Japan's Yosano: dlr to remain world's key currency

[Beetle]

Holy smoke Vector!

Over a half a billion in us dollars (that we know of) in a couple of brief cases? If they start unloading them, I hear tell that bad things could happen. I hope they aint.

What about Medvedevedev? I thought they were going to to stay with the dollar and now there is a report he's eating at the Waffle House?

What does all this mean? Is it going to effect us as much as I think it could, or should I put the Mountain Dew down?

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This is not going to help.

The question is does this take our dollar down slowly or suddenly?

We still see unemployment on the rise, even after all the spending.

Soon we could see inflation.

If we have a natural or financial disaster it will hasten the decline and God help us if we have a Pandemic or Terror attack.

[Beetle]

Seems to me that there is an economic tsunamis headin' this way and our leaders are playing in the sand.

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Financial End Game for the Dollar
Russia, China to Promote Ruble, Yuan Use in Trade

By Lyubov Pronina and Alex Nicholson

June 17 (Bloomberg) -- The leaders of Russia and China agreed to expand use of the ruble and yuan in bilateral trade to lessen dependence on the U.S. dollar a day after they took part in the first summit of the so-called BRIC countries.

“We agreed to take further steps in this direction, including, perhaps, by adjusting contracts and laws that already exist,” Russian President Dmitry Medvedev told reporters in the Kremlin today after talks with his Chinese counterpart Hu Jintao.

Russia, the world’s biggest energy supplier, wants to start selling oil to China in rubles, said Deputy Prime Minister Igor Sechin, who is also chairman of OAO Rosneft, Russia’s biggest oil company. Energy sales in rubles are a “strategic” issue for Russia, he said, adding that oil exports to China over the next 20 years will surpass $100 billion.

Brazil, Russia, India and China agreed yesterday to push for more clout in global financial institutions during what Medvedev called BRIC’s “historic” first summit in the Ural Mountains city of Yekaterinburg. China and Russia have called for a more diversified financial system to give emerging economies a bigger say in economic affairs, including the creation of alternatives to the U.S. dollar as a reserve currency.

‘Symbolic Value’

“Expanding the use of national currencies in mutual settlements is a separate, important task,” Medvedev said. China has the world’s biggest foreign-currency reserves, almost $2 trillion, while Russia is third with more than $400 billion.

The ruble weakened 0.1 percent to 31.2396 against the dollar in Moscow today after earlier strengthening as much as 0.4 percent. The yuan was little changed against the dollar on speculation China will prevent appreciation to avoid a prolonged slump in the nation’s exports.

It will take “at least a couple of years” to start converting the first contracts into domestic currencies, said Elina Ribakova, Citigroup Inc.’s chief economist in Moscow.

Today’s announcement has “important symbolic value,” she said. “If you take a 10- or 20-year perspective, trade between Russia and China will increase significantly.”

Total trade between the neighboring countries reached a record $56.8 billion last year, according to the Kremlin.

After today’s Moscow meeting, Russia and China signed an agreement worth $3 billion to cooperate in trade and investment in areas including light industries, high technology and energy.

U.S. Deficit

The dollar’s status has come into question as leaders of the BRIC nations consider substituting other assets for their dollar holdings amid a ballooning budget deficit that keeps the U.S. dependent on foreign financing. China alone owns about $744 billion of U.S. Treasury bonds among its $2 trillion of foreign- exchange reserves.

Russian central bank First Deputy Chairman Alexei Ulyukayev’s comment on June 10 that Russia may sell some of its U.S. bonds to buy International Monetary Fund notes helped push 10-year yields on Treasuries to the highest level since October.

Brazilian President Luiz Inacio Lula da Silva today denied that BRIC leaders discussed buying each other’s bonds at the Yekaterinburg summit, after Medvedev’s top economic adviser said the matter might be discussed.

