European Tribune - Dollar Dump

Dollar Dump - China Edition

by Jerome a Paris
Wed Nov 7th, 2007 at 09:01:31 AM EST

Dollar Slumps to Record on China's Plans to Diversify Reserves
"We will favor stronger currencies over weaker ones, and will readjust accordingly," Cheng Siwei, vice chairman of China's National People's Congress, told a conference in Beijing. The dollar is "losing its status as the world currency," Xu Jian, a central bank vice director, said at the same meeting.

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Dollar Dump - China Edition | 30 comments (30 topical, 0 editorial, 0 hidden)

Re: Dollar Dump - China Edition (none / 1)

That statement lacks a little credibility whilst the Chinese currency is tied to the dollar. If they really think it's a crock, they should de-couple.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Wed Nov 7th, 2007 at 10:48:11 AM EST

Re: Dollar Dump - China Edition (4.00 / 2)

They can't de-couple. The Chinese government is in a more serious bind here than the US government. If the Chinese dump the dollar in favor of the euro, then they have the effect of placing an enormous burden on the ability of their best customer to purchase their products. I would take significant redirection of Chinese trade from the American market to European or other markets to be a more serious indicator that something is amiss.

The Chinese need the American export market or their economy collapses. For the US, a serious dollar decline suddenly makes American products more competitive relative to other advanced economies. There's some indication that GM intends to shift production out of its Canadian factories to the United States because of the rise of the Canadian dollar.

When the loonie was at .60 on the dollar, that meant that a CAN$50/hr wage and benefit cost $30/hr American. And at the same time, the comparable US wage was $60-75/hr including retiree benfits. Now with the new UAW contract, that wage has dropped to around $48/hr American, while at the same time the Canadian cost has risen from around $30/hr US, to around $50 US. They shifted healthcare costs for retirees over onto this VEBA, and now the games different.

The convergence of VEBA deals to shrink healthcare costs, and downward pressure on the US dollar coming from the Chinese mean that in the next few years, American advanced manufacturing is going to have a huge cost savings in wage terms over their counterparts in the rest of the developed world. And if trade balances between the US and EU start to shift in favor of the US, then this is going to mean that European economies are going to be less able to soak up surplus Chinese production.

My prediction?

China ends up pulling a Japan circa 1987, and goes into severe economic decline. And that creates a political crisis. And there's now guarantee that the new regime in Beijing is going to be as pacific as the current. If China can't secure raw materials through commerce, then outright conflict seems like a real possibility. Particularly by proxy in Africa, by which I mean China may fuel conflict on that continent in order to seize natural resources.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Nov 7th, 2007 at 12:12:38 PM EST
[ Parent ]

Re: Dollar Dump - China Edition (none / 1)

I think if there is eough political upheaval to topple the current government, then China will struggle with itself for the foreseeable future (this could be comflicts up to a full-blown civil war), and you can forget even proxy wars.

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Wed Nov 7th, 2007 at 01:21:16 PM EST
[ Parent ]

Re: Dollar Dump - China Edition (none / 1)

I don't know.

I think that a return to full blown warlordism of the 1920-1940 (roughly) period is unlikely. Ironically, I think that there are important and cohesive bonds in Chinese society, it's just that they are of the pathological variety. I see that at least two regions (The Pearl River Delta centered on Guangdong and swatch from Shanghai through Fujian) could consolidate into functioning states indepedent of Beijing. And they would still be enormously powerful states, with the capacity to raise a lot of hell.

A South China state if it included Shanghai, could be a powerhouse. And I think that they might willingly turn their backs on to the Chinese interior, choosing instead to plot their games in Africa, SE Asia, and Latin America where the ability to coerce trading partners is more profound.

A Chinese coastal state released of the burden of supporting the interior and the sclerotic north would be an important state.

Consider.

The top 4 provinces in China in terms of GDP were Guangdong (USD 325 billion), followed by Shandong (USD 269 billion), Shanghai (USD 273 billion) and Zhejiang (USD 196 billion) in 2006

So a Chinese state that looked like the one in red.

