China-Russia currency agreement further threatens U.S. dollar

[manojb]

thats one year old article from OP BTW!!

Why china keep buying US treasuries?

here comparison of currencies USD v/s rest ,except chinese currency and AUD not many doing well recently. India worst!!

 

[anonymus]

Aryan_B,You are in a habit of recycling old threads.I have already answered you query on reserve currency in concise form on following thread.But it seems your ambition is propagating hate for US rather than gain Knowledge about concept of reserve currency.But for argument sake i would repost it here also.

http://www.defence.pk/forums/u-s-fo...volts-spread-40-us-cities-13.html#post2159176

People talking about reserve currency have no idea what a reserve currency means or their knowledge is limited to wikipedia.

The salient features of reserve currency could be summed up as

1.The currency is fully convertible(Both Capital account and current account)

If a currency is not convertible,it's value can't be determined by the market and the holder of that currency cannot be sure it's value.Also value of a non convertible currency can be changed at whims of issuing countries which can be detrimental to holder's interest.A convertible currency's value can be manipulated by printing more money which leads to inflation and acts as natural stabiliser.
Yuan non convertibility is its biggest drawback which is an impediment to it's becoming a reserve currency.If chinese government makes Yuan convertible,it would appreciate wrt Dollar and Chinese Export would become costly ruining their industries.

2.The currency is traded in international markets at volume large enough so that there is no volatility.

Scale of International trade is truly gargantuan.There is massive need for a liquid currency to settle payments.Swiss franc,SDR,and Gold has all the required characteristics except that their market is not deep enough to absorb volume of trade.

3.The currency should be acceptable to commodity sellers like oil merchants.

Except Iran Everybody is accepting Dollars.

4.The derivative market for the currency is developed enough to provide enough insurance against fluctuation.

For yuan it does not exist and Gold is too volatile to allow any meaningful development(Premium quoted very high)

5.The currency should be backed by sovereign guarantees.

Even you could issue a currency provided that anyone would accept it.The piece if paper your grocer gives you when he is out of change or the loyalty point your supermarket provide you are also a currency.But they can't be held in reserve as they are not tradable.

6.IF the Reserves are held in form of bonds then there should be no chance of default on part of issuer.

If bonds are held in the issuer's currency there is no chance of default.

US issue its Bonds in dollar so if china liquidates it's holding US could simply print dollars to pay to china.

Greece issue it's Bonds in Euro which it can't print hence it is on the verge of default.(Though it is a very long story in itself).

7.The bonds should at least give some return so that value of reserve does not depreciate.

As far as i know except inflation proof bonds which are very costly,Bond of nearly every Reserve currency depreciates.

 

[FairAndUnbiased]

derivatives provide insurance against volatility?!

derivatives CAUSE volatility.

thats one year old article from OP BTW!!

Why china keep buying US treasuries?

here comparison of currencies USD v/s rest ,except chinese currency and AUD not many doing well recently. India worst!!

We've been dumping long term bonds for short term ones in the past and haven't bought new ones recently. All new buying has been short term ones, after previous long term bonds have expired.

Even this is foolish, because US bonds are trading at historical highs with lowest interest payments on record. Why the f* would anyone buy high, sell low, and buy an instrument with almost zero return?

 

[anonymus]

derivatives provide insurance against volatility?!

derivatives CAUSE volatility.



We've been dumping long term bonds for short term ones in the past and haven't bought new ones recently. All new buying has been short term ones, after previous long term bonds have expired.

Even this is foolish, because US bonds are trading at historical highs with lowest interest payments on record. Why the f* would anyone buy high, sell low, and buy an instrument with almost zero return?

Yes derivatives cause volatility.You seemed to have clearly misunderstood what i meant by point 4

4.The derivative market for the currency is developed enough to provide enough insurance against fluctuation.

For yuan it does not exist and Gold is too volatile to allow any meaningful development(Premium quoted very high)

Derivatives are basically hedging instruments.They are used by speculators to induce volatility.

