How then, do we move backwards? How does a society, with most of the people having no clue of future events, move from being dependent on a vast and intertwined network of goods and services produced by the indigenous people of whereever, to a local resource and renewable energy based society, and do so in the timeframe available (20-30 years using the most liberal extimates, 10-20 with resonable estimates, 5-10 with worst case scenarios), all the while prices on everything increasing, world politics getting more militaristic, governments continuously reducing civil liberties, shortages of goods on the market and weather patterns resembling bad Hollywood movies?
Until now oil is solely priced, traded and paid for in the greenback on both markets in London and New York. The Treasury Inflow Capital data from mid-2005 show that OPEC members have parked only a skimpy $120 billion in direct dollar holdings which are almost equally split between equities and debt paper. This is a clear indication that oil producers are investing their windfalls elsewhere. The yield spread between US and EU debt papers in favor of the EU is clearly another hint where the petrodollars might flow after conversion.
Quote:
The Fed San Franciscos's recent paper about the progress of the diversification of international central bank's reserves shows that the dollar position is on the decline in many countries. NOTE: China has officially declared to diversify a part of its forex holdings into oil here.
Iran holds a strong hand as the #2 producer of crude behind Saudi Arabia. Politicians there will also keep in mind that dollar deposits might become a burden in the future when the US will step up its current war of words to the level of economic sanctions in the crusade against nuclear power plants. Money in the bank does not help when you have no access to it.
It's kinda old, August last year... so you guys may have already seen it. _________________ Ye shall know the truth, and the truth shall make you mad. - Aldous Huxley
Posted: Mon Jan 30, 2006 12:40 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
MOCKBA wrote:
Once again, WHERE WOULD EUROS COME FROM?
US run deficit to supply the rest of the world with USD. ECB is chartered to keep the Euro stable, i.e. not to print money for Chindia and such. To be reserve currency, the currency need to be readily available. Where would trillions of Euros to deversify China or Japan position would come from?
I think you're missing the fact that the majority of USD that the US prints end up inthe bank vaults of either China or Japan and are not really "in circulation".
There is no problem for the EU zone to provide the currency needed in a non-inflated world market.
In fact that there are so many USD out there that are just "hidden" is bad for the US, because if China or Japan wanted they could crash the USD withini seconds by dumping vast quantities of their USD reservers on the open market.
Posted: Mon Jan 30, 2006 12:41 pm Post subject: Re: Why the Euro can't replace the USD as reserve currency
Snowrunner wrote:
MOCKBA wrote:
Once again, WHERE WOULD EUROS COME FROM?
US run deficit to supply the rest of the world with USD. ECB is chartered to keep the Euro stable, i.e. not to print money for Chindia and such. To be reserve currency, the currency need to be readily available. Where would trillions of Euros to deversify China or Japan position would come from?
I think you're missing the fact that the majority of USD that the US prints end up inthe bank vaults of either China or Japan and are not really "in circulation".
There is no problem for the EU zone to provide the currency needed in a non-inflated world market.
In fact that there are so many USD out there that are just "hidden" is bad for the US, because if China or Japan wanted they could crash the USD withini seconds by dumping vast quantities of their USD reservers on the open market.
I know it's not always convenient to go back and read these entire threads, but I addressed this issue earlier. Here is a quote from my earllier post.
......it is a common opinion on this board that the Chinese or Japanese might launch some sort of kamikaze financial market attack on the US by initiating a sudden and massive USD liquidation. While a possibility in theory, in practice it is about as likely as a direct asteroid hit to planet Earth. Forex markets would not be accomodative. No market maker will take those dollars. If the Chinese signalled their intent to continue with this behavior when markets reopened, it's possible the US could declare it an act of war and freeze Chinese assets, which are nothing more than bookkeeping entries at NY banks anyway. There is precedent for this and it would not impact USD safe haven credibility with other foreign holders, considering the circimstances of a hostile act that was threatening to ruin them as well. If anything, it would enhance US safe haven status.
Also I have discussed earlier how self destructive such an act would be for the Chinese and Japanese. Even if they were able to induce a market panic and dollar free fall, they would devalue the rest of their dollar holding, surely before they had even liquidated a small fraction of them. Bonds would collapse as well as the dollar, a double whammy to their investments that the are stuck in. The final nail in their own coffin would be collapsing the economy of their biggest customer, the US. I'm not sure anybody is that stupid and last I checked the Chinese and Japanese aren't.
Again, to be reasonable, they may try to hold less dollars in the future as their reserves grow. This is natural and doesn't imply a malevolent intent or international conspiracy. And it is a concern, it could lead to a weaker dollar and higher interest rates in the US. They have to balance the two interests.
Posted: Tue Jan 31, 2006 9:27 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
According to the IMF on DEC 21'05, global FX reserves topped $4 trillion in Q3'05, up about $599 billion year on year from 2004. Not all these reserves can be readily assessed by public information, but it is surmized that of the $2.696 trillion of the total that 66.4% are denominated in US dollars, 24.3% in euros, 3.7% GBP and 3.6% yen.