Would still be a 1 trillion USD economy, on par with Spain or Canada. And a 1 billion economy with a real chance to develop an internal economy might become a 2 billion USD economy in 1 years. And that means it's a player on par with Germany or France in real terms. And probably much larger than them in PPP terms. That kind of money can buy a lot of ships, guns, and planes. And being oriented towards the sea, might have a naval focus that's not true of present day China.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Nov 7th, 2007 at 01:54:40 PM EST
[ Parent ]

Re: Dollar Dump - China Edition (4.00 / 2)

You consider GDP as it it grew on the ground. But these rich provinces depend on (1) influx of low-wage workers from the countrysdide, 2) inclux of food, raw materials and energy from the inner parts. Alone, they would more resemble Hong Kong than a major military power.

Important and cohesive bonds existed in the warlord era China, too -- they were an eventual reason for re-unification (as half a dozen previous times). But internal conflict, from standing disputes to disintegration, is driven by elites competing or defending their turf, when the supreme power isn't clear. Would the Party leadership go, I don't see na obvious candidate for an unquestioned successor -- I'd expect various local Party barons, democratic and nationalist forces to vie for power, while the peasant and worker rebellions the Party now routinely puts down could blow up big-time regionally.

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Wed Nov 7th, 2007 at 02:42:27 PM EST
[ Parent ]

Re: Dollar Dump - China Edition (none / 1)

Would the Party leadership go, I don't see na obvious candidate for an unquestioned successor -- I'd expect various local Party barons, democratic and nationalist forces to vie for power, while the peasant and worker rebellions the Party now routinely puts down could blow up big-time regionally.

The decision to allow entrepenuers (i.e. capitalists) membership in the party several years ago means that now there's a fusion between the rising capitalist class and what remains of the party and military bureacracy. So you have a military-industrial complex in waiting. If south China can hold their shit together, and the rest of the country crumbles into warlordism then you're still going to have migration. Possibly more profound then now, and the migrants will have even fewer rights if they are not citizens of this south China state.

As for resources, I think that if US power is checked as it is now with the Iraq war, then this state could act agressively in the South China Sea, and develop a closely controlled source of oil. Further, Australia is a country where natural resources are being transferred to the Chinese. Australia supplies, coal, wheat, etc. In the long term, if the US can't enforce territorial integrity in Asia, is the Australian position tenable? Or does Australia fall under Chinese regional hegemony?

And with Australia's natural resources, and naval power to open markets, the new Chinese state is a real contender.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Nov 7th, 2007 at 03:08:14 PM EST
[ Parent ]

I think that the Chinese leadership are way (4.00 / 2)

smarter than that. The occasional internal skirmish here or there is relatively easy to contain and mask and spin, when, as pointed out above, the new entrepreneurial class is wedded to the political and military rulers.

They seem to fully understand the state of affairs on this planet. They are picking their friends and their fights; and they seem to have absorbed the idea that it is easier to shut up or to tell the truth than to remember your lies.

Australia is another trading partner, not a target. China understands trade quite well. I think that 2000+ years of an almost consistent nationhood - with plenty of lessons learned - does inform them to a major extent today. They've seen militant imperialism from every side. I think that they see the downside. (On the other hand I might not want to be Vietnamese.)

As far as dumping dollars, my guess is that they are already in the process of adjusting their stake, but it won't go into full dump mode for the reasons stated elsewhere in the comments. For one thing who is going to take a trillion US$ right now? Nobody. My guess is that their recent statements were partially for the fun of tweaking BushCo, who are currently working on the first joints of their fingers, having already gnawed through their fingernails.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Nov 7th, 2007 at 05:50:06 PM EST
[ Parent ]

Nope (none / 1)

If the Chinese dump the dollar in favor of the euro, then they have the effect of placing an enormous burden on the ability of their best customer to purchase their products. I would take significant redirection of Chinese trade from the American market to European or other markets to be a more serious indicator that something is amiss.