Dollar bonds sold by China earned 11.4 percent in the past year, more than double the 4.6 percent for debt in yuan, JPMorgan Chase & Co. indexes show. Brazil’s U.S. currency bonds returned 3.6 percent as real-based notes lost 4.9 percent, and Russia’s dollar bonds outperformed with a 1.9 percent loss compared with a 7 percent drop in ruble debt. India doesn’t have dollar-denominated debt.

To contact the reporter on this story: Lyubov Pronina in Moscow at lpronina@bloomberg.net; Alex Nicholson in Moscow at anicholson6@bloomberg.net
Last Updated: June 17, 2009 10:26 EDT

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Mexico Wants to Join BRIC IMF Bond Scheme



Mexico’s central bank reportedly intends to buy IMF bonds, following similar announcements by China, India and Brazil.

While some may question this use of dwindling reserves at a time when the economy is under such severe pressure, analysts say it is a good idea.

Alfredo Thorne, MD of economic and policy research at JPMorgan, says that doing so would allow the central bank to reduce exposure to the US dollar in favor of more stable IMF special drawing rights.

He adds that he has heard Mexico might purchase $25bn in the bonds, versus Brazil’s $10bn bid. The country’s reserves total $75bn, versus Brazil’s roughly $200bn.

Walter Molano, an analyst with BCP, says that by acquiring IMF bonds, Mexico – as well as the other countries interested in doing the same – can have more say in how the fund operates.

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Emerging powers try to wean themselves off U.S. dollars
national post ^
Posted on Wednesday, June 17, 2009 3:09:44 AM by FromLori

Leaders of emerging world powers discussed creating a new global order on Tuesday, one less dependent on the United States and the West.

Existing reserve currencies, including the U.S. dollar, had not performed their function and it was time for change, said Russian President Dmitry Medvedev as he hosted a summit of the so-called BRIC nations of Brazil, Russia, India and China.

"We are likely to witness the creation of a supranational reserve currency ... which will be used for international settlements," Mr. Medvedev said. "The existing currency system is not ideal." Countries should use their national currencies more for trade, he added.

(Excerpt) Read more at nationalpost.com ...

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From The Times
June 19, 2009
To fight deflation, abolish cash. Could Japan make reality of ‘science fiction’?

Leo Lewis Asia Business Correspondent

With recovery elusive, a population doddering into old age and perhaps a decade of deflation in prospect, Japan may start mulling the most radical monetary policy of all — the abolition of cash.

Unorthodox, untried and, said one Bank of Tokyo Mitsubishi strategist, “in the realms of economic science fiction”, the recommendation has nevertheless begun floating around Tokyo’s corridors of power and economists have described Japan as particularly suitable as a testing ground.

The search for more outré economic policies continues, despite the recent surge in the Nikkei 225 index.The market may be reflecting soaring Chinese investment, rising consumer confidence and other cheerful data but economists see few long-term beacons of hope for Japan.

Other extreme ideas mooted by the financial authorities include a tax on physical currency or introducing one to operate alongside the yen.

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• Deflation returns to Japan as recession bites

All three ideas are based on a theory concerning interest rates and the concept that a nominal rate of zero — as Japan has now lived with for much of the past decade — may be too high. In Japan’s case, the theory would suggest that nominal rates of -4 per cent might be closer to what is required to rescue the economy from another deflationary spiral.

Having agreed that this might be necessary, the next question is how it could be imposed.

Several MPs in the ruling Liberal Democratic Party believe the abolition of cash, though politically radioactive, might be technically feasible. Richard Jerram, a senior economist with Macquarie bank, told investors that “the proposal has become practical with the broad penetration of electronic money and credit cards in Japan”.

He said that all the proposals were radical but worth consideration for Japan. Without physical cash, a central bank can set rates exactly where it likes, runs the argument. Mr Jerram said: “At the heart of the problem of achieving negative nominal interest rates is the idea that physical currency is an anonymous bearer bond with a nominal interest rate of zero.” While a central bank can impose positive or negative rates on non-physical assets, transmitting those rates to physical currency is a huge challenge. By permanently removing cash from a system, he added, policymakers are robbed of the excuse that zero is the lowest that nominal rates can go as a deflation-fighting tool.

