...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.
Showing posts with label Reserve Currency. Show all posts
Showing posts with label Reserve Currency. Show all posts
Wednesday, July 19, 2017
Tuesday, December 1, 2015
GRANDCHILDREN WARS: THE PATHOGENS AWAKEN
Made it back having undergone assault from indubitably multiple armies of pathogens, merged and mixed in three third grade classrooms by the triplets. Modern medicine has no answer to this: you either survive or....anyway, here I am.
Our landscaper, Ted, stopped in today.
"Yuan, " he said, "and the IMF. Big deal? Can you invest in it?" Ted is obviously far richer than I had imagined. I'll have to start looking at his bills more closely.
"Well," said I, here's what I think, " having just lost $.25 to My Really Smart Friend, Larry, with the news of the IMF allowing the Yuan to join in the currency basket of the IMF before year's end.
"Chrissie Lagarde just declared the Yuan, 'freely usable,' and if you are going to bank on that there's a bridge...somewhere...any bridge...that I would like to sell you cheap. In fact, most of the conditions for the establishment of a reserve currency have not yet been met--not to mention the inability to engage in domestic equity investment in the Chinese equity market. What has occurred is at this stage a recognition of the economic power of China and a near-capitulation by the IMF to China's rather unique way of doing business as a result of the Fund desperately needing a friend at this stage, having run out of really any role and yet still having a lot of very expensive mouths to feed. Chrissie also wants her next title to be Madame Le President and this 'breakthrough' fills in some rather empty space on her resume.
In order to further bolster the complete unhinging of IMF rules the argument is being made all of the place that this will help liberalize China and diminish the power of the Communist Party as China will now be forced to play 'by the rules' and liberalize not only their economic and monetary policies but, by extension, their political policies as well. Bollocks. The CCP will do damn what it pleases unless and until a failure in their economic policies causes a rather compliant population, now seeing a rise in living standards so desperately needed, to experience a set-back and being asking, 'Hey, what am I getting out of this?' It is a vanity gift to the Chinese people giving their government extra time but accomplishing little.
It is also being argued that this move is good for the world's financial system as it breaks the hold that the dollar has exerted over all facets of international financial and for that matter, ALL business dealings and by extension, the influence of the United States. Fair comments except that there are far more many reasons for the existence of this influence beginning with the Rule of Law which far surpass the mere existence of the dollar and I would argue even the vast infrastructure and liquidity which supports it, although in reason years, under this---allow me to be political---incompetent administration and increasingly politicized central bank, these advantages are being eroded. With a weighting of nearly 11% in the SDR basket let's see how many central banks switch 10% of their reserve holdings into dollars? Aside from those tightly wedded to China in other areas, very few I would bet. I'll take on all comers; I'm down $.25 to Larry.
The other thing in which I will be most interested is to see just how much of the approximately $18 trillion in Yuan sitting in deposit accounts will remain. Under the agreement, the Chinese are supposed to be allowed to invest up to 50% of their assets in foreign assets. Does money flow in, out, or simply sit tight. If the trend is out, given how much Chinese money is already in such places as New York, San Francisco, Miami, London and points around the Globe with all sorts of restrictions in place, with restrictions relaxed if we have a vast outpouring, how long will Xi's mob allow that to continue as the result will almost certainly be the collapse of the Yuan? Not long I would argue. And the Fund's reaction? Not much I would argue making it even a bigger joke than the ECB in dealing with budget deficits.
Finally, I would once again bring up the effect this ill have on one of the U..S's greatest strategic tools, financial sanctions. If all the other reserve currencies are always on your side politically, they can work quite well. When one reserve currency issuer is not on-side they don't work at all. The U.S.'s strategic bag of tricks has just lost a big component."
"So, Ted," said I, "There you have my views. Your call. Have any more questions?"
"Charlie, that was great and I thank you so much. Actually I have just one more. Do you have Larry's number?"
Our landscaper, Ted, stopped in today.
"Yuan, " he said, "and the IMF. Big deal? Can you invest in it?" Ted is obviously far richer than I had imagined. I'll have to start looking at his bills more closely.
"Well," said I, here's what I think, " having just lost $.25 to My Really Smart Friend, Larry, with the news of the IMF allowing the Yuan to join in the currency basket of the IMF before year's end.
"Chrissie Lagarde just declared the Yuan, 'freely usable,' and if you are going to bank on that there's a bridge...somewhere...any bridge...that I would like to sell you cheap. In fact, most of the conditions for the establishment of a reserve currency have not yet been met--not to mention the inability to engage in domestic equity investment in the Chinese equity market. What has occurred is at this stage a recognition of the economic power of China and a near-capitulation by the IMF to China's rather unique way of doing business as a result of the Fund desperately needing a friend at this stage, having run out of really any role and yet still having a lot of very expensive mouths to feed. Chrissie also wants her next title to be Madame Le President and this 'breakthrough' fills in some rather empty space on her resume.
In order to further bolster the complete unhinging of IMF rules the argument is being made all of the place that this will help liberalize China and diminish the power of the Communist Party as China will now be forced to play 'by the rules' and liberalize not only their economic and monetary policies but, by extension, their political policies as well. Bollocks. The CCP will do damn what it pleases unless and until a failure in their economic policies causes a rather compliant population, now seeing a rise in living standards so desperately needed, to experience a set-back and being asking, 'Hey, what am I getting out of this?' It is a vanity gift to the Chinese people giving their government extra time but accomplishing little.
It is also being argued that this move is good for the world's financial system as it breaks the hold that the dollar has exerted over all facets of international financial and for that matter, ALL business dealings and by extension, the influence of the United States. Fair comments except that there are far more many reasons for the existence of this influence beginning with the Rule of Law which far surpass the mere existence of the dollar and I would argue even the vast infrastructure and liquidity which supports it, although in reason years, under this---allow me to be political---incompetent administration and increasingly politicized central bank, these advantages are being eroded. With a weighting of nearly 11% in the SDR basket let's see how many central banks switch 10% of their reserve holdings into dollars? Aside from those tightly wedded to China in other areas, very few I would bet. I'll take on all comers; I'm down $.25 to Larry.
The other thing in which I will be most interested is to see just how much of the approximately $18 trillion in Yuan sitting in deposit accounts will remain. Under the agreement, the Chinese are supposed to be allowed to invest up to 50% of their assets in foreign assets. Does money flow in, out, or simply sit tight. If the trend is out, given how much Chinese money is already in such places as New York, San Francisco, Miami, London and points around the Globe with all sorts of restrictions in place, with restrictions relaxed if we have a vast outpouring, how long will Xi's mob allow that to continue as the result will almost certainly be the collapse of the Yuan? Not long I would argue. And the Fund's reaction? Not much I would argue making it even a bigger joke than the ECB in dealing with budget deficits.
Finally, I would once again bring up the effect this ill have on one of the U..S's greatest strategic tools, financial sanctions. If all the other reserve currencies are always on your side politically, they can work quite well. When one reserve currency issuer is not on-side they don't work at all. The U.S.'s strategic bag of tricks has just lost a big component."
"So, Ted," said I, "There you have my views. Your call. Have any more questions?"
"Charlie, that was great and I thank you so much. Actually I have just one more. Do you have Larry's number?"
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