Is the U.S. Dollar Headed for a Mighty Crash? Part II 29 comments
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Already, the "green shoots" of future inflation are sprouting forth in the commodities market. Base metals, energy, grains, and fertilizer are charging higher, spurred along by China’s great sucking sound, as Beijing pursues a major effort to stockpile raw materials, with prices hovering near multi-year lows. Beijing is spending 4-trillion yuan on infrastructure, to bring its roads, ports, airports, power-generation capacity and other infrastructure systems up to speed.
The Baltic Dry Index, a measure of shipping costs for commodities, rose to a seven-month high of 2,645, in London on strong Chinese demand for iron ore, coal, and grains. Crude oil rose above $60 a barrel after China increased crude imports by 14% in April to 3.9-million barrels a day. Soybeans rose to $11.65 / bushel, as US stockpiles are dwindling to a five-year low of 130 million bushels, the USDA said.
China imported 57 tons of iron ore in April, up +33% from a year ago, setting a record for a third month. China’s State Reserves Bureau SRB may have imported 300,000 tons of refined copper in the first quarter of this year. Most base metals will experience "severe" supply constraints in coming years as a lack of investment and exploration prevents miners from meeting demand when the global economy recovers, Ernst & Young warned on May 12th. "When that happens, expect metal prices to set new record highs."
In this case, the revival of the "Commodity Super Cycle" is also getting charged up by Beijing’s printing press, where the ruling elite are expanding the Chinese M2 money supply at a blistering +26% annualized clip, far above the +14.8% rate seen last November. Chinese banks have extended 5.2 trillion yuan ($750 billion) of new loans in the first four months of this year, and much of the freshly printed yuan has been funneled into the Shanghai stock market.
"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine-months, but in a range of three to 18 months. The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation," according to the late economist Milton Friedman.
Capitalizing on the still privileged position of the US dollar, the American ruling class is funding bailouts of the Wall Street Oligarchs through the sale of massive volumes of debt on world markets. The Fed’s policy of printing vast quantities of money, in part to finance the Treasury’s debt has an inflationary lag effect that has generated an extremely nervous reaction from other powers, most noticeably China, which has over $1 trillion in dollar-denominated bonds. These assets would plunge in value in the event of a major upswing in inflationary pressures.
The latest TIC report claims that China, the largest holder of US Treasury securities, increased its holdings of US Treasury bonds by $23.7 billion in the month of March to a record $767.9 billion. Yet the US Treasury’s figures are at odds with stark warnings issued by top Chinese monetary officials on March 25th. Zhou Xiaochuan, chief of the Chinese central bank is calling for a new international currency to replace the US-dollar. Li Xiangyang of the government-backed Chinese Academy of Social Sciences called the Fed’s radical QE policy "irresponsible," and asked for "specific measures on the part of the US to insure the value of Chinese holdings."
Earlier, on March 13th, Chinese Premier Wen Jiabao held a news conference to send a blunt message to Washington. "We have lent a massive amount of capital to the United States. Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried," said Wen. Furthermore, China’s trade surpluses are shrinking compared with a year ago, less than half compared with a year ago, leaving Beijing with fewer dollars to reinvest in the Treasury market.
It’s a vast stretch of imagination to believe the TIC reports are accurate, and not the configurations of "mark-to-make-believe" accounting. Yet China is caught in a bind. If it tries to lighten up on its US bond portfolio, it could trigger a global stampede to dump US debt securities and shoot itself in the foot. Still, it’s highly possible that the US Treasury is doctoring-up the TIC data, in order to prevent an imminent collapse of the debt bubble, which could send interest rates sharply higher.
Very few analysts, if any at all, have questioned the accuracy of the TIC data. The most glaring red-flag is the US Treasury’s claim that the Kremlin boosted it holdings of US Treasury debt by $30-billion from August 2008, until March 2009, to a record $138 billion. Yet over the same time span, the Kremlin sold $221 billion US dollars from its foreign currency stash, in a heroic defense of the Russian rouble from the whims of speculators, and massive capital flight from the Russian markets.
Furthermore, the US dollar's share of Russia’s FX stash fell to 41.5% from 47.0 last year, according to Bank Rossii. Russia, along with China, has raised the idea of replacing the US-dollar as global reserve currency, as the Fed tries to massively inflate its way out of the recession and bailout Wall Street Oligarchs. By any stretch of the imagination, it’s impossible to believe the accuracy of the US Treasury’s TIC report, claiming that Moscow increased its exposure to US-bonds.