In theory, many Japanese could easily make the leap into a cashless world. The country has six main competing cashless payment systems, many of them embedded into mobile phones. Including Oyster-type cards issued by public transport companies, industry sources estimate that there are about 120 million cashless payment chips sitting in Japan’s wallets and handbags, waiting to be swiped.

Nevertheless, the country remains a wholeheartedly cash-based consumer society. Currency in circulation is about 16 per cent of its GDP, compared with the levels of 2 to 3 per cent in most developed countries. Reducing that 16 per cent to zero would be a wrench but would come with considerable benefits, Mr Jerram said.

But just as Japan’s cultural attachment to cash may prove hard to dislodge, some economists believe that the same may be true of deflation. The country’s growing population of elderly people mainly hold cash or cash equivalents and, compared with its US and European counterparts, the Bank of Japan has come under virtually no political pressure to be more belligerent in its war on deflation. It is unlikely, added Mr Jerram, to brook anything as radical as abolishing cash.

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Is this the death of the dollar? Re: $134bn in smuggled US bonds

After two smugglers were stopped last week with what at first appeared to be $134bn in US state bonds, the tension and paranoia surrounding the fate of the dollar hit a new high.

By Edmund Conway
Published: 7:32PM BST 20 Jun 2009

Border guards in Chiasso see plenty of smugglers and plenty of false-bottomed suitcases, but no one in the town, which straddles the Italian-Swiss frontier, had ever seen anything like this. Trussed up in front of the police in the train station were two Japanese men, and beside them a suitcase with a booty unlike any other. Concealed at the bottom of the bag were some rather incredible sheets of paper. The documents were apparently dollar-denominated US government bonds with a face value of a staggering $134bn (£81bn).

How on earth did these two men, who at first refused to identify themselves, come to be there, trying to ride the train into Switzerland carrying bonds worth more than the gross domestic product of Singapore? If the bonds were genuine, the pair would have been America's fourth-biggest creditor, ahead of the UK and just behind Russia. No sooner had the story leaked out from the Italian lakes region last week than it sparked a panoply of conspiracy tales. But one resounded more than any other: that the men were agents of the Japanese finance ministry, in the country for the G8 meeting, making a surreptitious journey into Switzerland to sell off one small chunk of the massive mountain of US bonds stacked up in the Japanese Treasury vaults.

In the event, late last week American officials confirmed that the notes were forgeries. The men, it appeared, were nothing more than ambitious scamsters. But many remain unconvinced. And whether fake or otherwise, the story underlines one important point about the world economy at the moment: that the tension and paranoia surrounding the fate of the US dollar has hit a new high. It went to the heart of the big question: will the central bankers in Japan, China and elsewhere continue to support the greenback even in the wake of the worst financial crisis in modern history, or will they abandon it as America's economic hegemony dissipates?

Dollar obituaries are nothing new. The currency has been presumed dead more times than Shane Macgowan. But like the lead singer of The Pogues, the greenback has somehow withstood repeated knocks and scrapes over the years and lived on, battered, bruised and a couple of teeth the lighter, to fight another day. In the 1970s and 1980s there were plenty predicting its demise, although at that point the main challenger was the Japanese yen. And in the years preceding this crisis, economists and investors including Peter Schiff and George Soros were lining up to declare the dollar's demise as the world's reserve currency. In the late 1990s, the creation of the euro gave dollar sceptics another stick to beat the currency with, and no doubt the European currency has claimed some of the prominence in its first decade.

Now, following the collapse of the global financial system, those warnings have become louder still, and ever more difficult to dismiss – because this time around there are threatening noises coming from those who actually have the power to do something about it. First came a paper from Zhou Xiaochuan, the governor of the People's Bank of China (PBoC), a couple of months ago, positing the idea of introducing the special drawing right (SDR) – a kind of internal currency at the International Monetary Fund (IMF) – as an international reserve currency. These calls were then repeated, with more force, by the Russian president, Dmitry Medvedev, who last week declared that the world needed new reserve currencies in addition to the dollar.