In another article on Jan. 26th, 2006, a discussion paper by several Fed economists doubted whether a declining dollar alone could close the US' yawning trade gap. Their findings indicate that trade surpluses/deficits (i.e. underlying trade patterns) have become far less elastic in response to moves in relative foreign exchange rates.
They estimate that a 10% drop in the value of the local currency would have increased import prices by 7% in the 1980's, but by only 4% in the last 15-years. And a 10% fall in the value of the local currency would have stoked local inflation by 2% in the 1980/s, but in the period ending 2004 the effect would have been neutral.
This makes any far reaching Plaza Accord like in 1985 far less likely or successful if tried again to redress the dollar's imbalances.
In my opinion, the inelasticity of exchange rate responses due to the reduced pass through effect may be a result of greater trade from developing countries where currencies are kept competitive through interference, local capital markets are underdeveloped and the economies are overwhelmingly export dependent. Under such a scenario it is very hard for export orientated economies to adjust to foreign exchange realities, so move in the currency are absorbed by exporters.
Translated this means that despite a weaker dollar, domestic demand in these exporting countries is not likely in the short to medium term to replace lost US demand and therefore these countries will continue to accumulate dollar receipts from exports to the US whether they want them or not. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Mon Feb 06, 2006 2:42 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
Quote:
In my opinion, the inelasticity of exchange rate responses due to the reduced pass through effect may be a result of greater trade from developing countries where currencies are kept competitive through interference, local capital markets are underdeveloped and the economies are overwhelmingly export dependent. Under such a scenario it is very hard for export orientated economies to adjust to foreign exchange realities, so move in the currency are absorbed by exporters
.
I think that works...up to a point. I was talking to my uncle the other day and I told him that I knew a consumer electronics company that told its supplier to keep the cost for a product the same as it was two years ago: despite increases in both labor and raw materials prices in China. He told me that same thing was true in his business that a chair that was $50 in 1980 was now $16.00 today.
Although this state of affairs may continue its obviously not sustainable.
Two professors at NYU have done some great work on this topic and have published quite a bit on their website .
Basically in their 56 page paper Setser and Roubini argue that for the dollar to maintain its value while expanding the trade deficit China must continue to acquire ever increasing amoounts of dollars. The figures sited were pretty astronimcal somewhere around 10-15% of Chinese GDP by 2007 or 2008.
You can find the paper on the internet but that's what it says in a nutshell.
The system at the moment benefits China and the US. It allows the US to consume more than it produces and it allows to China to expand via export growth.
Of course anyone working in regular consumer manufacturing realizes that the system has its limits. On the manufacturing side the problem is with demand. Even as prices for all inputs increase the market simply won't bear higher prices.
This is squeezing manufacturers even in China. The bottom line is this how many more consumer goods can Americans consume while China increases capex investment at 10%+ rate annually? There is a very clear limit and we are going to hit the wall soon.
Of course if we hit the wall on the demand side the Chinese may reconsider the desirablity of Bretton Woods 2. The problem with the system in its current form is that everyone must continue to acquire dollars to keep the system going. Even if Chinese continue to accumulate dollars,but at a slower pace or perhaps even at the same pace in the face of increasing budget deficits, the system would have serious problems as the value of the dollar declines.
Peakoil represents an interesting twist. Yes as oil prices go up the trade deficit will explode but conversely players in the oil futures markets will need more dollars to play the same game. So perhaps there is a balance a ying and yang of sorts.
Personally I think the Americans will do something rash and dangerous in the middle east. This administration has a history of shooting first and asking questions later. The biggest wildcard will be the Bush administration. When the shooting starts anything could happen to the dollar or the world all bets are off.
Posted: Mon Feb 06, 2006 11:40 am Post subject: Re: Why the Euro can't replace the USD as reserve currency
[quote="mefistofeles"]
Quote:
Two professors at NYU have done some great work on this topic and have published quite a bit on their website .
Basically in their 56 page paper Setser and Roubini argue that for the dollar to maintain its value while expanding the trade deficit China must continue to acquire ever increasing amoounts of dollars. The figures sited were pretty astronimcal somewhere around 10-15% of Chinese GDP by 2007 or 2008.
.
Yes, I visit Setser's webpage quite often and have quoted/linked to his points in the past. I would argue that it is neither desirable for China to continue to export to a country who pays in debt they cannot sustainably afford, nor for the US to continue to import using their future earnings to pay for it either. Clearly, both sides have benefited from this arrangement, up to a point, up to now. However, also clearly China would be better off in the long run to diversify itself away from an America as Consumer of Last Resort Policy, and America would do well to reduce its external imbalances, and if nothing else, diversify away its funding from its China as Lender of Last Resort Policy.
The problem is that many exporting countries that have seen their quality of life improve through export competitiveness and savings are loathe to abandon these policies, however, neither can they count on America to keep importing. Therefore, they have to a) grow slower, b) export less, c) consume more domestically, or d) all of the above.
Even when you have a glutton for a customer and everything is going in your favor, there are no free Chinese take-aways. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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