China to Deploy Foreign Reserves

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

Read more here:

http://globaleconomicpulse.blogspot.com/2009/07/china-to-deploy-foreign-reserves.html

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Tags: Chinese Monetary Reserves, US Dollar, USD, EURO, Yen, Swiss Franc, Chinese State Firms, Sovereign Wealth Funds, Diageo, PetroChina, Chinalco, China Telecom, Bank of China, China Investment Corp., HSBC, China Development Bank,

Posted via email from Global Business News

America Snubbed as China, India, and Russia Summit

Challenging America will be the focus of meetings in Yekaterinburg, Russia, on Monday and Tuesday for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other leaders of the six-nation Shanghai Co-operation Organisation.

The alliance comprises Russia, China, Kazakhstan, Tajiki stan, Kyrgyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia.

The attendees have assured American diplomats that dismantling the US financial and military hegemony is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the US or for the dollar as a vehicle for trade among these countries. The meeting is an opportunity for China, Russia and India to “build an increasingly multipolar world order”, as Mr Medvedev put it in a St Petersburg speech this month.

What he meant was this: we have reached our limit in subsidising the US military encirclement of Eurasia while also allowing the US to appropriate our exports, companies and real estate in exchange for paper money of questionable worth. “The artificially maintained unipolar system”, Mr Medvedev said, was based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks”.

Keen observers of America, if not effective managers of their own economies, these countries argue that the root of the global financial crisis is that the US makes too little and spends too much. Especially upsetting is US military expenditure – such as military aid to Georgia or the presence in the oil-rich Middle East and central Asia – using money that foreign central banks recycle.

Overconsumption by US citizens, US buy-outs of foreign companies and dollars the Pentagon spends abroad all end up in foreign central banks. These governments face a hard choice: either recycle the dollars back to America by buying US Treasury bonds or let the “free market” force up their currencies relative to the dollar – thereby pricing their exports out of world markets, creating domestic unemployment and business failures. US-style free markets hook them into a system that forces them to accept unlimited dollars. Now they want out.

This means creating an alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want”, Mr Medvedev concluded his St Petersburg speech: “What we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries, will not dominate.”

For starters, the six countries intend to trade in their own currencies so as to get the benefit of mutual credit, rather than give it to the US. In recent months China has struck bilateral deals with Brazil and Malaysia to trade in renminbi rather than the dollar, sterling or euros.

Many foreigners see the US as a lawless nation. How else to characterise a country that holds out a set of laws for others – on war, debt repayment and the treatment of prisoners – but ignores them itself? The US is the world’s largest debtor, yet has avoided the pain of “structural adjustments” imposed on other debtor nations. US interest rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programmes that Washington has forced on other countries via the International Monetary Fund and other vehicles.

It is no mystery to other countries how the US remains above the law. Foreigners see a financial system backed by American military bases encircling the globe. The IMF, World Bank, World Trade Organisation and other Washington surrogates are seen as vestiges of a lost American empire no longer able to rule by economic strength, left only with military domination. They see this hegemony cannot continue without adequate revenues and are attempting to hasten the bankruptcy of the US financial-military world order. If China, Russia and their allies have their way, the US will no longer live off the savings of others, nor have the money for unlimited military spending.

US officials wanted to attend Yekaterinburg as observers. They were told no. It is a word that Americans will hear much more in the future.

The writer is professor of economics at the University of Missouri

Source: http://www.ft.com/cms/s/0/e9104e82-58f7-11de-80b3-00144feabdc0.html

Tags: Unipolar, Multipolar, decline of the American empire, Russia China India summit, Shanghai Co-operation organization, Global Development News, USD, IMF, World Bank, WTO, reserve currency, economic hegemony, Medvedev, Jintao, Manmohan Singh, renminbi, Brazil, Malaysia,

Posted via email from Global Business News

In Defense of Timothy Geithner

This recent article from the WSJ Opinion Journal is of interest as it tackles many of the relevant issues and developments of current global geo-politics.

