China may revalue its currency soon. The Yuan does not float like most currencies but is rather "pegged" by the government. A 5% increase vs. the dollar is speculated- this will weaken the dollar. This is at a time when a stronger dollar will be better for the next treasury auction now that the US Government (via the executive branch) just raised the debt ceiling so the US can borrow more money.
However, a 5% increase vs. the dollar, while weakening the USD does make US exports look more attractive. That is if we were actually exporting anything anyone wanted because not much is actually manufactured here anymore. Hence, the conundrum from the state of the union speech calling for doubling US exports in 5 years. I am sure what the president meant was that we would be at 2X the amount of actual exportable products in 5 years allowing for adjustments in things we don't export anymore. This is mathematics similar to jobs created vs. jobs saved. My point being that success is defined as exporting 2X the amount of things we would of have been exporting if no action was taken. Are you following this? Cause that was the easy part.
China pegs its currency to the dollar. Why? Because that enables China to enjoy the same biased currency hedge that the US enjoys with having the dollar act as the world's reserve currency without taking accountability for being the world's reserve currency. Very clever. So why increase your currency and make your own product 5% more expensive. Doesn't that mean people will buy less Chinese goods?
Maybe. Or, maybe it doesn't matter if you buy less Chinese goods. Think about that for a moment.
Or maybe the Chinese are pressuring the EU. With the PIGS in near default (Portugal, Italy, Greece, Spain) the narrowing of the gap between Euro and Dollar is closing. Could a Yuan revaluation put so much pressure on the EU that the USG needs to bail out the EU and with what? More US Debt that is, by the way, purchased by China?
Editor's note: Keep an eye on this point. There is a growing drum beat that the EU's problems stem from Wall Street therefore the US (and therefore the US Taxpayer) is accountable to fixing any monetary problems in Europe. This is the same thing that happened when billions of US Taxpayer money was channeled to AIG only to go to EU Central banks.
Given the notion that China can now purchase US Debt in Yuan rather then dollars, this enables them to purchase 5% more of America without actually putting up any additional costs. Are you getting this? 5% is just the shot over the bow. 10% will come very fast.
Or if this happens and the US needs to float more debt then is planned and doesn't want to sell it to China, maybe the Federal Reserve can increase its purchases of US debt to keep liquidity flowing.
But does that make any sense? I mean the USG authorized the Fed to create money. The money created is given to the banks, who in turn, buy US Government debt. That is puting money from the left pocket to the right pocket and calling it a loan.
I am getting nervous that the conspiracy theorist I talked to in July of 2009 was right-- we may be at war and the matter is not made public. It may be everybody against everybody. But that is what happened monetarily just before the great depression.
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**FLASH**: Not to freak anybody out but here is the pop up that I got right after I pushed the "PUBLISH" button on this post. Big brother is out there... no doubt. After all, if it was this easy to send me a targeted advertisement, just guess how good more motivated surveillance is!
http://finance.uncommonwisdomdaily.com/roi/war-on-the-dollar.php?sc=G100&ec=A97650&ga_campaign=uw+content+-+bernanke/obama/rwr+(a97650)&ga_adgroup=dollar-+text&ga_keyword=content&gclid=CKO8wpfH9Z8CFdRM5Qodb2ecfg
Hey man where you been? I finally got an RSS ping on this post. I thought you would be posting like mad with all that US snow I saw on the news.
ReplyDeleteAnyway, what you don't see from your side of the pond is the de-Linking hedge risk counterparty from any structured finance cashflow transactions that occurs by entering into a hedge transaction with a "special purpose vehicle" to continue participation in that transaction without collateralizing its obligations so long the underwriter maintains a long-term senior unsecured creditor. I see more AIG margin calls in your future so assuming you are a US taxpayer get out your checkbook because there is no speculation on our part that WS caused this problem with the blessing of the USG. So time to fix your mess.
M.T.
ReplyDeleteI was just editing the post when your comment came in and I must say that I am not familiar with the details of any SPV. Having said that, the major concern is that any unwind of swap agreements will start a series of dominos falling.
With entities, whether private or public, needing immediate capitalization or capital unfusion, it may be Chinese Yuan which (now revalued at an arbitrary higher valuation by fiat) which enters in and buys everything up.
This is not so different than Japanese buying up real estate in Hawaii or NYC so many years ago. The problem in Japan was that they were not the "last man standing" but rather a middle player. Last man standing owns everything and at this point I don't know who that is going to be.