And this time around, the dollar is most certainly suffering. Since 2002 its trade-weighted strength – calculated against a basket of other currencies – has fallen by more than a quarter, from 112 to 81 points. In the same period, the proportion of dollars held by reserve managers in leading central banks has also taken a dive. According to figures from the IMF, confirmed holdings of dollars in government vaults, from Beijing and Tokyo to London and Paris, fell from 71pc of reserves to 64.5pc between 2002 and 2008.

However, detecting what is really happening in the world of foreign exchange reserves is notoriously closer to an art than a science. For instance, figures from April seemed to suggest a fall in China's holdings of US Treasuries – something 'dollapocalypticists' pounced on at the time. But according to Brad Setser of the Council on Foreign Relations, the country was merely rejigging its Treasury portfolio rather than liquidating parts of it. In such an opaque world it is little wonder the conspiracy theories over those two Japanese smugglers show little sign of dissipating.

Nonetheless, for US Treasury Secretary Tim Geithner, who has inherited his predecessors' role as dollar wallah-in-chief, the currency's travails have made it all the more difficult for him to repeat the mantra that he "believes in a strong dollar" while keeping a straight face. Indeed, when he tried to insist at a university lecture in Beijing earlier this month that "Chinese financial assets are very safe," it drew floods of laughter from the audience.

He wasn't playing for laughs, but the irony of the situation is plain to see. If there were a textbook list of actions one could take to weaken a currency, the US (alongside most other developed nations) would be following it to the letter. It has cut interest rates to a whisker above zero; it has engaged in quantitative easing, pumping cash directly into the economy; it has committed to spending trillions of dollars on a fiscal stimulus package designed to pull the country out of recession; it has pledged tacitly to support its stricken banks so that no major institution is allowed to collapse. In any normal circumstances, actions like these would hammer a currency.

According to Stephen Jen of BlueGold Capital Management: "People are having second thoughts not simply because they don't like the dollar, but they are having second thoughts about whether US assets are obviously the strongest assets to own."

Like everything else, the currency's fate depends on how well the US authorities manage the crisis. The US is balanced on a knife-edge between possible Japan-style deflation as the weight of all its debts bear down on it and potential inflation as the force of all its powerful stimulus measures take root. No one knows for sure which way it will fall, but neither would be particularly good for the currency, and by extension for those who hold much in the way of dollar assets.

And China and all other major central banks which have trillions of dollars in their vaults, face something of a dilemma. Any fall in the greenback will cause the value of their investments to slide. Even if they wanted to exit, there seems no easy way of doing so without provoking some serious self-harm. Indeed, according to Olivier Accominotti, a PhD economist at Paris's Sciences Po university, the situation is not unlike that faced by France in the 1920s, as it sought to reduce its massive sterling reserves. The Bank of France found itself in a "sterling trap" in which it "could not continue selling pounds without precipitating a sterling collapse and a huge exchange loss for itself".

Neil Mellor, of Bank of New York Mellon, said: "We've got a situation where Geithner is smiling and has no choice but to stress the credibility and stability of the US financial and economic system, while the creditors [such as the Chinese] smile back and say they believe him, while at the same time giving hand signals to their reserve managers to get rid of these things."

Rather like the brinksmanship on display throughout the Cold War, it is a dilemma which applies itself to game theory. Both sides know that the dollar is set to weaken, but both could be set to suffer if they both allowed it to collapse at the same time. "If you are the Chinese it is in your interest to play the game – you've got a lot of dollars at stake – but in the long run you surely want to reduce your holdings and diversify them at the margins," says Mellor.

Still, with every passing week, the conjunction of different warning signals for the US currency seems to evolve and intensify. Recently, the alarm bell ringing most loudly has been the increase in yields on US Treasuries – a sign, some fear, of acute nervousness among institutional investors about the sheer scale of the cash the Obama administration is planning to borrow in coming years. The Federal Reserve's meeting next week is likely to be watched attentively by everyone with a stake in the game, as the central bank indicates whether it is planning to plough more dollars of newly-created cash into the economy.