Brazil and China are working towards directly exchanging their own currencies in trade transactions rather than using the US-dollar as an intermediary, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president. "What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi." The move follows other challenges by Beijing to the status of the dollar as the world’s leading reserve currency, such as currency swaps with Argentina and Indonesia.
The other key players in the US dollar, the Arab oil kingdoms, are sticking with their archaic dollar pegs, and still demanding US dollars in exchange for their oil. No wonder US president Barack Obama decided to bow before Saudi king Abdullah on April 2nd, at the G-20 meeting in London - a friendly gesture, but also sending an ominous signal of the US dollar’s precarious position.
On May 20th, Iranian president Mahmoud Ahmadinejad said his army tested a missile that could hit Israel and US military bases in the Persian Gulf; coming a day after Iran’s supreme leader the Ayatollah Khamenei accused the Americans of promoting terrorism. "The Sejil-2 missile, which has an advanced technology, was launched today, and it landed exactly on target," Ahmadinejad said. That target was the crude oil pits in London and New York, - lifting Iran’s foreign exchange income, and the value of its gold reserves in one quick-blow.
Iranian defense chief Mostafa Mohammad Najjar said the Sejil-2 has "great destructive power" and that mass production of the missile had started, rattling the nerves of the neighboring Arab oil monarchies. The Obama team was unmoved, however - and still seeks "vigorous" diplomacy with Tehran’s mullahs.
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This article has 29 comments:
A most interesting article, filled with stats that will keep me busy over the weekend! Fascinating time we live in, is it not?
Debt does not go away. All debt will be paid. Either by the debtor or by the lender, either with pennies on the dollar or with dollars that are worth pennies!
One thing for sure about the dollar, is that this will be the LAST global economic crises in which it is viewed as a safe haven.
In the end, the search for a new international currency for trading becomes interesting. And as much as some people wrote that Gold does not have the same place it used to have, well guess what, it still does. History does not guarantee the future, but it is indeed a very good indicator. The currency and economic situation is not sustainable, and buying time is only temporary, the truth surfaces and people eventually become aware of it. I believe in the work we do and the experiences we share amongst ourselves rather than listening to what the news and the government have to say, and i have to insist that it has been working. Morale of the story: stay critic and observant and make use of great common sense.
I hope you all have some Gold somewhere in your portfolio.
The dollar has thus lost the status of the basic reserve currency for the Russian Central Bank, the annual report, which the bank provided to the State Duma, said.
In accordance with the report, about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.
The dollar share had increased to 49 percent and remained so as of October 1. The euro share made up 40 percent. The rest of investments were based on the British pound, the Japanese yen and the Swiss frank
Everyone knows that China has $2 trillion in foreign reserves. Two-thirds of those reserves are said to be denominated in dollars.
But - after years of speculation - there are increasing signs that China is diversifying out of the dollar.
For example, the head of China's energy bureau said in comments published on Monday "China should use part of its nearly $2 trillion in foreign exchange reserves to buy more gold, oil, uranium and other strategic commodities".
As you can research, Chna has increased sgnficantly in these metals, using foreign reserves
And as Bloomberg writes March 13 th.:
“We have adopted a principle of diversification with our foreign-exchange investments,” said Wen. “So far, our holdings are generally safe. China will mainly use the reserves for outbound investments and trade.”
There it is, straight from the horses mouth. China appears to finally be diversifying out of the dollar.
The dollar is going south. Short US currency.
The strategy will be to let the air out of US currency / bonds slowly while concurrently taking the trade prizes for the next decades. He has no concern about Union members or consumers. China will grind its population down to take market share while the US is fatally wounded. Good strategy - if you are living in China.
I think we are midway though a two step process. As the great credit bubble began to burst, the panic lead people to move to what was safe and liquid - dollars and Treasuries. Trouble is, although these are indeed the most liquid, they are not the safest. Anyone holding Treasuries or Fed Reserve notes (dollars) has felt they were in the safest and calmest place, whereas in fact, they were in the eye of the storm. Those in power have abused the situation and created trillions of liabilities out of thin air without sound assets to set against them.
