Finansiella Insikter

Som om det inte redan stod tillräckligt illa till för den amerikanska dollarn så meddelade Kina på torsdagen att man tar nästa steg för att etablera sin egen valuta som en av världens reservvalutor på bekostnad av dollarn. Ni kanske kommer ihåg att Kina de senaste året redan tagit ett par steg i denna riktning genom direkt handel mot euron, rubeln och snart rupeen.

Detta är en oerhört stor händelse, men nyheten verkar närmast ha mörkats av massmedia. Inte konstigt med tanke på de omfattande och allvarliga konsekvenserna för dollarn och därmed hela det finansiella systemet, som är så knutet till dollarn. Tror ni redan inser hur detta kommer att påverka priset på guld och silver. För de av er som inte redan gjort det rekommenderar jag att läsa intervjun med James Turk om dollarns framtid.

Här är mer information kring Kinas planer från ZeroHedge:

China “Attacks The Dollar” – Moves To Further Cement Renminbi Reserve Currency Status

In a surprising turn of events, today’s biggest piece of news received a mere two paragraph blurb on Reuters, and was thoroughly ignored by the broader media. An announcement appeared shortly after midnight on the website of the People’s Bank of China.

The statement, google translated as “Pragmatic and pioneering spirit to promote cross-border renminbi business cum on monitoring and analysis to a new level” is presented below:

Reuters provides a simple translation and summary of the announcement: “China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency’s international role. In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily.” To all those who claim that China is perfectly happy with the status quo, in which it is willing to peg the Renmibni to the Dollar in perpetuity, this may come as a rather unpleasant surprise, as it indicates that suddenly China is far more vocal about its intention to convert its currency to reserve status, and in the process make the dollar even more insignificant.

International Business Times provides further insight:

This is all part of China’s plan for the internationalization of its currency, which may, in the decades to come, threaten the global ‘market share’ of other currencies like the US dollar.

Previously, China also announced that bilateral trades with Russia and Malaysia will begin to be conducted with the yuan and the ruble and ringgit, respectively.

Other moves on the part of China to internationalize its currency include allowing foreign companies to issue yuan-denominated bonds and relaxing rules for foreign financial institutions to access the yuan.

Aside from the efforts of the Chinese government, fundamentals also point to the increasing international popularity of the Chinese currency.

China is already the leading trade partner with Australia and Japan. It’s also the leading or a large trade partner with many of its smaller neighbors. The purpose of having foreign currencies is to conduct foreign trade and investment, so the yuan is expected to become a more attractive currency for China’s trade partners, espeically as the government continues to relax restrictions.

The reason for this dramatic move may be found in what Stephen Roach wrote a few days ago inProject Syndicate:

In early March, China’s National People’s Congress will approve its 12th Five-Year Plan. This Plan is likely to go down in history as one of China’s boldest strategic initiatives.

In essence, it will change the character of China’s economic model – moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers. This shift will have profound implications for China, the rest of Asia, and the broader global economy.

Like the Fifth Five-Year Plan, which set the stage for the “reforms and opening up” of the late 1970’s, and the Ninth Five-Year Plan, which triggered the marketization of state-owned enterprises in the mid-1990’s, the upcoming Plan will force China to rethink the core value propositions of its economy. Premier Wen Jiabao laid the groundwork four years ago, when he first articulated the paradox of the “Four ‘Uns’” – an economy whose strength on the surface masked a structure that was increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”

The Great Recession of 2008-2009 suggests that China can no longer afford to treat the Four Uns as theoretical conjecture. The post-crisis era is likely to be characterized by lasting aftershocks in the developed world – undermining the external demand upon which China has long relied. That leaves China’s government with little choice other than to turn to internal demand and tackle the Four Uns head on.

The 12th Five-Year Plan will do precisely that, focusing on major pro-consumption initiatives. China will begin to wean itself from the manufacturing model that has underpinned export- and investment-led growth. While the manufacturing approach served China well for 30 years, its dependence on capital-intensive, labor-saving productivity enhancement makes it incapable of absorbing the country’s massive labor surplus.

Instead, under the new Plan, China will adopt a more labor-intensive services model.It will, one hopes, provide a detailed blueprint for the development of large-scale transactions-intensive industries such as wholesale and retail trade, domestic transport and supply-chain logistics, health care, and leisure and hospitality.

Obviously, a reserve currency would be not only extremely useful, but quite critical in achieving the goal of China’s conversion to an inwardly focused, middle-class reliant society. And even that would not guarantee a smooth transition. However, should China really be on a path to a step function in its evolution, the shocks to the system will be massive. Roach puts this diplomatically as follows:

But there is a catch: in shifting to a more consumption-led dynamic, China will reduce its surplus saving and have less left over to fund the ongoing saving deficits of countries like the US. The possibility of such an asymmetrical global rebalancing – with China taking the lead and the developed world dragging its feet – could be the key unintended consequence of China’s 12th Five-Year Plan.