See you need to understand how derivatives work.I would provide a simple example

Suppose you are in possession of a house in hongkong.You need to sell it after a month but want to get at least a specific price for that say the current prevailing price.You could achieve this by buying a put option on your house.By buying a put option you would have an right but not an obligation to sell your house to the buyer of your put.The buyer would buy your put on basis of some premium which you have to pay upfront.If the price of your house increases,you could choose not to exercise your put and your only loss is premium.If the price of your house decrease you could sell it to buyer limiting your loss to that of premium money.

same kind of option called "Call Option" which works in same way but is used if you want to buy something on later date.

another derivative is a forward option but it binds you in an obligation to buy or sell.

*Note:These derivatives are used only for bonds and securities.I gave example of house to make things simple.If you want to trade a real asset like a house you have to convert it into an saleable paper asset which is done by banks and mortaging companies.

So the real purpose of derivatives is to hedge risk and it is used as such by genuine users.

But if only genuine users would be trading in market than there would be nobody to buy derivatives.Here comes the role of speculator who believe that market would swing in his favour.

The volatility occures when an speculator buys naked derivatives i.e for those assets whom he do not possess and shorts his position.

But as my point no 4 has made clear and i have given example of gold for making my position clear.An speculator can induce volatility only when market for that currency is not deep enough.Currently USD8.2trillion is in circulation.It would require someone having hundred of billions of dollar to induce volatility.And financial institutions are not as irresponsible as Fanboi's on internet.they take well reasoned decisions.

For underlined portion

The comment shows that you have only superficial knowledge of economics.

If a country is running a trade surplus it could do following things.

1.It could consume that surplus.

It could be done in following ways.

If the country has a floating currency,it's value could be allowed to appreciate and if it is pegged like yuan.It could be pegged at higher value.

This has following effects
i.It makes Exports costlier.
ii.It makes Imports cheaper.
iii.It provides an incentive for manufacture to serve local market.

these points together lead to decrease in exports and increase in in domestic consumption.

2.It could save that money and keep it in hard currency or treasury bills.

Now given the high dependence your economy has on exports and the fact that your exports are dependent on their low value(if people want quality they would buy german) your government is left with no option but to buy treasury bonds.The rate of buying has gone down because your surplus is also gradually decreasing.If your government allows sudden appreciation of yuan,the manufacturers would simply pack up and leave for other low cost locations like vietnam.the cost of setting up a factory is miniscule compared to cost of running it.Thus your central bank is not run by fools.They know what they are doing and they have to buy US bonds even when it is trading at historical high.


And in Economic terms Short and Long maturity Investments are equal except for sake of liquidity.If chinese government want to sell long term bonds then it has to do so in open market.It has to find a buyer and sell at the price quoted with that buyer which ensures that if it tries to sell a substantial portion of its reserve there would be no buyers for that and it would fetch very low values.While it could redeem Short investments at their face value when they are mature.

 

[FairAndUnbiased]

Yes derivatives cause volatility.You seemed to have clearly misunderstood what i meant by point 4

4.The derivative market for the currency is developed enough to provide enough insurance against fluctuation.

For yuan it does not exist and Gold is too volatile to allow any meaningful development(Premium quoted very high)

Derivatives are basically hedging instruments.They are used by speculators to induce volatility.

See you need to understand how derivatives work.I would provide a simple example

Suppose you are in possession of a house in hongkong.You need to sell it after a month but want to get at least a specific price for that say the current prevailing price.You could achieve this by buying a put option on your house.By buying a put option you would have an right but not an obligation to sell your house to the buyer of your put.The buyer would buy your put on basis of some premium which you have to pay upfront.If the price of your house increases,you could choose not to exercise your put and your only loss is premium.If the price of your house decrease you could sell it to buyer limiting your loss to that of premium money.

same kind of option called "Call Option" which works in same way but is used if you want to buy something on later date.

another derivative is a forward option but it binds you in an obligation to buy or sell.

*Note:These derivatives are used only for bonds and securities.I gave example of house to make things simple.If you want to trade a real asset like a house you have to convert it into an saleable paper asset which is done by banks and mortaging companies.

So the real purpose of derivatives is to hedge risk and it is used as such by genuine users.

But if only genuine users would be trading in market than there would be nobody to buy derivatives.Here comes the role of speculator who believe that market would swing in his favour.