In essence, the US has bankrupted itself to save its banking system. I don't think it was worth it...
no jobs and the slow but sure continual loss of prosperity. Our future is very bleak, because this country has mortgaged it's self by benefitting those who don't contribute, but only consume. Both political parties are quilty, but especially the liberal democrats.....and especially now because they control all the branches of gov't and all of the media watch dog groups. Corporations and the very wealthy can leave this country for safe havens, but the vast majority of us cannot. Everyday I spent alot of mind energy in an attempt to "obama proof" my portfolio and protect it from the disaster in the the making.
Time is rapidly passing and I'm not sure I will succeed.
On May 21 07:56 PM Don Stacy wrote:
> The bottom line: obama chose to redistribute income as opposed to
> investing in the U.S. economy. Liberals hate wealth generated by
> others, but desire it themselves. We as a country are not creating
> new technologies or new forms of wealth (as a nation), because our
> tax policies discourage success, therefore....
> no jobs and the slow but sure continual loss of prosperity. Our future
> is very bleak, because this country has mortgaged it's self by benefitting
> those who don't contribute, but only consume. Both political parties
> are quilty, but especially the liberal democrats.....and especially
> now because they control all the branches of gov't and all of the
> media watch dog groups. Corporations and the very wealthy can leave
> this country for safe havens, but the vast majority of us cannot.
> Everyday I spent alot of mind energy in an attempt to "obama proof"
> my portfolio and protect it from the disaster in the the making.
>
> Time is rapidly passing and I'm not sure I will succeed.
The structure of reserves as of Sep 2008 (cbr.ru/publ/Obzor/2009...):
cash: 13.4 %
repo: 24.2 %
papers: 62.3 %
The structure of reserves as of Jan 2008 (cbr.ru/publ/Obzor/2009...):
cash: 8.1 %
repo: 1.2 %
papers: 90.7 %
(gov papers 77.5 %, non-gov papers: 13.2 %)
This data alone reflects the significant shift in the structure of Russian Central Bank reserves. In addition to this there are reports that last fall CBR sold about 50 bn of agency debt (Freddie and Fanny) and purchased Treasures instead. And since February CBR was not selling dollars anymore, it was buying them to slow ruble appreciation a bit, and it bought about 20 bn up to now.
Also it's not clear why you claim that "Kremlin sold $221 billion US dollars". Yes, it is nominal amount the reserves were decreased by. But if Kremlin was selling only dollars, then having initially 47% in dollars and 42% in euros, now they would have something like 5% percent dollars and 90% euros. But actually they still have 42% of dollars. Obviously the were selling both dollar end euro assets. And probably at the same buying other assets that they deemed more safe.
All in all I don't see much reason to doubt the amount of Treasures holdings by Russia.
On May 22 06:20 AM sooku wrote:
> Stop crying like babies, the debt has to be monetized and will be
> monetized - because China won't keep lending to the US. Yes, that
> will cause a slowdown in deflation and eventually, inflation. What
> did you expect? Ronald Reagan made debt a toy and private greed and
> fiscal irresposibility a religion. Now it's time to pay up.
On May 22 01:56 AM avd wrote:
> For your doubts about Russian holdings of Treasures here is some
> data from CBR (Central Bank of Russia) :
>
> The structure of reserves as of Sep 2008 (cbr.ru/publ/Obzor/2009...):
>
>
> cash: 13.4 %
> repo: 24.2 %
> papers: 62.3 %
>
> The structure of reserves as of Jan 2008 (cbr.ru/publ/Obzor/2009...):
>
>
> cash: 8.1 %
> repo: 1.2 %
> papers: 90.7 %
> (gov papers 77.5 %, non-gov papers: 13.2 %)
>
> This data alone reflects the significant shift in the structure of
> Russian Central Bank reserves. In addition to this there are reports
> that last fall CBR sold about 50 bn of agency debt (Freddie and Fanny)
> and purchased Treasures instead. And since February CBR was not selling
> dollars anymore, it was buying them to slow ruble appreciation a
> bit, and it bought about 20 bn up to now.
>
> Also it's not clear why you claim that "Kremlin sold $221 billion
> US dollars". Yes, it is nominal amount the reserves were decreased
> by. But if Kremlin was selling only dollars, then having initially
> 47% in dollars and 42% in euros, now they would have something like
> 5% percent dollars and 90% euros. But actually they still have 42%
> of dollars. Obviously the were selling both dollar end euro assets.