But while the debate fixates on the greenback, the issues at heart here go far deeper. The dollar's fate is intertwined with that of the global economy. America is on the brink of losing its economic superpower status, which it will have to share with China at least, if not others, in the coming years. Holding such a position confers important responsibilities, none of which is more symbolic than providing the world's reserve currency – the currency against which all major commodities are denominated, and the de facto international unit of exchange in trade and finance.

It was a position enjoyed by UK sterling during the first waves of globalisation in the Victorian era and the final decades of the British Empire. Eventually, around the time of the Second World War, the dollar inherited the mantle. At first this was something enshrined in the Bretton Woods agreement of 1944, which fixed world currencies to the dollar, but although that system broke down in the 1960s and 1970s, it has remained the de facto currency of choice.

In a globalised world, with trade being carried out between hundreds of different nations by thousands of different companies, having an international standard makes sense: it enables traders to exchange goods more quickly and efficiently than they would have done otherwise. It may be invisible to us, but the vast majority of foreign exchange transactions – particularly those between smaller nations – involve the dollar. Exchange your sterling for Thai baht and you're actually swapping pounds for dollars for baht, whatever the exchange booth says. Even the much-vaunted exchange arrangements by the Brazilian and Chinese are designed not to disrupt these foundations, but merely to smooth things over for importers and exporters.

But a by-product of the dollar's dominance has been the skewing of the world's monetary system. By dint of having this blessed position, the US has been able to finance ever-larger current account and fiscal deficits, with both the government and the public borrowing from overseas, at cheap rates of interest. It has been able to sell US Treasuries at interest rates that other countries can only dream of because of this position as reserve currency. It has had a captive consumer – both because its government bonds are something of a safe haven and because those wishing to peg their currencies against the dollar and enhance their trade flows have little choice but to buy US Treasuries.

And this mutated international monetary system that has evolved since the 1960s is largely responsible for the crisis into which the world has tipped. Because it was able to borrow off other countries at such low rates without enduring the market punishment – in other words higher interest rates – America was able to build up massive current account deficits which poured a record amount of debt throughout its economy, which manifested itself in the financial crisis.

Indeed, as Mervyn King said in a speech earlier this year: "At the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall."

When the PBoC's Zhou referred to the SDRs he was not merely questioning the dollar's pre-eminence. He was indicating something far more radical – that China supports plans for a new Bretton Woods-style agreement to manage the flows of cash around the world. At that seminal conference in 1944, John Maynard Keynes's original idea, which was watered down by Harry Dexter White of the US Treasury, was for an international reserve currency, Bancor, fixed against a basket of 30 currencies, and that countries would be penalised if their current accounts swung too far into surplus or deficit. It is an idea which is now being dusted off from history books by officials in finance ministries around the world, including in China.

Such a radical shake-up would cause earthquakes in the currency markets, a prospect which perhaps makes it unlikely. So in the absence of such a deal, how is the dollar's role likely to evolve in the coming years? The short answer is that no one should expect it to lose its reserve currency status any time soon. It took around half a century for Britain to cede this position to the US, even after being overtaken in true economic might.

One possibility is that the SDR may be used increasingly as a means of denominating assets in accounts, but this is something which would take place gradually, over a course of some years. But even if that is a bridge towards a multi-polar world, in which other currencies vie with the dollar for influence, it will take some time – perhaps 30 years or more, according to Stephen Jen. "People should look at history," he said, referring to sterling's pre-eminence in the first part of the 20th century. "There's a real incumbency advantage."

Jim O'Neill, chief economist at Goldman Sachs, sees the next few years as something of a "vacuum period".

"The BRIC countries [Brazil, Russia, India and China] are becoming so much more important, while the G7, including the US declines, which raises issues about the degree of dominance of the dollar. The problem is that the currencies of the BRICS are the ones that matter, but they won't let you export or use their currencies.

