Sunday, May 10, 2009

The new new money


It's official: The government in Beijing has announced that the Yuan can now be used in international trade. Their mouthpiece for this occasion was the Industrial and Commercial Bank of China, a private entity, which made the announcement on their behalf. By the end of this year, it is expected that fully 50% of all transactions with Hong Kong will be denominated in the Yuan. In turn, Hong Kong re-exports 90% of its Chinese imports. Importer #1 is the European Union; importer #2 is the United States. Some of these countries may soon find themselves hard-pressed to earn enough Yuan to continue importing Chinese-made products.

This is only the next small step in Beijing's "policy of small steps." Already the Chinese government has ramped down its purchases of US Treasury paper, forcing the Federal Reserve to step in as the buyer of last resort. The IOU, with which the US has inundated the world, is now becoming the I-owe-me - which is not quite as impressive to those who are considering selling products to the US on credit. Instead of the funny paper, the Chinese government has started to buy up gold on the international market. The Yuan has long been in de facto use in Hong Kong, Sigapore, Kuala Lumpur, and other countries in the region, in preference to the US Dollar. In several countries it is already possible to have Yuan-denominated savings and checking accounts; in Hong Kong alone such accounts are set to exceed US$100 billion by the end of this year.

The United States and Europe have recently demonstrated their unwillingness to grant other countries a greater say in the IMF and the other organizations that govern international finance. Now Beijing can turn this combination of weakness and recalcitrance to its advantage, by quickly creating a wide coalition of countries that wish to isolate themselves from the financially untrustworthy regions of Europe and America. This is but one of many developments that those who are predicting economic recovery in the US sometime next year have chosen to ignore, but it may turn out to be one of the more important ones.

What do these major shifts in international finance portend for us mere private citizens? The implication is simple: if you think that you still have some money, let's hope that you don't mean that you have something or other denominated in the US Dollar. Or that you just wrote yourself an I-owe-me.

Source: PRIME-TASS.

17 comments :

Russian President (unofficially) said...

Amen.

Anonymous said...

I fully expect to see ashen-faced policy experts on TV tomorrow wringing their hands and crying about thow they never saw this coming. That, or absolutely no coverage besides PBS. Great job, Dmitry. First I've heard of this news.
-Anon001

Gary said...

My guess is that either there will be no mention of this in the MSM or they will send out a parade so-called "experts" who will reassure us that we are the all powerful nation with the deepest and most liquid capital markets and that this is a non-event.

Dmitry Davydov said...

Hey, tyozka, who'd ever thought that one would quote TASS as credible news source, while CNN and other mainstream controlled media outlets just spew out govenment propaganda?

Life's just too crazy. What's next? Bunch of educated americans tuning in Russia Today to get real news?

Russian President (unofficially) said...

Gary is right. CNN (for example) is silent so far.

Anonymous said...

May 5 Bloomberg article here.

Anonymous said...

Good observations. This will not even be discussed in the US press, and certainly not in the gossip media. The other day I had a strange vision: I turned on the TV briefly and there were three talking heads on CNN discussing, get this... IS BIPARTISANSHIP POSSIBLE?

Total decoupling from reality. Meanwhile, this business of the new new money confirms the trend that was predicted by every sane and honest analyst. The dollar (and the euro as well) are going to go to hell. The "leaders" are going to sink with the ship. This leads me to believe that the "leaders" think there is a private boat that will rescue them when they're floating in a sea of shit of their own making. I don't think this rescue is assured...

Anonymous said...

I don't think that Hong Kong using yuan to settle trade with the mainland automatically means that Hong Kong will demand payment in yuan from Europe and the US....
What am I missing?

Anonymous said...

This is like any other catastrophic decline, people cant see the paradigm shift. When you're in the bubble, it's hard to have perspective.

Your article matches another that I read where the Chinese are buying iron ore from Brazil with both hands. This on top of a recent article that talked about the IMF wanting to sell its gold and China said meekly "we'll buy it" When they asked how much they said "We'll buy it all". Now the IMF is one of the largest holders of gold in the world, so if China bought there gold that would make China one of the largest holders.