The piece takes direct aim at President Obama’s rookie Treasury Secretary, Timothy Geithner, by saying the following:

 

“Mr. Geithner is learning on the job, and yesterday's lesson is that it isn't smart to fool with currency markets when you are already tempting fate with a gigantic U.S. reflation. Treasury and the Federal Reserve are flooding the world with dollars to break the recession, and the world is rightly getting nervous.”

 

Mr. Geithner has been the target of a good deal of criticism thus far, during his short tenure in office, due to his “unseasoned” leadership (read, he doesn’t have grey hair). And for the fact that his public performance while delivering President Obama’s Economic policy prescriptions, have thus far failed to inspire confidence for unstable markets.

 

“As if the dollar didn't have enough problems, Timothy Geithner took China's bait yesterday and said he was "quite open" to its suggestion this week to displace the greenback with an "international reserve currency." The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say "the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long time.".”

 

In this author’s opinion, the WSJ article is “piling on” in its reactive treatment of Mr. Geithner’s unprepared comments given during a talk at the Council of Foreign Relations. Just in case anyone has forgotten, the USD, and the US economy had the same problems, and many more, before Mr. Geithner was even a glint in President Obama’s eye.

As a seasoned Technocrat, Mr. Geithner is uniquely qualified to hold the role that he now undertakes for President Obama. He is the former President of the New York Federal Reserve, which is the main organ through which most of the President’s stimulus, and “bail-out” policies are enacted.

As a personage, Mr. Geithner is whip-smart, articulate, and is sensitive to the complexity of modern financial and economic systems.

Perhaps, if the WSJ was equally sensitive to the inherent complexities of the current global economic reality, Mr. Geithner would be well-received as the able steward of economic recovery that he is. And as a result, shaky markets might be less so.

http://online.wsj.com/article/SB123802521198942455.html

Dollar Alarm - The Currency Paradigm

This recent op-ed from the WSJ, presents a fine discussion of some of the issues facing G7 Central Banker’s, in the wake of turmoil in the world’s financial markets. In particular it focuses on US monetary policy, and its effects on other world currencies.

“Currencies are not a typical commodity, like wheat or platinum. They are a medium of exchange. While currencies are freely traded in a world of floating exchange rates, the supply of dollars, euros or yen is set by a cartel of central banks. Those banks can influence exchange rates by signaling a change in their respective monetary policies.”

I wonder if the author is aware that the phrase “cartel of central banks” is likely to be borrowed by all manner of “causes” as the underpinning of proof of some paranoid conspiracy, hatched in the nether regions of the web.

Seriously though, the limited supply of money, combined with relatively unlimited exchange of money, certainly differentiates fiat money from good ol’ fashioned bricks and mortar commodities.

“This is where the currency traders will test the G-7's sincerity. The hint that the countries might "cooperate" to influence exchange rates is a warning that central banks could intervene in currency markets and catch some traders on the wrong side of a bet. However, such interventions are typically "sterilized," which means that the banks quickly mop up whatever dollars or euros they use to intervene in markets. If central banks really want to put a floor under the buck, the Federal Reserve will have to change its weak-dollar policy.”’

Sterilized… indeed. That’s the straight-dope on Central Bank realpolitik courtesy of the Wall Street Journal, and your good friends at http://GlobalITandBusinessnews.blogspot.com.

“Dollar weakness has contributed to soaring commodity prices that have walloped U.S. consumers just when their spending is most needed to offset the housing slump. The commodity boom is the result in large part of the Fed's weak-dollar policy, and it may have tipped the U.S. into a recession that could have been avoided.”

“As Stanford's Ronald McKinnon noted on March 31 on these pages, the Fed's easing has also driven private capital away from the U.S. Money has flowed instead to those countries with rising currencies, such as China. To prevent the too-rapid revaluation of their currencies, these central banks are buying up dollars, which they then invest in safe U.S. Treasury’s. This explains the paradox of low U.S. Treasury rates even amid a weakening dollar.