"Until we see another five years' of evidence over whether China is a more consumer-driven economy, becoming bigger and bigger, and whether the euro can have a successful second decade, the dollar looks set to remain dominant."

China has made some hints about loosening its hold over the yuan in recent months, but these are only early manoeuvres. A second step would be to allow the yuan to become a part of the SDR – whose own value is determined by those of a basket of currencies including the dollar, pound and euro. As Jen adds, there are certain prerequisites any contender to the crown of world reserve currency needs in its pocket.

"We have to ask this question: is Russia going to provide asset market that will be as liquid, reliable property rights, the rule of law, currency convertibility and so on? Will we see the same from the likes of China? Their task is very daunting."

Referring to the forged Treasury bonds picked up on the Japanese smugglers on the Swiss border, he adds: "There is a message here: we haven't heard much about anyone counterfeiting roubles. That is probably telling you something."

[Beetle]

WRAPUP 1-Russia, China flex muscles on currencies, politics

06.17.09, 12:01 PM EDT

By Toni Vorobyova and Denis Dyomkin
MOSCOW, June 17 (Reuters) - The leaders of Russia and China on Wednesday trumpeted fast-growing bilateral trade and investment as symbols of a closer political relationship which also underlined the importance of emerging markets globally.

The two countries have signed energy deals worth a record $100 billion this year, and the Russian Economy Ministry said on Wednesday that China overtook Germany and the Netherlands as Russia's biggest trade partner in the first four months of 2009.
'Deeper, practical cooperation has an especially important significance in overcoming the difficulties that face our countries,' Chinese President Hu Jintao said after wide-ranging talks with Russia's Dmitry Medvedev in Moscow.

In a joint statement, the two leaders called for a greater role for emerging economies on the world financial stage and a bigger use of national currencies in bilateral trade.
'It is essential...to move forward the work on the creation of favourable conditions for widening the sphere of settlement in roubles and yuan,' the statement said, also calling for more active financing of trade deals by Russian and Chinese banks.

Although China has not echoed Russia's repeated calls for less world reliance on the dollar, the plan for more bilateral trade in national currencies could weigh on the greenback.
The joint statement also made a thinly veiled attack on the United States on the political front, saying no country should base its defence on expanding military alliances and building missile defences.
'Russia and China consider international security indivisible and all-encompassing,' the joint statement said.
'The security of certain countries cannot be ensured at the expense of the security of others, including through the expansion of military political alliances and the creation of global and regional missile-defence systems.'
NATO expansion eastwards and a Bush-era plan to put U.S. missile defences in Eastern Europe has been fiercely opposed by Russia and has strained bilateral ties. The Obama administration said on Tuesday it was undecided on the issue.
Moscow and Beijing also called for a diplomatic push to resolve tensions over the nuclear programmes of Iran and North Korea.

AT LEAST $100 BILLION
China and Russia, respectively holders of the world's first and third biggest reserves, are playing a growing role on the global stage as developed economies are hit by the crisis.
Nine of the statement's 14 pages focused on economic issues. Medvedev valued a spring deal for Russia to supply China with oil for 20 years at a record $100 billion, while Russian oil companies get $25 billion in loans.
'This is the biggest deal in the world economy... That ($100 billion) is the most careful, cautious valuation of the effectiveness of this contract. We will work on the effect for our country being much bigger,' Russian Deputy Prime Minister Igor Sechin told reporters on the sidelines of the meeting.
Moscow and Beijing also signed memorandums for cooperation on coal -- which Sechin said could include working together to build power stations -- and on natural gas.
Hu came to Russia for a state visit which included two summits of developing world countries covering global trade, security and greater representation for emerging market powers on the world stage.
Hu invited Putin to visit Beijing in October. The two leaders know each other well, having met several times when Putin was president of Russia from 2000-2008.
Medvedev, meanwhile, has agreed to visit China in 2010.
(Writing by Toni Vorobyova and Conor Humphries; Editing by Jon Boyle) Keywords: RUSSIA CHINA/

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