choice. By software I mean the independent financial institutions, regulatory authorities, the independent legal system, the rigid constitutional obligations and the political accountability via a matured democratic electoral process..these are the factors that underline the real strength and inspire confidence worldwide - to park capital in the safest haven with iron clad guarantees provided by constitutional and legal foundations.

It too the USA nearly 150 years to arrive at this matured status. China is right now at level zero in this context. And nobody knows if or when it will start to transform..and from there how many decades before it can reach the USA status.

In short, the intangibles factors matter more than the tangibles.

The USD was and is the reserve currency NOT because it was an economic power house or world's biggest economy.

It was because USA was the last country to drop the "gold standard". The reason why all countries held on to USD cos the US dollar was redeemable in gold, at least until 1971 when this peg to a certain weight in gold was dropped. This allowed the Governments to print shitloads of $$$$ that it didn't have to spend; like now with all the wars and bailouts and trillion dollar deficits etc.. This could never have been allowed under the gold standard.

Thus it was because USD = Gold that it was the reserve currency, and old habits hard to change.

 

[GoFlyKiteNow]

As I had mentioned dollars days are not over because US is still largest economy in the world as well as military super power. But in 30 years time .....

As far as software is concerned, I do not think the current bailouts and scams within the US financial bodes well. They even adjusted how Tier 3 assets are to be valued.

You should not look at how long it took the US to become economic superpower. Instead you should see how quick it took Brits to lose that status to the Americans.

The Chinese cannot be at ground zero in economic development because if so how would we categorize countries like Pakistan, India, Vietnam, Burma etc etc etc

....bear in mind..the current turmoil in the financial markets came out of a system that hd also produced continuous non-stop prosperity globally for 70 odd years. There is no parallel performance by any alternate system that comes even close. And hence a bust cycle after 70 years must be assessed objectively within the context of this long 70 year time span.

 

[GoFlyKiteNow]

The Chinese cannot be at ground zero in economic development because if so how would we categorize countries like Pakistan, India, Vietnam, Burma etc etc etc

You misunderstood. I meant - Ground Zero in the software aspect. By software I mean what I mentioned in my original post..the Independent constitutional institutions, matured open political system and so on...

 

[Zombie]

The USD was and is the reserve currency NOT because it was an economic power house or world's biggest economy.

It was because USA was the last country to drop the "gold standard". The reason why all countries held on to USD cos the US dollar was redeemable in gold, at least until 1971 when this peg to a certain weight in gold was dropped. This allowed the Governments to print shitloads of $$$$ that it didn't have to spend; like now with all the wars and bailouts and trillion dollar deficits etc.. This could never have been allowed under the gold standard.

Thus it was because USD = Gold that it was the reserve currency, and old habits hard to change.

Up points

Very few people know/remember why there was the Bretton Woods System and how it made the USD the reserve currency.

 

[GoFlyKiteNow]

The USD was and is the reserve currency NOT because it was an economic power house or world's biggest economy.

It was because USA was the last country to drop the "gold standard". The reason why all countries held on to USD cos the US dollar was redeemable in gold, at least until 1971 when this peg to a certain weight in gold was dropped. This allowed the Governments to print shitloads of $$$$ that it didn't have to spend; like now with all the wars and bailouts and trillion dollar deficits etc.. This could never have been allowed under the gold standard.

Thus it was because USD = Gold that it was the reserve currency, and old habits hard to change.

Gold standard.?..how is it practical in today's world vis a vis the smaller economies of 40 years ago.?. There is simply not enuf gold going around to back up todays 15 trillion dollar US economy. Unless you price gold equally upwards. Maybe 20,000 USD an oz. ( as against 950 USD now ). That would be the same as using print money economics.

Or for example, compared with 40 years ago, today a 5 oz plastic disc can cost 10,000 dollars or more - if that plastic happens to contain a computer software on it. ( 5 gm of gold costs only 160 USD today ).

 

[hockbeng]

Gold standard.?..how is it practical in today's world vis a vis the smaller economies of 40 years ago.?. There is simply not enuf gold going around to back up todays 15 trillion dollar US economy. Unless you price gold equally upwards. Maybe 20,000 USD an oz. ( as against 950 USD now ). That would be the same as using print money economics.