Another thing that explains low US T-bill rates is that America’s exports are increasing quickly, as its current account deficit declines. The “paradox of thrift” this is not. http://en.wikipedia.org/wiki/Paradox_of_thrift

When you are the world’s reserve currency, the forces acting upon, and the momentum acting with the currency are unique. In a way, in its role as the reserve currency of choice, the USD dollar is the paradigm upon which all other currencies are built upon. As the star in a heliocentric currency solar system the fundamentals rules of financial gravity that may apply to all other currencies, may not always apply to the USD.

“In a double irony, China is now revaluing the yuan of its own accord to avoid importing inflation from the U.S. Other countries that have pegged their currencies to the greenback are now de-linking. The U.S. devaluationists are getting their way, but in the most painful way possible for the U.S. and world economy.”

Trader #1 – “So you work in International trade eh? What’s your poison?”

Trader #2 – “I export inflation”

Trader #1 – “Very cool, I hear that’s a growing market”…

Trader #2 – “Definitely, it’s an emerging one too”

http://online.wsj.com/article/SB120812890806011487.html?mod=djemEditorialPage

The Demise of the Euro?

This recent article by Avi Tiomkin at Forbes boldly predicts the demise of the Euro.

“It is only a matter of time, probably less than three years, until the euro experiment meets its end.”

“What will undo the euro: the mounting tension between the inflation-obsessed German bloc (including Austria, Luxembourg and the Netherlands) and the Latin bloc of France, Italy and Spain… Despite core inflation in the euro zone of only 2.4% and a slowing global economy, the Germans insist that the European Central Bank maintain a tight monetary policy. In direct opposition to Germany, the Latin bloc, joined by Ireland, wants the ECB to lower interest rates.”

Mr. Tiomkin rests his prognostication upon the apparently divergent needs of two “distinct” blocs within the European Monetary Union. As plainly illustrated above, he ascribes the need for polar and differing monetary policies for each bloc, which will ultimately sow the seeds of the Euro’s self-dismantling.

There is no doubt that “getting monetary policy right” for even one economy is a massive and unpredictable undertaking, let alone striking the perfect monetary balance for 15 diverse economies with unique and emerging economic conditions

One gets the feeling though, that there is an element of “wishful-thinking” to Mr. Tiomkin’s thesis.

“Along with the steep selloff that will precede the disintegration of the high-flying euro, other markets will be shaken. Look for much higher interest rates for prospective euro deserters like Spain and Italy as spreads for benchmark German bonds widen.

What should investors do? Gradually start to hoard dollars and short the euro. Another strategy is to sell investments in Italy and Spain and buy German fixed-income assets.”

There is no doubt that “hoarding dollars” at this particular point in time, is certainly contrarian investment advice in most precincts, and doing so would most certainly help out the battered US economy.

Although it appears that there are political and populist elements within Europe that are saber-rattling for change in the realm of monetary policy, it would be a rash move for Europe to undo the progress that it has made with the Euro since 1999.

“Launched in 1999, Europe’s single currency is now shared by 15 EU countries and around 320 million citizens, making it one of the world’s most important currencies and one of the EU’s greatest achievements.” http://ec.europa.eu/euro/index_en.html.

The current “crisis of confidence” in European circles in regard to the effectiveness of the Euro is perhaps more likely to lead to further integration between the states in question, rather than less, as Mr. Tiomkin suggests. The relative strength of the Euro globally is of course helping Europe in many ways too.

Perhaps most importantly, is that much of the current “brouhaha” in Europe over the value of the Euro is largely due to the continuing “exogenous shocks” caused by International economic forces outside of Europe’s control.

In today’s global economy we’re seeing a swift devaluation of the world’s reserve currency, resulting in a massive and simultaneous transfer of wealth from the USD to the rest of the world. This of course is the nature of the monetary policy beast, in the system that we have, set-up as it is. As this “shakeout” process in the US economy has progressed it has enabled the Euro to emerge as a safe-alternative currency for foreign Central banks to hold, outside of the USD.

Nonetheless, it will be more than interesting to follow this story as it emerges further.

http://www.forbes.com/forbes/2008/0421/034.html?partner=commentary_newsletter

http://globaleconomicpulse.blogspot.com/