Thursday, November 08, 2007

 

China shakes the dollar market

China has just announced plans to "diversify" its foreign exchange reserves. Translated that means that the Chinese would rather be holding anything other than dollars. The dollar fell immediately. Min Zeng reports that

The dollar fell to a record versus the euro and the lowest since 1981 against the pound after Chinese officials signaled plans to diversify the nation's $1.43 trillion of foreign exchange reserves.

The U.S. dollar also declined to the cheapest versus the Canadian dollar since the end of a fixed exchange rate in 1950 and a 23-year low against the Australian dollar. The New York Board of Trade's dollar index dropped to 75.077, the lowest since the gauge started in March 1973.

But here's the part that matters—

"The dollar sell-off was sparked by concern that foreign central banks' diversification away from dollar assets may accelerate," said Paresh Upadhyaya, who helps manage $29 billion in currency assets at Putnam Investments in Boston.

You bet.

The situation facing the players is a classic problem for Game Theory. Let's say that you, I and Beelzebub are all holding a wad of dollars. We all know that the dollars are losing their value and would like to trade them for a stronger currency. It's like keeping your money in a savings account with a negative interest rate.

We also know that if anyone of us unloads them too fast their value could fall to near nothing. To put it another way, the only reason they're worth what they're worth is that we keep holding them and trading in them.

Now you, I and Beelzebub are not the closest of friends, and each fears that the other may try to pull a fast one by unloading the dollars while there's still a market for them. A hint, say, that Beelzebub intends to sell could cause you and me to panic and start a preemptive sell-off to trade our dollars before Beelzebub can get in on the action. And Beelzebub feels the same about us.

After all, the first to sell will get the best return. The last one to sell will be left holding some paper that will be about as valuable as a mortgage-backed SIV. So we warily watch each other's dollar accounts as we continue to pretend there's nothing we love more than dollars.

In the meantime we've been trying to shift the burden onto other poor suckers by using our dollars to buy real assets such as African oil or Bolivian gold, which promise to be worth something someday.

Jessica Hupp discusses the positions of some of the real players in this great game (Saudi Arabia, South Korea, China, Venezuela, Sudan, Iran and Russia) and raises a point seldom mentioned in the mainstream media—

.... Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

Sarkozy before the Congress

French President Sarkozy has paid a state visit to Washington after enjoying Bush's wienie roast so much in August. He was invited to speak to a joint session of Congress where they've decided to revoke the "freedom fry" and eat the post-Iraq-invasion French fry once again. Sarkozy was even allowed to speak French. It was quite a show.

Tom Baldwin reported

The British former Prime Minister’s [Tony Blair's] own address to Congress in 2003 had been received with a huge ovation. But yesterday Senator Patrick Leahy suggested that Mr Sarkozy had outdone him, saying that the response to a foreign leader had been the “most positive that I’ve heard in 30 years”.

M. Sarkozy is standing as tall as a short politician can stand. He has been making threatening noises toward Iran, which makes him our new best friend. What has Britain, now mired in Afghanistan, done for us lately, I ask you?

Where former French presidents might have warned of American "cultural imperialism," Sarkozy couldn't get enough of it—

Mr Sarkozy described “the American dream” and went on to cite such figures as Elvis Presley, John Wayne, Marilyn Monroe and Neil Armstrong as he spoke of the impact that the US had made on his generation.

But toward the end Sarkozy slipped in some chastisements, first abusing us for our unregulated financial markets that gave the world, not to mention France, the subprime mortgage nightmare—

Those who love this nation which, more than any other, has demonstrated the virtues of free enterprise expect America to be the first to denounce the abuses and excesses of a financial capitalism that sets too great a store on speculation. They expect her to commit fully to the establishment of the necessary rules and safeguards. The America I love is the one that encourages entrepreneurs, not speculators.

And then the falling dollar—

Those who admire the nation that has built the world's greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates. The yuan is already everyone's problem. The dollar cannot remain solely the problem of others. If we're not careful, monetary disarray could morph into economic war. We would all be its victims.

Pretty strong words, when you think about it. The Congress applauded heartily.

How much time do we have left?

How long can this game go on before somebody cracks and begins a massive dollar sell-off? Weeks? Months? Till the next presidential election? Nobody but my copromancer knows, and he's not telling.

Not so long ago I wrote that

The dollar, of course, is not facing such a drastic loss of value. But by jerks and spurts the loss of value must and will continue.

Silly me. I fear I may have been overly optimistic. That the dollar may end with more of a bang than a whimper seems all too possible. If you liked "shock and awe," you ain't seen nothing yet.

With that in mind, you might want to peruse a transcription of Dmitry Orlov's PowerPoint presentation in which he makes a point-by-point comparison between the current state of the U.S. versus the U.S.S.R at the time of its collapse. He finds that, horrible as the Soviet collapse was, the Soviet Union was better prepared to endure it.

Orlov offers this—

If the economy, and your place within it, is really important to you, you will be really hurt when it goes away. You can cultivate an attitude of studied indifference, but it has to be more than just a conceit. You have to develop the lifestyle and the habits and the physical stamina to back it up. It takes a lot of creativity and effort to put together a fulfilling existence on the margins of society. After the collapse, these margins may turn out to be some of the best places to live.

I hope that I didn't make it sound as if the Soviet collapse was a walk in the park, because it was really quite awful in many ways. The point that I do want to stress is that when this economy collapses, it is bound to be much worse. Another point I would like to stress is that collapse here is likely to be permanent. The factors that allowed Russia and the other former Soviet republics to recover [oil, for instance] are not present here.

In spite of all this, I believe that in every age and circumstance, people can sometimes find not just a means and a reason to survive, but enlightenment, fulfillment, and freedom. If we can find them even after the economy collapses, then why not start looking for them now?

Related posts
Buying a used Mercedes (2/8/05)
Currency of the Day (7/23/07)
Many in finance found to be SIV-positive (10/30/07)

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