Europe is a bigger market for China than the US, now - and imports are growing faster too.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Wed Nov 7th, 2007 at 03:09:41 PM EST
[ Parent ]

Re: Nope (none / 0)

Jerome,

What happens if European exporters suddenly face dropping returns for their exports in the US?

Capital goods aside, the luxury good market is important and arguably very subject to rising prices.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Nov 7th, 2007 at 03:20:31 PM EST
[ Parent ]

Hard to tell (none / 1)

Europe has survived the near halving of the value of the dollar over the past 6 years reasonably well, so where's the breaking point?

Luxury goods, as positional goods, tend to have negative price elasticity - ie the more expensive they are, the better they sell because they get even more exclusive (which is what you buy).

Airbus suffers. Some manufacturers suffer. Others are price-makers (cf - wind turbine manufacturers ...) Many have booming markets in Europe and the Middle East. Many enjoy cheaper inputs thanks to the lower dollar.

There's no obvious breaking point, if at all.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Wed Nov 7th, 2007 at 06:12:34 PM EST
[ Parent ]

Re: Dollar Dump - China Edition (none / 1)

Interesting, I hadn't thought of it like that.

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson

by NearlyNormal on Wed Nov 7th, 2007 at 05:24:33 PM EST
[ Parent ]

Japan did not go into a severe economic decline (4.00 / 2)

in the late '80s. That is Wall Street propaganda. That is based on their imperative that growth is the holy grail.

Japan's growth stopped by most indicators at that time, and there were some concerns. However, the social network there is probably superior to everywhere else. (There was a reported sighting of a homeless person, it is true.)

What happened actually is that Japan shifted gears, just as it had in the early '70s. In that earlier era, it had built up its infrastructure and labor force to the point where it could support a modern industrial base. In the late '80s the ruling class moved huge segments of industrial production off-shore via investment and switched to "high tech" domestically.

To make the investment and keep the domestic working class tractable, they recycled tax money and savings via 0% interest loans. Not a bad way to run a country.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Nov 7th, 2007 at 06:10:57 PM EST
[ Parent ]

Good point - (none / 1)

this might be the time for them to do just that - or at least raise prices in terms of US$.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Nov 7th, 2007 at 05:52:52 PM EST
[ Parent ]

Re: Dollar Dump - Productivity (none / 1)

From a story purporting to explain away a one-day DIJA "retreat" of 120 pnts through underperforming US blue chips.

Worker productivity in the U.S. accelerated more than forecast in the third quarter, leading [sic] to a decline in labor costs. Productivity, a measure of employee efficiency, rose at an annual rate of 4.9 percent, the most in four years and up from a revised 2.2 percent in the second quarter, the Labor Department said today. Labor expenses dropped at a 0.2 percent pace, the first decrease in more than a year. more ...

That item is not news; it's another data point on a continous downward trend in wages due to substitution of US labor for other technologies in a domestic economy whose GNP metric is bloated by financial services "output." Consider, GM lost USD 0.74 as compared to the range 1.60 - 2.62 for WaMu and US government reinsurers Freddie Mac and Freddie Mae, which preceded further public exposure of fraud, that is, aside from deliberate FRB/Treasury USD devaluation.

[NY Attorney General Andrew] Cuomo said in an e-mail he will hold a news conference in New York City at 12 p.m. [7 Nov 2007] and will announce "a significant new development in his expanding investigation into the mortgage industry involving Fannie Mae and Freddie Mac." Last week, Cuomo sued the real estate appraisal unit of First American Corp., the biggest U.S. title insurer. Cuomo accused the appraiser of inflating home values under pressure from Washington Mutual.

The people who report financial news in the US are tripping. But if GM tanks to ~$15, I might feel compelled to buy a chunk in anticipation of the big fire sale to come.

