Tuesday, March 24, 2009

China Calls For New Reserve Currency / CT Protests Market Rally


China calls for new reserve currency
By Jamil Anderlini in Beijing

Published: March 23 2009 12:16 | Last updated: March 24 2009 00:06

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.

China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.

Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies.

Mr Zhou said the proposal would require “extraordinary political vision and courage” and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.

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© Copyright The Financial Times Ltd 2009.

BRACE FOR INFLATION-- Especially if China Dumps the Dollar

Image America: “Brace for Inflation!—Especially if China follows through on their threat and dumps the dollar in favor of a new currency.

So says Swiss America Trading Corporation CEO Craig R. Smith.

Said Craig, “In its attempt to bolster the U.S economy, the Federal Reserve has left no doubt in my mind that we are in a modern day depression – one that will be addressed by a massive expansion of the Fed balance sheet by trillions of dollars.”

Even if China does not dump the dollar, in favor of some sort of new IMF currency, we’re still in deep trouble but in a different way than in 1929 when the Fed CONTRACTED the money supply, resulting in deflation, similar to what occurred in the initial stages of the current recession that began in December of 2007.

According to Craig, had that recession had been allowed to run the normal course of a recession, we would be well on our way to recovery. But given the low tolerance for political pain in D.C., our leaders employed massive doses of spending that killed the pain but did not address the disease. Therefore, the economy now is worse off than it was before all the so-called government ‘help.’

But what is particularly troubling about the new proposed Obama financial ‘fixes’ is that Ben Bernanke is planning on EXPANDING the balance sheet of the Fed to whatever level is necessary to avoid a deeper and more prolonged recession/depression.

While this solution may look fine and dandy to Ben Bernanke, this recipe for inflation does not make the dollar look like a very good investment to China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Ben Bernanke's master thesis for his doctorate degree in college was the Great Depression. And why is this of particular importance to any of us? Simple. Bernanke’s assessment of the Great Depression is that the Fed acted way too late in 1929 and should have never restricted the money supply. Bernanke is a firm believer in printing money-- even to the point of throwing it out of helicopters to stimulate an ailing economy! This seeming flippant and cavalier attitude of Ben Bernanke earned him a profoundly telling nick name within the financial community of: ‘Helicopter Ben.’

Craig stated, “Last week Ben loaded the chopper with $1.125 trillion of freshly printed U.S. dollars and threw it out onto awaiting recipients. He purchased an additional $750 billion of government-guaranteed, mortgage-backed securities on top of the $500 billion he has already purchased.”

Craig also gives other ‘helicopter-esque’ so-called ‘fixes’ being offered by Mr. Bernanke, including these two:

1) The Fed agreed to buy up to $300 billion worth of longer-term Treasury securities over the next six months; a move virtually never seen from the Fed. What need has the Fed to buy the safest financial instrument available other than to lower rates? This in turn will likely force Treasury holders to look for better returns in other markets. There is no other plausible explanation for such a Fed purchase.
2) Ben will also buy up to another $100 billion of agency debt for a total of $200 billion. In essence, the Fed has expanded its balance sheet to $1.8 trillion from just under $900 billion. The actions announced last Wednesday may well ultimately expand the balance sheet to $3 trillion or more over the next year.

“How did the market receive this stroke of Keynesian ‘genius’?,” Craig asks, answering his own question, “Stocks rallied from down 50 to up 80 points, gold rallied from down $30 to up $30 and the dollar suffered it single worst day since 1985 losing a full 3 percent against all major currencies. Gold went up an additional $18 on Thursday while stocks dropped 80 points and the dollar received a thorough pounding. Friday fared no better with stocks down another 122 points. And after reducing interest rates to virtually zero and employing quantitative easing with little to no positive effect on the economy, Bernanke is using one of the last tools in his box of fixes: printing money—and what does that spell? I-N-F-L-A-T-I-O-N!”

And what is the effect of inflation on people holding dollars? Moderate inflation makes those dollars worth LESS. But runaway inflation could make those dollars WORTHLESS!—as in the case of the Weimar Republic of Germany ending up with it taking a one trillion Mark note to buy a single cup of coffee!

“Given the fact that the Chinese are holding long-term dollar denominated assets such as Treasuries, they are nervous about the value of those assets falling apart in the future,” said Smith.

Translated into layman terms: If China does not dump the dollar, we’re in a recession or a mid level recession. But if China does dump the dollar, we’re in a very, very deep doo doo, a.k.a. headed for a very bad depression, compounded with uncharacteristic depressionary inflation.