The volatility occures when an speculator buys naked derivatives i.e for those assets whom he do not possess and shorts his position.

But as my point no 4 has made clear and i have given example of gold for making my position clear.An speculator can induce volatility only when market for that currency is not deep enough.Currently USD8.2trillion is in circulation.It would require someone having hundred of billions of dollar to induce volatility.And financial institutions are not as irresponsible as Fanboi's on internet.they take well reasoned decisions.

For underlined portion

The comment shows that you have only superficial knowledge of economics.

If a country is running a trade surplus it could do following things.

1.It could consume that surplus.

It could be done in following ways.

If the country has a floating currency,it's value could be allowed to appreciate and if it is pegged like yuan.It could be pegged at higher value.

This has following effects
i.It makes Exports costlier.
ii.It makes Imports cheaper.
iii.It provides an incentive for manufacture to serve local market.

these points together lead to decrease in exports and increase in in domestic consumption.

2.It could save that money and keep it in hard currency or treasury bills.

Now given the high dependence your economy has on exports and the fact that your exports are dependent on their low value(if people want quality they would buy german) your government is left with no option but to buy treasury bonds.The rate of buying has gone down because your surplus is also gradually decreasing.If your government allows sudden appreciation of yuan,the manufacturers would simply pack up and leave for other low cost locations like vietnam.the cost of setting up a factory is miniscule compared to cost of running it.Thus your central bank is not run by fools.They know what they are doing and they have to buy US bonds even when it is trading at historical high.


And in Economic terms Short and Long maturity Investments are equal except for sake of liquidity.If chinese government want to sell long term bonds then it has to do so in open market.It has to find a buyer and sell at the price quoted with that buyer which ensures that if it tries to sell a substantial portion of its reserve there would be no buyers for that and it would fetch very low values.While it could redeem Short investments at their face value when they are mature.

Yuan is not pegged. It has appreciated 30% within 6 years. It is controlled, yet appreciates anyways. Whether a currency floats or not has little to do with whether it appreciates or not. If you want to do business in China, you will pay the government ordered price for RMB, or you don't do business in China, since no one will take other currencies. Indeed, part of the demand for RMB is due to the government deliberately raising the price level, which causes speculators to want to buy RMB and turn the "artificial high" into a "real high".

China has little dependence on exports when compared globally. Take a look at how export dependent Germany and South Korea are. Even India has 20% dependence on exports, vs. China's 25%. Yet a strong Euro has not prevented export dependent Germany from thriving, nor did an extremely weak won protect South Korea from a nearly decade long stagnation 1997-2005.

It is the exact opposite. The capital costs of setting up a new factory is astronomical. To set up a new semiconductor fabrication line costs 2 billion dollars. A steel plant costs a billion dollars. A petrochemical refinery costs hundreds of millions of dollars. The operational costs are miniscule because labor is only 15% of costs, and that's where your foolish idea of cheap currency = big exports is wrong.

A strong currency means cheaper imports. China currently imports basically every single industrial input, from food to iron to oil. The only raw material we do not import is coal. The whole point of a strong RMB (btw, much stronger than the rupee) is to reduce inflation.

No one is "forced" to buy bonds. And we're not buying. Employment is less important in China than controlling inflation, because of our large agricultural population; workers who get laid off in the city can go back to become farmers with low employment, but with high inflation, farmers cannot afford to survive.

Short and long maturity investments are definitely different in terms of volatility and in terms of risk. If I think the US go ver nm e nt is going to collapse soon, and I need to cash out my bank and start buying hard assets, then I'm not going to buy long maturity investments.

BTW, throughout the world, people are shorting the USD. This is proven by the rising price of gold. If you buy gold, you are effectively shorting USD. Along with straight up printing, the demand for USD is dropping strongly.

And you also forget in a command economy with a production surplus, the government can just print money to buy goods then dump them into the ocean. China is a command economy at heart.

I think the one that has a shallow understanding of economics is not me.