Diversity is the key to economic and political evolution.

by MarketTrustee on Wed Nov 7th, 2007 at 11:24:14 AM EST

Re: Dollar Dump - Productivity (none / 1)

Anyone working in the banking and/or housing sector is in for some real tough times.

you are the media you consume.

by MillMan (millguy at gmail) on Wed Nov 7th, 2007 at 01:07:38 PM EST
[ Parent ]

Re: Dollar Dump - Racketeering! (none / 0)

The attorney general's investigation calls into question the value of securities Fannie Mae and Freddie Mac have guaranteed from mortgages provided by lenders. Cuomo said he discovered a "pattern of collusion" between lenders and appraisers and that he's targeting banks beyond Seattle-based Washington Mutual for potentially pressuring appraisers.
"I don't believe it's just about Washington Mutual," Cuomo said at a press conference in Manhattan today. "I believe it's widespread. I believe it's the rule not the exception. And we're investigating Fannie Mae and Freddie Mac and other investment banks as to the underlying practices that have allowed this to go on for so long."
more ...

MB securities, mortgage guarantees, and own loans of combined value of $4.75 trillion compromised. Schweet.

Diversity is the key to economic and political evolution.

by MarketTrustee on Wed Nov 7th, 2007 at 06:12:44 PM EST
[ Parent ]

Too late? (none / 0)

Is it too late to invest some of my US$ cash in, say British Pound CD's?

by NHlib on Wed Nov 7th, 2007 at 12:59:10 PM EST

I don't know (4.00 / 3)

Migeru:

However, a number of ETers have income and/or assets in dollars and expenses in Euros. They are exposed to exchange rate risk already - what they need is a currency swap which, taken today at par, would be favourable if the dollar keeps losing value.
Others have said they intend to move from the US to the EU shortly. They need a hedge against their dollar assets losing a lot of value by the time they are actually ready to make the move.
Yet others have expressed a desire to speculatively bet against the dollar.
Chris has been talking about "borrow dollars to buy energy assets" for a while. His Bulgarian brewery example just has the brewery play the role of what in other comment threads has been energy assets.
So the idea would be to pool the dollar assets of willing ETers in the situations mentioned above (the economies of scale in terms of commissions and financing costs are substantial!) and use those dollar assets as (dollar) margin to buy a portfolio of energy and/or euro assets with the combined income, return and liquidity requirements of the various people involved.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Wed Nov 7th, 2007 at 01:00:49 PM EST
[ Parent ]

Re: I don't know (4.00 / 3)

For whatever it's worth, it sounds fun. We could donate the dividends to the ET upkeep or something.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid (arvid.hallen at gmail.com) on Wed Nov 7th, 2007 at 02:53:09 PM EST
[ Parent ]

Re: Too late? (none / 1)

I have a good wad of dollars in an ETF called FXE which tracks the Euro (read the prospectus though, as of course that isn't exactly what it is or does).

you are the media you consume.

by MillMan (millguy at gmail) on Wed Nov 7th, 2007 at 01:06:36 PM EST
[ Parent ]

Re: Too late? (none / 0)

I ask because the Bloomberg article mentions some technical analysts think the dollar is nearing its bottom and will come back. I never liked technical analysis in picking investments and prefer the fundamentals. If the cause of the dollar drop (people would rather hold something else, for whatever reason) is not going to change in the next, say, 12 months, a 6mo CD in Pounds paying 4.25% might be a good idea.

by NHlib on Wed Nov 7th, 2007 at 01:06:51 PM EST
[ Parent ]

Re: Too late? (4.00 / 2)

some technical analysts think the dollar is nearing its bottom

They put the "anal" in analysts I think, because it is their fundament these wishful thinkers are talking out of IMHO.

The $ is looking into a black hole - that's for sure...

Modern conservatives engage in one of man's oldest exercises in moral philosophy: the search for a superior moral justification for selfishness.Galbraith

by ChrisCook (cojockathotmaildotcom) on Wed Nov 7th, 2007 at 02:04:07 PM EST
[ Parent ]

Implication for retirement? (none / 0)

Doesn't this basically condemn 60-something year olds who have virtually all of their savings in U.S. dollars to retire in the U.S. or countries whose currencies are pegged to the U.S. dollar (either directly or effectively)? (I am talking about those retirees who calculated and managed to save just enough to last them through their retirement years, but who could not afford to lose significant amounts of that in unfavorable transfers of their savings to stronger currencies.)