Or for example, compared with 40 years ago, today a 5 oz plastic disc can cost 10,000 dollars or more - if that plastic happens to contain a computer software on it. ( 5 gm of gold costs only 160 USD today ).

1. All I'm saying is that the reason why the USD was the reserve currency was becos it was redeemable in gold. Gold versus Fiat currency; which would you prefer to keep or store your reserves? Real physical gold or pieces of paper that the Gov can print endless amounts.

2. Under the gold standard, there was more Gov discipline. Look at what the US Gov is doing for the past decade? Running trillion $$ deficits. It is spending money it doesn't have/collect in taxes. How? Print/Borrow lah! How much further can this arrangement go?

3. 15 Trillion $ economy? The reason why its trillion $$ is because of massive increase in money supply since the Gold Standard was dropped, and it has resulted in massive inflation over the years.

4. It is not be nominal value of your salary, bank balance etc.. It is the purchasing power of that dollar that is important. I remember 10c could buy you many things 20 years ago but not now. Inflation is how the government steals away the wealth of its citizens without anyone noticing.

5. This is exactly what the US Gov is trying to do for their banks: Inflate their debts and toxic assets away, and hope the world doesn't notice. Well if you are the holders of USD debt (like china and russia and japan), you'd start getting very worried (although they don't talk much about it).

6. Gold is very practical when it comes to protecting/preserving wealth. When shit hits the fan, there is always a flight to gold.

I'm dumping the USD whenever I receive any dividends in USD.

 

[AhSo1]

Two weeks ago the Russians gave up the idea of an alternate currency to the US dollar.

China says dollar to remain leading world currency
6 Jul 2009, 0049 hrs IST, REUTER

ROME: Chinese Deputy Foreign Minister He Yafei said on Sunday the U.S. dollar would continue to be the world's leading reserve currency for years
to come.

"The U.S. dollar is still the most important and major reserve currency of the day, and we believe that that situation will continue for many years to come," He told a news briefing in Rome before this week's Group of Eight summit.

Beijing has floated the idea of an alternative to the dollar as world reserve currency and wants the topic broached at the summit starting in Italy on Wednesday.

Translation :

We (China) absolutely refuse to allow full convertability of our currency as our mighty reserves might be subject to fluctuation and our central bank balance sheet might actually suffer as a consequence. We (China) don't want that responsibility, we intend to keep our currency artificially low and shielded from any type of risk whatsoever and continue bathing in pure wanton liquidity and safe (hopefully) US Debt. We (China) will instead allow the US to take that responsibility and and we wont be too unhappy when such responsibility causes the Americans consternation. We are somewhat annoyed at the US as they have decided to follow our lead and ditch their currency, and we are more than a little put out at Japan for copying us. We are amused by the strength of the Euro and other currencies of commodity rich nations, as someone has to pay for American debt and you had better believe its not going to be us (China) Let the Europeans and Australians pay for it. May their interest rates not destroy them overnight. We are laughing at their consumer prices and inflation.

Also, we will continue to publish fake GDP numbers that suggest the size of our economy is only approx 4 Trillion USD when in fact it is many times more than that. We (China) will never admit our true economic might as we prefer to let other nations deal with world problems and the International Political Economy. We have better things to do like get fat and make cheap products to sell to America, who already have the lowest consumer prices in the world.

We are China after all

 

[hockbeng]

Translation :

We (China) absolutely refuse to allow full convertability of our currency as our mighty reserves might be subject to fluctuation and our central bank balance sheet might actually suffer as a consequence. We (China) don't want that responsibility, we intend to keep our currency artificially low and shielded from any type of risk whatsoever and continue bathing in pure wanton liquidity and safe (hopefully) US Debt. We (China) will instead allow the US to take that responsibility and and we wont be too unhappy when such responsibility causes the Americans consternation. We are somewhat annoyed at the US as they have decided to follow our lead and ditch their currency, and we are more than a little put out at Japan for copying us. We are amused by the strength of the Euro and other currencies of commodity rich nations, as someone has to pay for American debt and you had better believe its not going to be us (China) Let the Europeans and Australians pay for it. May their interest rates not destroy them overnight. We are laughing at their consumer prices and inflation.