 

[anonymus]

Yuan is not pegged. It has appreciated 30% within 6 years. It is controlled, yet appreciates anyways. Whether a currency floats or not has little to do with whether it appreciates or not. If you want to do business in China, you will pay the government ordered price for RMB, or you don't do business in China, since no one will take other currencies. Indeed, part of the demand for RMB is due to the government deliberately raising the price level, which causes speculators to want to buy RMB and turn the "artificial high" into a "real high".

This is exactly what is meant by pegging.It is not that a pegged currency cannot rise but a pegged currency has to be raised by fiat.

China has little dependence on exports when compared globally. Take a look at how export dependent Germany and South Korea are. Even India has 20% dependence on exports, vs. China's 25%. Yet a strong Euro has not prevented export dependent Germany from thriving, nor did an extremely weak won protect South Korea from a nearly decade long stagnation 1997-2005.

Correction:India has 22% and China has 38% dependence

U.S. and China Exports as a Percentage of GDP, 1980-2030 | Future of US-China Trade

There is difference between the export basket of Germany and China.Germany deals in high end engineering goods not Toys and steel.German products are dependent upon quality of human resouse while chinese are dependent on quantity.

It is the exact opposite. The capital costs of setting up a new factory is astronomical. To set up a new semiconductor fabrication line costs 2 billion dollars. A steel plant costs a billion dollars. A petrochemical refinery costs hundreds of millions of dollars. The operational costs are miniscule because labor is only 15% of costs, and that's where your foolish idea of cheap currency = big exports is wrong.

Cost of setting up a factory has to be seen in prespective of the volume of business that it do.A petrochemical or a semiconductor fabrication line if it do a business of say $10Billion a year then its running cost simply overshadow's cost of setting it up.And you are only giving a straw example.Semiconductor is not the only thing that is manufactured in China and any company running on economy of scale has greater running cost than the cost require to set it up.It concentrates on volume rather than profit percentage to gain profit.

And yes cheap currency means big exports.It is not the only factor but yet a major factor.

No one is "forced" to buy bonds. And we're not buying. Employment is less important in China than controlling inflation, because of our large agricultural population; workers who get laid off in the city can go back to become farmers with low employment, but with high inflation, farmers cannot afford to survive.

Yes certainly US has not put a gun on your central bank Governor to buy it's treasury bill.But as an old saying goes that everything has consequences.If your central bank refuses to buy treasury and your Economy runs a surplus it would increase the supply of dollar in market and since your currency would not be rising officially either it would lead to establishment of a black market and your exports would start fetching less value while your imports would become cheaper by way of sticker prices.

Short and long maturity investments are definitely different in terms of volatility and in terms of risk. If I think the US go ver nm e nt is going to collapse soon, and I need to cash out my bank and start buying hard assets, then I'm not going to buy long maturity investments.

The difference exist only for buyers.For US government,unless it is planning on default both long and short maturity investments are same.It has to pay dollars for both.

And you also forget in a command economy with a production surplus, the government can just print money to buy goods then dump them into the ocean. China is a command economy at heart.

I think the one that has a shallow understanding of economics is not me.

I could buy a ferrari and throw it into ocean.The loss is completely mine.The government that buy goods and do an equivalent of throwing them into ocean loses money.It can't do this forever.Even your $2.8 trillion reserve can't sustain this behaviour for more than 6 months.

 

[VCheng]

..........................

its not a possible risk, its a guarantee the US dollar wont be the only reserve currency in 10 years if these trends continue.

as the demand decreases and supply increases, many will flee from the dollar and inflation in the US will skyrocket.

................................

IF. Says it all. A "guarantee" based on such a big "if" is mere speculation, not a guarantee.

The trends won't continue.

Simple as that.

When inflation "skyrockets" here, please do let me know.

 

[karan.1970]

Cheng i went to bed, then thought id look at my iphone and I saw your comment. come on mate Im really sorry to say you are now coming over as a bit dim. It is not a potential risk its inevitable and its only a matter of time. in Empire terms the sun has set. Im gobsmacked at your incredulous & flawed position. There will come a time if it hasnt already when you will say something that make sense and people will dismiss it cos its you?