Truth unfolds in time through a communal process.

by marco (cowannar at gmail punkt com) on Wed Nov 7th, 2007 at 03:07:00 PM EST
[ Parent ]

I've been profiled - (4.00 / 3)

I guess that the good news is that I only feel comparatively decrepit, so I can still pump gas or flip burgers.

My only regret is that visiting Europe is going to be very painful due to my frugal nature - which is to say that I am known as the king of 'cheap' in my county.

Nonetheless, I'm still willing and able - at this point - to help to bootstrap think-tanks and such like.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Nov 7th, 2007 at 03:39:48 PM EST
[ Parent ]

Pretty much (none / 1)

And since the U.S. imports just about everything except food staples, TV, and housing these days, the cost of most things will be going up faster than inflation even for those who stay.

My wife and I visited Switzerland for 2 weeks in 1985, and I had been there alone several times in the early 80's. Never again I think.

One thing I have been doing over the last few years is being heavily invested in non-US stock mutual funds. (DODFX, AEPGX, etc) The question is should I move some cash there too?

by NHlib on Wed Nov 7th, 2007 at 05:04:31 PM EST
[ Parent ]

The question might better be - (4.00 / 2)

do we try to hire Migeru to create a hedge fund for dollars? Or do we maybe try to hire Migeru to set up the ET Consultants Semi-anonymous LLP (or C)? I'm for either or both.

Question - Japanese yen seem to be strongly undervalued. What would the risks be in that currency? I will point out one aspect - we just about cannot spend it in Japan, because they have jimmied the books from a different angle. Everything there - in the big cities at least - is overpriced.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Nov 7th, 2007 at 05:30:23 PM EST
[ Parent ]

Re: The question might better be - (none / 1)

Tell me about the accursedly undervalued yen! You Europeans get a fifty percent drop, yet the yen, my sole source of income, has yet to return to its 2004 levels!

I have a bunch of yen, and debt in the US, and I'm just waiting to cash in on the final day of reckoning.

Actually, sometimes I wonder how much I should bet on this. I do have massive, untapped credit card reserves . . .

by Zwackus on Wed Nov 7th, 2007 at 10:09:01 PM EST
[ Parent ]

Zwackus-san (none / 1)

You Europeans get a fifty percent drop, yet the yen, my sole source of income, has yet to return to its 2004 levels!

yup. i waited, and waited, and waited for a time when the yen would "bounce back" against the euro so i could convert some for long term savings. never happened. so i just bit it and exchanged at 155 yen to the euro some time last spring. frikking outrageous. i'm convinced that if it weren't for the sorry dollar, the yen would be much higher against the euro.

I have a bunch of yen, and debt in the US, and I'm just waiting to cash in on the final day of reckoning.

but the yen is still fairly strong against the dollar. in fact, at this rate, i would have converted my yen into dollars if i wanted to pay off U.S. dollar debts. (now i'm just praying the Bank of China doesn't adjust the yuan basket unfavorably with respect to the yen.)

Truth unfolds in time through a communal process.

by marco (cowannar at gmail punkt com) on Thu Nov 8th, 2007 at 06:36:28 AM EST
[ Parent ]

Re: Zwackus-san (none / 1)

Given that Japan still has a strong export economy, I suspect this may be deliberate government policy or something.

by Zwackus on Thu Nov 8th, 2007 at 06:19:36 PM EST
[ Parent ]

Re: Dollar Dump - China Edition (none / 1)

Guess I won't be taking anymore pictures of Pont Neuf in the near future. Bye, bye bucks.

"I said, 'Wait a minute, Chester, You know I'm a peaceful man...'" Robbie Robertson

by NearlyNormal on Wed Nov 7th, 2007 at 05:21:39 PM EST

Dollar Dump - China Edition | 30 comments (30 topical, 0 editorial, 0 hidden)

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