Now China is doing exactly what they must. They're converting their dollars into long term, commodity based agreements that dovetail perfectly with their well developed manufactoring base.

This will absolutely lead to a Chinese rise in standard of living and you know if one ship is rising another is sinking and guess whos on the sinking ship?

Invest like the Chinese and in China itself. You wont lose money guarranteed. China is going to one day resemble a gigantic Hong Kong or Tokyo. If you've ever been to either city, you would know the monumental change that entails.

Farmer Mark said...

Interesting stuff,
It will be interesting to see how long the new Chinese model of working really hard to live just slightly better than a peasant will satisfy a population choking on appalling levels of pollution. It will be interesting to see whether a lid can be kept on a rising middle class if suddenly the wealth thins out as exports dry up. They have done one heck of a job securing resources, they don't ask pesky questions about human rights or other abstractions, they just write good checks. I think they can carry on for a while, but their prosperity was tied to our foolish excess. When the party's over some will still have a few beers left over, how long they last is another matter...
Of course being a 7000 year old culture used to tumultuous change might be a serious advantage. We'll see...

Anonymous said...

Farmer Mark, you may want to consider a career in comedy.

Go to Iraq or Afghanistan and tell the millions of killed, maimed and tortured how great the US human rights record is.

Bill R said...

I tend to agree with Farmer Mark's perspective... the next 10-15 years will likely see the Chinese currency appreciate appreciably against the USD, but its not like their econonmy does not have huge issues. Like feeding a billion people, severe pollution, political repression, and being built on someone-elses consumption. Unfortunately, I think we are ALL headed for some sort of deflation/collapse, although from a relativistic perspective it might look like the chinese are rising compared to us. Cheers.

Anonymous said...

Nouriel Roubini weighs in on the renminbi question:

"The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time."

The rest is here

Rob Taylor said...

I know this is a dumb question, but do you guys think this means A) The Yuan will increase in value and B) Would it be a good investment? I know gold and metals are best, but would a little Yuan in the bank be a good or bad idea?

Anonymous said...

Nothing in the bank is a good idea. A bird in the hand is.

James A. Donald said...

The Chinese government continues to invest in US government fiat money, but is now making an effort to diversify away from the fiat money of the US in particular and other governments in general.

By and large, people do not trust governments with their money - in particular the Chinese government does not trust *other* governments with their money - the less government involvement in money the better. The increased intervention by Obama/Bush is scaring the pants off businessmen around the world.

Government dominates money because it always winds up taking over privately developed financial systems.

The Chinese government is buying up gold, silver, and copper for monetary purposes, and is engaging in fiat money swaps with nations that are its major customers and suppliers, to facilitate direct transactions, so that it can, for example, buy stuff from Japan and sell stuff to Japan using Chinese fiat money and Japanese fiat money, rather than American fiat money.

There is a lot of ruin in a nation, but the present US deficit constitutes a lot of ruin. It is probably sustainable for about ten to twelve years before inflation starts to go Zimbabwean, but disturbingly high rates of inflation are likely in two to four years.

At present there is a very low premium on TIPS (inflation protected treasuries. This could be an indication that most investors do not expect inflation. But investments in oil and gold indicate a lot of investors *do* expect inflation - in which case the low premium on inflation protected treasuries indicates an expectation that the US will default on the inflation protection, probably by issuing a grossly falsified CPI, as Zimbabwe did.

Debra said...

Farmer Mark is right in my book.
The Chinese are entering into this game of currency "Russian" roulette at a much later time in the industrial revolution that G.B. or the U.S.
The game is almost up, you guys.
The planet's resources are finite, not infinite, and fiat currency is a major, disconnected abstraction in terms of REAL wealth...
There will be NO winners in this little lottery.
I wouldn't bother investing my "money" in a losing game, when who knows for how much longer fiat "money" is going to be around ?
Better to be investing in MANUAL skills, and skills designed to improve one's capacity to THINK in this new world that is just around the corner. (And I'm NOT really a believer in apocalypse theories...