This is an epic post.. Aryan finally used the Incred adjective for something that is not Indian

 

[lem34]

Aryan_B,You are in a habit of recycling old threads.I have already answered you query on reserve currency in concise form on following thread.But it seems your ambition is propagating hate for US rather than gain Knowledge about concept of reserve currency.But for argument sake i would repost it here also.

http://www.defence.pk/forums/u-s-fo...volts-spread-40-us-cities-13.html#post2159176

People talking about reserve currency have no idea what a reserve currency means or their knowledge is limited to wikipedia.

.

You have made various allegations which are not related or are irrelevant to the thread.

You state that I recycle old threads. I would say that the destruction of the US reserve currency is an on going process and we need from time to time reminders of what’s happening. My recycling threads do not support your position or detract from my position.

I had not noticed but in a previous explanation by you why the reserve currency was not facing destruction you stated that you were fed up of idiots making assertions that this is the case. How does this supports your assertions? Firstly it is not accepted that I am an idiot and even if I was an idiot it does not support your assertions regarding the dollar. The Mods have taught me that insulting someone does not support an argument. I could say something about your parentage but I don’t think I have sufficient information to make that assertion and in any event it would not support my assertions regarding the dollar. The fact that you are prepared to come to the conclusion that I am an idiot on so little information suggests flaws in your thought process. I mention this because if your thought process is flawed on this occasion it may also be flawed on your thinking on the dollar.

You then seem to have a superiority complex which I think is born out of an inferiority complex common in some Indians. You try to knock people who use Wikipedia as a source. Why? How does knocking this source support your assertions?

You then are critical of my immigration status I don’t really know what that’s got to with the US dollar but suggests once again hatred and an inferiority complex in you and does not support your position on the US dollar.

You are now attempting to complicate something which is all too simple. Stop trying to blind us with rocket fuel science.

Let me introduce you to my mate Nadeem the editor of the Market Oracle


Walayat Street - Nadeem Walayat's Financial Markets Trading and Analysis Site

I have taken this paragraph below from a lengthy article by him which I think is relevant but I suggest anyone really interested in the detail read the full article
Quantitative Easing AKA Money Printing
U.S. politicians are living in fantasy land where they think they can get away with printing money and debasing the dollar without any consequences, they either do not care because they have become rich on the cash funneled to them by their bankster masters who they serve, or that they are delusional, completely detached from the real world. Many countries in the past thought the same, Germany, Russia, Italy, Zimbabwe to name a few and they ALL economically collapsed leaving the holders of their currencies with worthless paper to sell on ebay as high denomination trinkets.

I stand by my submission that it’s only a matter of time before the US dollar is no longer the reserve currency.

 

[T-Rex]

It is going to to take a LOT more than mere $40 billion dollars worth of mutual trade to have any impact. I think the technical description is similar to "xxxxing" in the ocean.

It is just the beginning, don't forget that a storm starts with a single drop of rain.

 

[VCheng]

It is just the beginning, don't forget that a storm starts with a single drop of rain.

Of course; I have my umbrella and boat ready.

---------- Post added at 07:27 AM ---------- Previous post was at 07:25 AM ----------

.............

I stand by my submission that it’s only a matter of time before the US dollar is no longer the reserve currency.

"One can lie with one's mouth open, wishing and hoping, but it will be a long time before a roasted pheasant flies into it!"

 

[lem34]

"One can lie with one's mouth open, wishing and hoping, but it will be a long time before a roasted pheasant flies into it!"

Its unbecoming of you to play with words when you have nothing to say on a subject it was this kind of crax that got you banned last time mr opinionator. If you want to live in denial thats a matter for you. I stand by all my comments that I have made earlier regarding the US dollar.

 

[VCheng]

 

[lem34]

No one is arguing here that US dollar is not the pre-eminent currency at the moment. To assist you understand I would say that we are talking about the demise of the US dollar in the next 5 to 10 years because america carries an unsustainable debt.

 

[VCheng]

No one is arguing here that US dollar is not the pre-eminent currency at the moment. To assist you understand I would say that we are talking about the demise of the US dollar in the next 5 to 10 years because america carries an unsustainable debt.

Exactly my point.

A LOT can, and WILL, happen in the next decade that will change the trends that you describe. US debt is not the unsurmountable problem it is made out to be.

No doubt about it.

========================================

...but I am NOT worried at all!