Wednesday, July 19, 2017


...but before that, there seems to be no end to this thing.  Equities up again; yields down; weather is great (until tomorrow...mucho caliente).  Despite all that is swirling around the pollsters (now THERE'S trouble) are telling us it's the economy stupid which everybody thinks is good and getting better.  Works for me, but I was really thinking about Asia and in particular Korea and along with that China and what we had discussed a couple of years ago.  A reserve currency.

 The Little Fat Porker is a real problem.  Worse yet the solution to the problem--China--will not, do not even consider CANNOT-- help solve this thing.  One word and the Little Porker is bacon but nope, not in the cards.  Apparently nothing else either.  Forget about sanctions, pressure, harsh words...the Porker could care less.  But on China?  Ah.

Now I rarely get into political questions but clearly, if pressure is to applied to anyone in this picture with any chance--however remote--of success it is China.  And so let's go back in time a bit and revisit the Yuan, the IMF, and the one overriding concern that this blog had at the time.

Your scribe had expressed concern at the time as to appropriateness of the rush to judgment  as to the currency given the somewhat, ah, spotty record of the PRC in regard to manipulation, convertibility, openness, honesty...well, you get the picture...but most importantly was asked the question, "From a foreign policy standpoint do we really want to risk a substantial portion of global trade to be exercised in Yuan?"I think the answer, once one thought about it was, "No," but the pressure and the willingness to bow to the same by the IMF was quite overwhelming.  As was usual, the Obama administration was less than fully involved.

Remarkably, in the intervening time frame all of the conditions  causing the concerns not only remain but in some cases have been magnified.  Had the PRC played a very good hand with any form of skill the landscape today might be a good deal different.  As it stands, the dollar remains far and away the dominant world currency with the Euro solidly in second place.  But had China chosen to liberalize?

The most important point to take away from this both then and now is that because of the currency the options available to the government of the United States are really quite broad.  Access to the financial system of the United States is essential to any internationally focused nation and absolutely essential to any financial institution therein. Even China and  Chinese institutions.   If the solution to the Korea quagmire is through China and if China need be pushed, the pressure will come through the financial sector.  This is going to be very, very difficult as, unfortunately, the Euros hardly feel as threatened by Korea as do we or especially our Asian allies, and it will be a true test of the ability of the Trump administration.  To this point we dodged a bullet as a result of the incompetence of the PRC and the ability of such a regime to conform to required standards.  Luck, however, is not a strategy.

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