A less diplomatic version implies that the relationship between China and the US would suffer a seismic shift in which the game theoretical model of Mutual Assured Destruction, and symbiotic monetary and fiscal policies, would no longer exist, allowing China to pursue its fate completely independent of any economic shocks that the increasingly distressed United States may be going through.

And confirming that the PBoC announcement is far more serious than the amount of airtime allotted to it by the mainstream media, is the just released article in Spiegel “China Attacked the Dollar” (google translated):

The Chinese central bank surprised with a spectacular announcement: The would-be superpower wants to handle their entire future foreign trade in yuan, not in dollars.Beijing shakes America’s claim to represent the key currency – with serious consequences for the U.S..

The announcement was inconspicuous , but it has the potential, to permanently change the balance of power on the world currency market: China strengthens the international role of the yuan. All exporters and importers will, this year, be allowed to settle their business with their foreign partners in Yuan, the central bank said on Wednesday in Beijing.

This will respond to the growing importance of the yuan as a global reserve currency.“The market demand for cross-border use of the yuan rises,” said the central bank. The PBoC had previously tested this plan by allowing 67 000 enterprises in 20 provinces to run their business abroad in yuan. The trade volume amounted to the equivalent of €56 billion.

Now the amount of yuan to be extended, it should be handled much more business in Chinese currency - and less in the U.S. Chinese companies trade at present often in dollars, they are thus dependent on the decisions of the U.S. Federal Reserve to pay on it in a rising oil price and will have pay higher transaction fees than necessary. That should change now.

Currently, the People’s Republic can hardly take yuan out of the country and even that is monitored within the boundary of all legitimate capital flows. Chinese exporters have to change a large part of their euro, yen or dollars at a fixed rate revenue in yuan. Foreign companies wishing to do business in China must do so in Yuan, they can exchange their money in the People’s Republic. Tourists are allowed a maximum of 20,000 yuan and exporting. Yuan an international market can not occur – and not on supply and demand-based exchange rate.

Needless to say, should the yuan be seen increasingly as a reserve currency, all of this, and virtually everything else is about to change.

The only question is whether or not the Yuan will cement its status at the top of the currency pyramid by allowing the backing of the currency with individual or a basket of commodities. If that were to happen, it would be the last nail in the coffin of the already terminally ill dollar.

FinanceAndEconomics.Org har nyligen publicerat ännu ett intressant inlägg där man tar upp hur Federal Reserves oändliga kvantitativa lättnader kommer att leda till ett dollarras de kommande månaderna och ett definitivt slut för obligationsbubblan, med stigande räntor som följd.

Noterade också att man räknar med en fortsatt förstärkning av yuanen, som faktiskt redan har börjat stiga de senaste veckorna, och att detta kommer att pressa upp råvarupriserna ytterligre.

Regelbundna läsare kommer troligtvis känna igen mycket av det som tas upp, men är ändå mycket läsvärt då det är så välskrivet.

Widening deficits and rising Treasury yields – the tide turns

US Treasury bond prices topped out at the end of September, and since then they have fallen sharply. The yield on the 10-year bond has risen from 2.4% to 3.4%, which is the break in the trend that those who believe bonds are in a bubble were looking for. Much of this rise in yields was after Congress agreed to extend the Bush tax cuts, prompting rumours that US sovereign debt might be downgraded by the rating agencies, given upward revisions to the budget deficit.

The extension of the Bush tax cuts could easily keep the budget deficit above $1.5 trillion for the next two years. To put this in context, Federal spending is to remain at about $3.7 trillion and tax revenue at about $2 trillion.  This is not a reasonable credit proposition for buyers of Treasuries and goes much of the way to explaining the rise in yields. Because Treasury yields are the principal determinant for all dollar borrowing, everyone needing dollar-denominated credit in 2011 should be very concerned that these rates are rising.

Furthermore, there are the other bits of bad news coming out of the US: a number of states are demonstrably bankrupt, as are individual towns, cities and counties.  The whole public sector is one insolvent mess. Would you really lend ten-year money to the government that presides over all this for only 3.4%? The private sector is in a fix as well. The banks have leant money with increasing carelessness since the early 1990s and have now lost more than their capital – though this has been concealed from us as a matter of expediency. Private individuals are unemployed, homeless or signed up for food stamps, and those that are not – well, many of them soon will be. It seems remarkable that any credible economist or investment strategist has the gall to forecast economic recovery in the foreseeable future.

It is against this background that the Bush tax cuts have been extended.  Tax cuts are a good thing, but more importantly than that there is still no attempt to deal with excessive public sector spending. Politically, spending cuts get more and more difficult the deeper America sinks into its insolvent mire.  The politicians have had no option but to say that government deficits will reduce when the economy recovers, giving them the excuse for not cutting spending. That is why they extended the Bush tax cuts. Together with the $600bn QE2, the politicians see it as a one trillion-plus boost to the economy. If only it were so simple.

Actually, QE2 is about the Fed printing money to buy new Treasuries, because there are no other buyers at these yield levels without the underwritten guarantee of the Fed.  It saves the politicians from addressing reality because this new money can be found for Medicare, social security, welfare handouts and defence, all of which might otherwise be cut.