Also, we will continue to publish fake GDP numbers that suggest the size of our economy is only approx 4 Trillion USD when in fact it is many times more than that. We (China) will never admit our true economic might as we prefer to let other nations deal with world problems and the International Political Economy. We have better things to do like get fat and make cheap products to sell to America, who already have the lowest consumer prices in the world.

We are China after all

US-China relations = One big vendor-financing scheme. The Americans borrow from the rest of the world (esp china), and then spend the $ to buy products from the rest of the world (esp china).

This means (at least until recently), the americans get to enjoy the products/stuff made by china while the chinese get to keep their jobs.
What good are jobs without stuff/products? That's slavery!

The chinese are not stupid and will start to realize that there is little point to keep producing and under-consuming while the americans keep consuming and not producing. In simple economics, in order to import stuff, consume and raise your standard of living, you have to also produce & export something else in return. Otherwise, there would be an imbalance, just like in any inter-personal relationships.

What do americans produce & export?: Cars that the rest of the world doesn't want; Movies; Songs; Microsoft(Winshit); Financial products & derivatives.
Hardly enough to sustain their massive appetite.

The chinese population will start to realize that there is little point in being slaves to america and start consuming their own products themselves.

 

[GoFlyKiteNow]

1. All I'm saying is that the reason why the USD was the reserve currency was becos it was redeemable in gold. Gold versus Fiat currency; which would you prefer to keep or store your reserves? Real physical gold or pieces of paper that the Gov can print endless amounts.

2. Under the gold standard, there was more Gov discipline. Look at what the US Gov is doing for the past decade? Running trillion $$ deficits. It is spending money it doesn't have/collect in taxes. How? Print/Borrow lah! How much further can this arrangement go?

3. 15 Trillion $ economy? The reason why its trillion $$ is because of massive increase in money supply since the Gold Standard was dropped, and it has resulted in massive inflation over the years.

4. It is not be nominal value of your salary, bank balance etc.. It is the purchasing power of that dollar that is important. I remember 10c could buy you many things 20 years ago but not now. Inflation is how the government steals away the wealth of its citizens without anyone noticing.

5. This is exactly what the US Gov is trying to do for their banks: Inflate their debts and toxic assets away, and hope the world doesn't notice. Well if you are the holders of USD debt (like china and russia and japan), you'd start getting very worried (although they don't talk much about it).

6. Gold is very practical when it comes to protecting/preserving wealth. When shit hits the fan, there is always a flight to gold.

I'm dumping the USD whenever I receive any dividends in USD.

You have enumerated the practicality of gold as a nest egg - for individual savings..however, nest egg qualities do not empower gold the candidacy for being a reserve currency..simply because there is not enuf gold (physical) on the planet to be used as a reserve instrument that reflects the huge GDPs of the present day world.

Yes, you are right abt what the US government is doing now to cool down the confidence crisis. But if you look carefully, the deflation is across the board and asset values have been brought down universally...hence no one is the loser in relative terms..the entire economic quantum has all been lowered by a few notches globally....thus placing all at the same economic levels vs each other.

 

[londoncabby]

Translation :

We (China) absolutely refuse to allow full convertability of our currency as our mighty reserves might be subject to fluctuation and our central bank balance sheet might actually suffer as a consequence. We (China) don't want that responsibility, we intend to keep our currency artificially low and shielded from any type of risk whatsoever and continue bathing in pure wanton liquidity and safe (hopefully) US Debt. We (China) will instead allow the US to take that responsibility and and we wont be too unhappy when such responsibility causes the Americans consternation. We are somewhat annoyed at the US as they have decided to follow our lead and ditch their currency, and we are more than a little put out at Japan for copying us. We are amused by the strength of the Euro and other currencies of commodity rich nations, as someone has to pay for American debt and you had better believe its not going to be us (China) Let the Europeans and Australians pay for it. May their interest rates not destroy them overnight. We are laughing at their consumer prices and inflation.

Also, we will continue to publish fake GDP numbers that suggest the size of our economy is only approx 4 Trillion USD when in fact it is many times more than that. We (China) will never admit our true economic might as we prefer to let other nations deal with world problems and the International Political Economy. We have better things to do like get fat and make cheap products to sell to America, who already have the lowest consumer prices in the world.

We are China after all

sounds alot like singapore. must be a chinese thing.