> And probably at the same buying other assets that they deemed more
> safe.
>
> All in all I don't see much reason to doubt the amount of Treasures
> holdings by Russia.
Oh, those clever Chinese. First they bought dollars at their peak, now they're buying gold at its peak.
On May 22 11:48 AM Kinabalu wrote:
> "China, which has over $1 trillion in dollar-denominated bonds."
>
>
> Oh, those clever Chinese. First they bought dollars at their peak,
> now they're buying gold at its peak.
i read both articles. they were useful and informative. i in no way wish to be taken as critical of the author. i just find the official numbers suspect. guess i'm gettin skeptical these days.
I am quite sure with time, more and more countries will accept RMB for trading purposes. I believe US$ has passes its zenith.
So, the U.S. has a declining share of a declining market for a currency to enable international trade or financial transactions.
In terms of the U.S. $ as a store of wealth and financial asset, China and others are clearly nervous and seeking to diversify. With every government on the planet expanding its debt issuance, there will be plenty of opportunity to diversify away from the U.S. $.
So, declining international demand and expanding supply of U.S $ government assets (bills or bonds). Therefore, price adjustment downward.
If we had all spent a lot of time Republicanizing our portfolios the past couple of years, we would be in great shape. The "disaster in the making" has been in the making for eight years now and we are bearing the fruits. Our problems didn't start on January 20, for those of you with selective memory. Bush's last budget that he submitted had a projected deficit of $1.2 trillion and, of course, with Iraq and Afghanistan off budget not included in that figure. But somehow Obama is ruining the economy even though his first budget won't take effect until next year.
As far as the commodity crisis now being touted everywhere, oil production by OPEC, Russia, etc. has been cut back. Oil inventories are close to all time highs, both in storage tanks and tankers at anchor. Gas prices are rising now because refiners are cutting back production and manipulating the market, as usual this time of year. POT just announced that they have cut back production due to lack of demand. Factory utilization worldwide is at the low end of the spectrum, which would depress steel, etc. Japan's economy shrank 15% last quarter. Just because China is stockpiling doesn't mean that there is a rise in demand by consumers. Demand creates inflation. No demand, no pricing power. The U.S. is 28% of the world economy. The EU and UK are in recession at least as bad as our. With that large a percentage of consumers on the ropes, higher prices are not the problem at this point in time. Talk to me in a year or two and things might be different.
Currently, inflation is in check. Unemployeement is up and demand for everything is down. Demand will not be increasing anytime soon. People have already started to cut back and they will continue to spend less and save more. They will live smaller.
The age of consumtion is over. The McMansions will be downsized to 2 bedroom ranch houses. People will begin to live within their means.
This will become the new normal and we will all learn to adapt to it.
We will survive and be better off for it!
On May 22 10:12 AM MarkitWacha wrote:
> The cap-and-trade tax is coming, too. We're in for loads of inflationary
> action when that happens. It will easily double the cost of energy-related
> consumer goods. Passing this legislation without raising the minimum
> wage first, and stabilizing that, is inhumane.
>
>
www.wealthalchemist.co.../
Interesting quotes from the above:
'Geithner wants China to further appreciate its RMB that means they don’t mind US dollar depreciation...However, China can't afford a strong currency at this economic cycle as an export oriented country.
China needs the US....who else is going to buy all of their knock offs, lead painted toy's etc.
If you think China is so great - put all your money in their market, and wake up one morning to find that the communist state has confiscated all business and investments.....
The USA is still the best place to put your money - and no matter what the rest of the world is saying - you can bet your ass they are investing in the good ole USA!
On May 23 02:22 PM chleoku wrote:
> One thing to note is that China is already in the bull cycle while
> US economy is still trapped in further unemployment rate and decreased
> consumption, not to mention the decaying dollar value.
>
> www.wealthalchemist.co.../
>
>
> Interesting quotes from the above:
>
> 'Geithner wants China to further appreciate its RMB that means they
> don’t mind US dollar depreciation...However, China can't afford a
> strong currency at this economic cycle as an export oriented country.
>
I prefer to invest in ideas, new technology, new drugs, things to improve life.
In 10 - 20 years let's see who has more money....
On May 21 12:56 PM RG2009 wrote:
> Very interesting indeed, lots of homework to be done here everyone.
