The Poor, Poor Dollar

I have a treat for my readers: The Atlantic's (December 2008, p. 62) interview with Gao Xiqing, who oversees and invests $200 billion of China's $2 trillion U.S. dollar holdings. This interview is one of the best ones I've ever read because of how open the government official was.

Below are my favorite two parts from the interview, one about the American dollar, and the other about derivatives:

Everyone is saying, “Oh, look, the dollar is getting stronger!” [As it was when we spoke.] I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors. But after a short while, the dollar may be going down again. I’d like to bet on that!

I have been converting my dollars into Canadian dollars (FXC) recently. I already have euros (FXE) and some Swiss francs (FXF). We'll see in a year whether my decision was the right one. I felt compelled to diversify my U.S. dollar holdings, because they were earning around 1% in interest, while competing currencies had much higher interest rates and the possibility of greater upside.

As for derivatives, here is what Mr. Gao had to say:

If you look at every one of these [derivative] products, they make sense. But in aggregate, they are bullsh*t. They are crap. They serve to cheat people.

Mr. Gao explains derivatives by comparing them to multiple mirror reflections of one actual product. It's such a perfect analogy, I'm surprised no mainstream American publication has mentioned it until now.

Kudos to The Atlantic and Mr. Fallows for publishing this interview.

Comments

[Klugwannnabe:]

Unfortunately all currencies are linked as they should be in a Global Economy.Trying to find the better one is like looking into the multifaceted mirror relecting but one currency into many phantom copies

2008 Dec 11 09:40 AM

[ozzy43:]

I'm curious to know why the author chooses to swap one fiat currency for others (we can partially exempt the CHF from this statement, as it must by law be backed by 40% gold reserves). Massive monetary manipulation via fiat currencies issued by fractional reserve banking systems seems to be at the heart of the crisis, conventional wisdom notwithstanding. At a minimum, partial diversification into gold would seem to a better strategy, or at least to have some place in such a dollar-wary strategy. Fiat currencies are all, after all, subject to, well, fiat.

2008 Dec 11 10:18 AM

[LeoTheDog:]

Dollar weakness simply cannot occur without an offsetting strengthening of another currency. So, which currency is going to strengthen over the next year relative to the dollar, and why?

2008 Dec 11 11:33 AM

[k9s-4-k8:]

I surely don't expect the Euro to strengthen for more than a short while. Their banking system is actually in worse shape than ours.

2008 Dec 11 06:45 PM

[sandspider:]

I must agree with Ozzy43. You have a fluctuation of one fiat vs another fiat. Faith and credit but nothing else. Trading a salmon for a tuna and back again depending on the taste of the day, The South African Rand has dropped tremendously against the dollar in terms of purchasing power but yet the $$ is droping as well. FXF would be the only play in hard times because traditionally it seems to have been a storehouse of faith. But the Swiss are in this crises as well. So back to my favorite which has stood the test of time...gold and silver...or silver and gold. I know the gold markets in Dubai are going great guns these days. Europeans, Americans, Orientals and a mixed bag of other folks are always there and they are always buying. And they are driving BMW, Audi and Mercedes...me I take the bus but I have my hand outstretched as well with my fist full of Durims, Dinar and $$ to trade...

2008 Dec 12 12:02 AM

[EUARTE:]

The dollar will remain a reserve currency although in mixed baskets. Why? It simply is because there is no other currency to take it's place.

2008 Dec 12 08:31 AM

[secmaven:]

The canny Chinaman is buying the Loonie after it has fallen in value with dollars that have a straight up trajectory in a few months. No tree grows to the sky and long term I would bet on the money of a country rich in natural resources rather than a country rich in bailouts and monetary illusions.

2008 Dec 12 11:23 AM

[Asbytec:]

Ozzy, yep. In a fractional banking system, fiat currency or not, eventually debt exceeds some level and the system comes under strain. The derivative markets have accelerated this money (debt) creation process and sent the money supply out of control to boot. This is the heart of the problem, the system is over leveraged and ready to collapse. It will collapse. It must. It's a built-in trait of fractional banking.

Leo and K9, certainly not the euro. The euro is soaring on yield and a flight from risk. A stronger euro in the face of global recession (or worse) will almost force the EU to ease along with the rest of the world. I believe they're supposed to be playing the game, anyway, as coordinated with the Fed...the global quarterback.

Sandspider and Euarte, yep, all fiat currencies fail and all currencies are fiat (mostly.) So, which currency will be on top of the trash heap? My bet is on the dollar. The euro just does not have the economic demographics nor the ability to support huge trade deficits to displace the dollar and become the world reserve currency.

2008 Dec 12 10:47 PM