CautiousInvestor

Spare a Dollar? Why We Need a New Monetary System Now

More important than my comments.........great article Edward.

Spare a Dollar? Why We Need a New Monetary System Now

"This is exactly what the Chinese are doing. They are preparing themselves for a non-dollar future. This is why the Chinese are buying gold. This is why the Chinese are settling trade in Yuan. And this also why the Chinese are getting a bunch of other countries onside. "

That and SDR's may be rebalanced to reduce the current weight given to the dollar but none of this does a currency make. One other interesting point: China and others who pegged their currencies to the dollar have been gaining export market share because their currencies have been falling vis-a-vis the euro and yen. The recent improvements in China's export performance was due to it gaining market share through a depreciated currency, not an expansion of international trade. China is now the world's largest exporter and the largest exporter to the US. Ironically, the weaker dollar while improving US exports is making us more reliant upon China as surplus country as their market share expands.

The Dollar Is Now China's Problem

The imbalances between China and the US remain a a bilateral problem; both countries must address their respective weaknesses.

For China, as the author correctly points out, it is the need to move towards a more consumption driven economy through improving education and epanding healthcare and retirement benefits. Along with rising incomes, this should help in making China more consumption driven.

The US, on the other hand, must do something to contain its reckless spending and borrowing policies to reduce its reliance upon sucking up all of the surplus capital available on the planet.
If we do not, we will place ourselves at economic risk and expose our creditors and currency to losses.

The depreciation of the dollar, while helpful, must be accompanied by efforts to expand savings, reduce consumtion, become more cost-effective and shift production to export goods and good that compete with imports. Currency alone is not sufficient.

China, India, Brazil, Turkey and other emerging market countries are providing the kind of domestic demand-driven growth stimuli that could pull the US along in its wake but these are the same countries that are most unlikely to prevent a real depreciation of the US dollar and a real appreciation their currencies.

China may allow a slow appreciation of their currency as internal consumption replaces exports, making it a long term process.

The Great Shift: China Rising, U.S. Falling

That China faces challenges to growth, cannot be argued but remember they are challenges not obstacles and with its massive population of over 3 billion people it does not have to follow historical patterns of growth and power. They are already projecting power forward through countless strategic relationships across Asia, Africa and South America; capitalism is being used in place of military power.

At the root of everything lies the question of whether the country's political structure is conducive to sustained growth. In the west, the classic pattern of development has been for economic change to stimulate demands for political reform and greater democracy. Fear of political change could hold China back; the top-down fiscal package exacerbated the fundamental weakness of the economy in expanding the role of state owned enterprises. The stimulus has rewarded many state owned enterprises and over the long run the role of SOE’s must be reduced while giving wider berth to small, privately held companies which will be more responsive to market changes and better incentivized to innovate.

The second biggest challenge for China is to move from an export driven economy to a more balanced model in which domestic consumption plays a larger role that it does today. Relative lack of healthcare and the cost of a decent education mean that families save far more heavily than in the west, leaving them with less money left over at the end of the month to spend. China must extend upon its rudimentary social safety net and expand educations, pensions and health care

The demographic issues is interesting because China is unusual in that it is experiencing the problems of both a developing and developed country; high economic growth along with an aging population. It is unclear how will address this issue but it is clear the government is worried about the cost of a western European-style welfare state. The important point, though, is that China’s population is large enough to support well above average growth for decades until this issue is addressed.

Other challenges include the gap between living standards in the cities and in the countryside; the comparison between the wealth of the coastal strip and the poverty of the inland regions; the mismatch between the country's projected growth rate and its energy needs; and the need to improve the structure and regulation of its capital markets.

In the longer term, Beijing has to decide how to use China's growing economic clout on the global stage. China has allowed Americans to live beyond their means for years by using its export earnings to buy US Treasury bonds but it is clear to both that this is unsustainable; both countries are preparing for change, including an expanded role for the Renminbi.

China's Helicopter Wen: World Champion of Money Printing

Quite simply, China has been mandating that banks expand lending to compliment the stimulus package and reverse the millions of peasants leaving factories and returning to villages.

Under these state driven directives, banks have loaned against marginal projects or projects that increase excess capacity; much of the money is reported to have found its way into the Shanghai exchange and the casinos in Macau.

The obvious aftermath, much as what we are experiencing, will be rising delinquincies, defaults and write-downs which could seriously impair the Chinese banking sector. China may want to keep a fair amount of cash on hand as we know repairing banking systems is not an inexpensive proposition.

As importantly, the episode reveal that ALL governments readily entertain short-term fixes at the expense of long-term interests. While terribly clever in managing a mercantilist state, Chinese leaders are still politicians and quite capable of being simultaneously brilliant and myopically desparate.

China Investor Update

Chinese corporations and the state owned sovereign wealth fund are striking keen deals across the globe and and are securing long-term access to needed resources at bargain prices.

The Chinese have what nobody else has at the moment: cash. This gives them tremendous leverage as does their willingness to strike deals with countries that have strained relationships with the US, e.g. Venezuela.

They appear to be focusing upon oil and minerals, both essential to the Chinese economy. In the literature there is a debate of sorts whether these deals will expand supplies or simply give China secured access at the expense of other buyers such as the US, Europe and India.

However it unfolds, China is doing whats best for China..........and I wish the US would follow its example.

Did 2008's $677 Billion Trade Deficit Cause the Recession?

Governments and central banks around the world pursued policies that, with the benefit of hindsight, caused a huge global boom in credit, pushing up housing prices and financial markets to unsustainable levels. Investors and banks took risks they did not understand. And all borrowed beyond their means.

There were systematic failures in the checks and balances in the system, by Boards of Directors, by credit rating agencies, and by government regulators.

The financial system operated with large gaps in meaningful oversight and without sufficient constraints to limit risk. Even institutions that were overseen by complicated, overlapping system of multiple regulators put themselves in a position of extreme vulnerability.