> It is obvious the US cannot "get away with murder" here. It's not
> as if the US can simply go bankrupt and start anew under another
> name, unlike many companies do!
>
> In the end, the search for a new international currency for trading
> becomes interesting. And as much as some people wrote that Gold does
> not have the same place it used to have, well guess what, it still
> does. History does not guarantee the future, but it is indeed a very
> good indicator. The currency and economic situation is not sustainable,
> and buying time is only temporary, the truth surfaces and people
> eventually become aware of it. I believe in the work we do and the
> experiences we share amongst ourselves rather than listening to what
> the news and the government have to say, and i have to insist that
> it has been working. Morale of the story: stay critic and observant
> and make use of great common sense.
>
> I hope you all have some Gold somewhere in your portfolio.
I would have to say that for the most part I agree. HOWEVER, for it all to be realized, Gov'ts and business would have to stand fast in their current positions. This simply will not happen.
As the finacial crisis broke last fall, Gov't and business alike changed. As each new crisis occurs, they will change again.
The truely devastating crisis will occur when Gov't is no longer able to change or create change to help. For the US it will be when our debt is no longer purchased by other Gov'ts. When will that happen? Eventually the interest on our debt will surpass our ability to pay based upon tax derived income. Then we either devalue the dollar or print money and ship. Either way when that point is perceived to be reached, we - as a Country - will crash hard.
First, i did not mention to throw all your money into Gold, i did specify "some", and "somewhere in your portfolio", i.e. whether bullion, GLD or even gold mining. Besides, it would be very unhealthy for the market if we all invest in the same manner. What makes the market what it is is diversity. And for the record, i also invest in other markets than precious metals, which matches the good practice of diversification that we should all apply ("Never put all your eggs in one basket").
Besides, such forums as this one are designed to share our thoughts, not to compare our wealth. If you want to compare our respective wealth in a decade or two, you will compare alone. Success is a personal measure, everyone here has their goals.
Your optimism in regards to improving life is a valid reason to invest, a respectable one i should say. No need to impose it on others however. Again, we all have our motivation and motives to invest.
If you have other thoughts, please feel free to share them.
On May 23 09:18 PM rockingandrolling wrote:
> Gold bugs have been preaching this same old tune as long as I can
> remember. So YOU buy gold and lock it in a safe deposit box.
>
> I prefer to invest in ideas, new technology, new drugs, things to
> improve life.
>
> In 10 - 20 years let's see who has more money....
But, the gold bug will have more gold. Plus he will have during the intervening years both insurance against currency defaults AND a cash reserve if irresistible bargains appear.
On May 23 09:18 PM rockingandrolling wrote:
> Gold bugs have been preaching this same old tune as long as I can
> remember. So YOU buy gold and lock it in a safe deposit box.
>
> I prefer to invest in ideas, new technology, new drugs, things to
> improve life.
>
> In 10 - 20 years let's see who has more money....
If China Banks is as secured as you and the rest of the world want to believe it should be it will becomes dominant. But commodity and stock markets are speculatory entities like the fluctuation of oil last year - nothing to do with demand and supply. But do you trust the Chinese with your money in the hope that its government will be as stable as the Roman Empire within two millennia. You have to find save haven for your money when US is deemed brankrupted - unable to provide fiscal aides for the states and federal government. US government is the single largest employer in the US.
Imagine when the Chinese decided it doesn't want our US bonds in Trillions. Print more money and raise taxes?
Imagine government shut down, e.g. when our military personnel are not getting paid for three months like what happened to USSR.
Texas and Montana will be happy for secession. You will see a lot of migratory movements by humans. Crimes will surge. When people are hungry they do desperate things. Anarchy reigns.
The euro is still undergoing battle testing and pretty much strong but there is no guarantees it's will be stronger than the dollar in term of stability. How stable is Europe.
You have to diversify your portfolio because it only takes one smart guy, eg, Madoff or George Soros to ruin any country's economy.
Everything is about security. If a whiz kid out there finds a way to wipe out all the world banking records there will be chaos. Imagine waking up one morning and there's no record of your million dollar saving account?
So, the safest investment is still the power of gold in your hands securely hidden in your backyard until someone can take a trip to space and found trillion tons worth of planetary debris consisted entirely of gold flooding the planet making it worthless.
US is not immuned to this speculation and so are you.