While finding it virtually impossible to restrict these vital spending commitments, the politicians are also unable to increase tax revenues.  The political imperative, to clobber the rich, will actually reduce tax receipts below expectations, as the experience of history has proved.  And rescinding the Bush tax cuts would have been counterproductive, by draining money away from the productive private sector for the benefit of the unproductive public sector. This must be obvious to all but those blinded with Keynesian myopia, since even the politicians seem to understand this point.  But they dare not take this chain of thought any further and address actual spending. Rather, they leave it to those clever guys at the Fed and their financial magic.

The truth is that economic energy lost in public sector bureaucracy and economic misdirection can only be made up by borrowing from abroad or by printing money. If overseas lenders are unwilling to lend, that leaves monetary inflation, which will only work for so long as the public does not understand what is happening to money’s value. It is an attempt at economic sustainability through monetary debasement.

Therein is the problem. In the coming months the wider American public will become increasingly aware that all this printing of money is just pushing up prices.  QE1 was sold as a one-off emergency measure not to be repeated, a response to the financial crisis and to stop it becoming an economic one.  Bond investors must now suspect that QE2 is more about funding the deficit than anything else.  Indeed, the only reason Treasury yields have been so conveniently low is the Fed has rigged the market by buying Treasuries and mortgage bonds to keep them there.  Imagine the cost, and therefore the increase in the budget deficit if long-dated Treasuries were priced more correctly, perhaps at six to eight per cent.  It would become obvious to all that the US is firmly snared in a debt trap, where higher interest rates increase the deficit, requiring yet higher bond rates to justify the extra default risk, and so on. Hence the fear of the rating agencies’ credit revisions, and that is what the market is beginning to understand.

Bernanke is an economist, not a market man, so there is a possibility he is unaware the tide in the market has actually turned.  He may temporarily take comfort from the increasing steepness of the yield curve, which makes it profitable for banks to buy Treasuries financed by short-term funds, bolstering their capital.  But as the money flows out of the dollar he will soon find the Fed is alone as a long-term buyer of Treasuries.  That would cause serious damage to inflationary expectations. Bernanke, the economist, will strongly resist raising interest rates, perhaps denying the presence of inflationary pressures much as he is today, or perhaps blaming rising commodity prices on demand from the BRICS rather than debasement of the dollar.  The cost of such obduracy will be a sharply lower dollar, adding further to price inflation expectations and eventually forcing interest rate rises on the Fed, who will always reluctantly raise them too little too late.

The timing and extent of this dollar weakness depends partly on the Chinese.  China’s own difficulty is also price inflation, and the prime contributor is the yuan currency peg.  China will have no alternative, if she is to control inflation, to raising her exchange rate.  Since China is now the principal source of demand for a most commodities, a rising yuan will lead to yet higher commodity prices in dollar terms.

It is now becoming a case of when, rather than if, the revaluation of the yuan happens. We can expect this to be a major currency event, triggering yet more selling by other foreign dollar holders.  And to judge the degree of dollar weakness, we must look at those raw material and commodity prices, and not other paper currencies, which have their own economic baggage to contend with.

So when the dollar plummets in the coming months, in commodity terms at least, the inflationary pressures will rack up, exposing the folly of Bernanke’s theoretical economics of zero interest rates, QE1 and QE2.  The end of the Treasury bubble signals the end of one interest rate era and the beginning of the next.  The highly indebted and those relying on further dollar borrowing will be unfortunately crushed.  The tide has indeed turned.

I helgen uppmärksammade vi det faktum att ett antal centralbanker aktivt och öppet ‘intervenerat’ på valutamarknaden i ett desperat försök att förhindra en förstärkning av den lokala valutan, däribland Japan, Schweiz och Brasilien. Vi liknade även dessa interventioner som ett tecken på början på ett globalt valutakrig om vem som kan devalvera mest.

Vi behövde inte vänta länge för att få hypotesen bekräftad för i tisdagens nummer av Financial Times säger Brasiliens finansminister Guido Mantega att ett “internationellt valutakrig har brutit ut”. Enligt Mantega har den brasilianska centralbanken köpt hela 1 mljard dollar per dag de senaste två veckorna.

Här är ett utdrag från artikeln i FT:

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies.

Ben Davies från Hinde Capital kommenterar i ett inlägg på KWN interventionerna så här:

“Within a single week 25 nations have deliberately slashed the values of their currencies. Nothing quite comparable with this has ever happened before in the history of the world. This world monetary earthquake will carry many lessons.”

“The RMB and US dollar are constantly colliding into each other. The clashing of these two tectonic currency plates has just begun to accelerate at an alarming rate. Ironically the move to greater currency flexibility on the part of the RMB against the dollar stands ready to produce the almighty mother of seismic monetary events – the collapse of the fiat currency system. The implications for government bonds, equities and real assets are profound. Are we being overly sensational? We don’t think so.”