Craig says China is in a pickle. They currently hold massive amounts of long-term dollar-denominated assets, including US Treasuries. If they dump dollars, they kill America and in the process their largest customer for their cheap slave labor goods. If they hold to the theory that they want other assets other than dollars, they starve the U.S. of necessary dollars to finance our deficits.

But if for whatever China and/or the rest of the world ever stops financing our debt, it is ‘game over’ for U.S. But that is unlikely to happen since the world is so dependant on our success.

“G-20 is meeting next week with the clear intent to discuss a one world currency. That would put us in competition against other currencies for deposits. That would mean we would have to increase the rate of interest we pay on deposits to attract them. At this stage that would cripple our economy as we need low interest to refinance all the debt we have and sustain the housing market, said Craig.

“The best way to engender confidence in our dollar again would be for our government to stop spending money we do not have. That would mean an immediate halt to entitlement spending. If we put the brakes on spending tomorrow the dollar would rally. China and the world for that matter would want to lend us any amount we needed to get through our pinch knowing we have restored fiscal sanity.”

But if we don’t call a halt to the insanity and if we continue on the headlong rush toward bankruptcy by implementing the Obama administration’s agenda that demands trillions of dollars we simply do not have, countries like China may be forced to do the unthinkable: pulling the plug on our finances, and to some degree on their own finances, in order to avoid going over the cliff along with US,” concluded Smith.

Craig maintains that there are trillions of dollars on the sidelines in bank deposits, money markets, treasuries etc. and now that Ben Bernanke has printed another trillion dollars, it makes those deposits worth less as the quantity has increased. If you have 100 bushels of corn and the farmer next door grows 200 more, your corn becomes worth less as the quantity has increased without an increase in demand. It’s Economics 101. If you increase the supply while demand remains unchanged, prices drop. If you increase demand while quantity remains the same, prices go up.

Bernanke is clearly willing to exponentially increase the supply of dollars by printing as his ability to borrow dollars at this time is at zero. Who in their right mind is willing to lend dollars knowing the Fed can and will print more making what they lent worth less, especially when the rate of return is less than the rate of devaluation?

The talk of re-inflating a balloon that has burst is a joke. That is unless the fabric of the balloon has been repaired. If not, the newly pumped air escapes. So the Fed will be forced to watch this air (printed dollars) disappear into this atmosphere.

In the past, the Fed has pumped billions through low-interest loans, thus creating the "dot-com" bubble, the stock market bubble, the housing bubble and now the Treasury bubble as people seek safety. Once Treasuries burst, which should be any day now given the Fed's willingness to devalue the dollar, the recipient of the pumping will be commodities. However this time the bubble will not burst for unlike paper markets there is an actual commodity. Gold, oil, wheat, steel, copper, corn etc. cannot be created out of thin air. They are real.

And as such their price movement will be a reflection of supply and demand.

The old days of simple stock and bond portfolio strategy in planning for retirement and savings are no longer valid. Commodities and commodity-oriented companies will be a must for every investor if they wish to survive the ongoing market management of the Fed and the government. As Obama, with the assistance of Bernanke, continues to create trillions of new dollars to bring about the socialism he envisions, the long term value of the dollar will go substantially lower.

Lower dollar value translates into higher costs of living, or a lower standard of living if an individual has no way to offset raising costs and possible unemployment.

Make no mistake about it, Obama, Bernanke and Geithner are doing exactly what they said they were going to do: print and spend their way back to prosperity. Their delusional minds actually believe that can be achieved by spending money we do not have with little to no prospect of ever being able to pay it back. For Obama to suggest he can balance a budget, no less reduce the national debt, with his corrupt math is ridiculous.

If some of the predictions are accurate, we may see a doubling of the national debt in the next decade if some fiscal sanity does not return to Washington and stop this very flawed and politically expedient process that the Keynesians and socialists are pursuing.

The Obama administration made it very serious last Thursday when Congress passed legislation to tax 90 percent of the bonuses at AIG with the blessing of the White House. While that may satisfy the populist outrage festering in America about bonuses, it will do little to fix the problems – not to mention the unconstitutional nature of such actions. Taxes are a means to generate revenue to facilitate the proper functioning of government, not to punish people. If the Treasury, the Justice Department and the Fed do not see the danger in such a move, they have ignored the Constitution.

The framers in their wisdom knew the potential threat of politicians being whipped into a frenzy by an angry electorate. Thus Article One and Nine state, "No bill of attainder or ex post facto shall be passed." This was designed to assure enforcement of the separations of power and as such protected individual rights. Disputes like the bonuses should be handled by the courts, not by legislative fiat. There are also specific assurances of "due process" and "sound legislation" to keep Congress from reacting irrationally. Obama should veto this bill to fulfill his oath to protect and defend the Constitution, regardless of how repugnant these bonuses may be.

If listening to Chucky Schumer and "Bawney Fwank" wax eloquent on how they will tax all of any citizen's money away doesn't send a chill up your spine, then you are a mindless follower of Obama mania. Where is the ACLU when Frank demands to have the identities of people under death threat be made public? Maybe we should ask for a list of Barney's boyfriends?

Am I the only American who is troubled with a Congress that takes only a few hours to increase taxes to 90 percent when it takes months to pass a normal spending bill? Every member of Congress should be impeached or fired over violating the oaths they swore to the Constitution. If they want the bonus money back, sue in the courts. That is what the judicial branch is for. Of course, they can't win because these contracts existed and were even reinforced in the TARP legislation passed to "save the world." Remember?

If the American people want to hang someone, it should be Congress, the secretary of the Treasury and the president. Each of them knew full well that TARP money would be paying bonuses at AIG, just as the money would be paying Goldman Sachs the $20 billion AIG owed it. Or how about the many foreign entities that received TARP funds via payments from AIG? American taxpayer dollars used to bail out cronies at Goldman and foreign banks all with the full knowledge of Congress? That is outrageous, don't you think? But Congress has done a fine job focusing our anger on AIG employees instead of where the real responsibility should lie ... with it!

If Obama and Dodd are so set on AIG employees giving back their bonuses, maybe they should give back the $100,000 plus each received from those employees in campaign contributions. How about John Kerry, Hillary Clinton ... shall I go on?

So while the "outrage" that Congress fakes incites a nation, Rome is still burning. And Obama is on Leno talking about his handicapped bowling abilities. How presidential.

So it is simple. It's simple to even a novice. The government, with full cooperation and participation of the Fed armed with printing presses, will print money to avoid a repeat of 1929 – regardless of what the long-term consequence is to the value of the dollar every American works for, saves and spends.

The government should have never gotten involved in trying to short circuit the normal business cycle we have seen over and over again in the economy. Our economy has expanded and contracted several times over the last 100 years. It is normal. But now that the government has made it its business to stop a recession, it will quickly learn it can no more legislate us out of a recession any more than it can legislate away the principles of mathematics.

It will fail, and I would argue it already has. That is why in prior writings I have pleaded with the government to stop any more wasteful deployment of taxpayer dollars. It is making things worse, not better.

If it really wanted to address the real problem, it would reduce the size of government, stop wasteful government spending and put more of America's money back in the hands of Americans. It would encourage savings, not consumption. It would lead by example in not spending money we do not have.

But obviously to do so would demand an immediate termination of the welfare state birthed under FDR and fulfilled under Nancy Pelosi and Obama. To have 300 million Americans all dependent upon government is not freedom. It is slavery. Abraham Lincoln helped end slavery, and now Obama wants it back – this time for all Americans. He's an equal opportunity master of our time. A good crisis is a terrible thing to waste, according to Rahm Emmanuel. That is especially true if you can expand the welfare state in the process.

These recent events demand immediate decisions by "We the People." If our government is going to pursue the "run the printing presses till they burn out" approach, we must take immediate steps to protect our financial future. The government stopped listening to the American people long ago. Therefore those steps include reducing personal debt and purchasing gold, other commodities and companies that produce commodities. Writing letters and making phone calls to the deaf and dumb is a waste of time.

Inflation is coming. Bernanke, short of taking a full-page ad in the Wall Street Journal, told you so. And while you may not see it just yet in the CPI, it will be there. It may well become hyper-inflation. I am convinced our leaders are such pansies that they will not make the tough decisions or demand sacrifice from the nation. Why? They are not willing to sacrifice themselves. They have become spoiled beyond belief, totally out of touch with reality and merely want to hold on to their power. The principles that will get us back the nation we are rapidly losing be damned in the eyes of this leadership. It is all politics now.


Craig R. Smith is the CEO of Swiss America Corporation and author of many articles and books including Black Gold Stranglehold and Rediscovering Gold in the 21st Century. As an economic analyst, Craig instantly engages audiences with his common-sense perspective on national and global economic trends. Over the past two decades he has been interviewed on over 1,500 radio and TV programs including: CFRN - Christian Financial Radio Network, FOX News, CNN, CNBC, ABC, NBC, CBS, PBS, CBN, TBN, Time, The Wall Street Journal, The New York Times, and Newsweek.

Momentum was on the long side but we had difficulty catching the vision. Why? God gave us a brain. We HOPE the economy rallies, but for a sustained move, there has to be more than empty rhetoric and a budget based on money "We The People" just don't have. Each trading day presents opportunities for points but today we chose to "sit it out" in silent protest of a punch drunk regime.

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