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UN Strongly Recommends SDRs Over Dollar as World Reserve Currency

Jun 30th, 2010
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Yesterday, the United Nations released a new report suggesting it’s time to stop using the dollar as the world’s single major reserve currency, noting it has shown “not to be a stable store of value,” and recommending its replacement with the IMF’s currency basket, called special drawing rights (SDRs).

The report came out of the UN Economic and Social Council and, according to Reuters, here’s what they said:

“‘The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,’ the U.N. World Economic and Social Survey 2010 said. The report says that developing countries have been hit by the U.S. dollar’s loss of value in recent years.

“‘Motivated in part by needs for self-insurance against volatility in commodity markets and capital flows, many developing countries accumulated vast amounts of such (U.S. dollar) reserves during the 2000s,’ it said.

“The report supports replacing the dollar with the International Monetary Fund’s special drawing rights (SDRs), an international reserve asset that is used as a unit of payment on IMF loans and is made up of a basket of currencies. ‘A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency,’ the U.N. report said.”

The UN now joins several vocal critics and nations, especially Russia and China, who have been expressing a strong desire for reserve currency options other than the dollar. Who can blame them? Since the inception of the Federal Reserve the dollar has lost well over 90 percent of its value.

When it comes to stable stores of value, particularly in a time of extreme money printing all over the world, it would make sense to see gold more actively discussed in this type of report. Central banks have certainly noticed gold is beholden to no nation’s printing press and lately have been doing some “peacocking” of their yellow metal assets. Saudi Arabia, for one, recently “restated” its gold reserves… so that they more than doubled in value overnight.

You can read more about the story in Reuters coverage of a UN report on scrapping the dollar as the world’s sole reserve currency.

Best,

Rocky Vega,
The Daily Reckoning

UN Strongly Recommends SDRs Over Dollar as World Reserve Currency originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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The Truth Behind China’s Latest Currency Move

Jun 22nd, 2010
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Over the weekend, the Chinese government announced its intentions to move away from a US dollar peg. Instead of being fixed, the country’s currency, the yuan, will be controlled by a daily band, with the ultimate price being settled by government officials in a morning statement. Previously, the Chinese renminbi, as it is sometimes referred to, was fixed to the US dollar at a rate of 6.83.

But despite the hype, this release isn’t anything new. Fact is, the government’s trading band was in place before the financial crisis. Yes, the yuan will be allowed to trade within a specific band. But that band is no more than 0.3% against the US dollar per day. Simply put, the relatively fixed currency has just reverted to its old pre-2008 regime.

Interestingly, the de-pegging decision comes just ahead of the meeting of Group of 20 later this week. In Toronto, where the meeting is scheduled, world leaders are expected to analyze and conjure up potential solutions to the global recession. Also on the docket was China’s potential manipulation of its currency. US politicians in recent weeks have increased protests for further revaluation in China’s currency. One in particular, Senator Charles Schumer of New York, has threatened to revive a proposal for a 25% tariff on all Chinese goods imported into the United States. Believing in China’s “unfair trade policies,” Schumer remained determined to “stop jobs and wealth from flowing out of America.”

So, could Chinese officials be preemptively moving to avoid another confrontation with leaders of industrialized nations? Definitely not. The Chinese government is known for being headstrong and unyielding when it comes to its own interests throughout history. This situation is no different. As a result, the decision to “remove” the currency peg should not be mistaken for Beijing’s caving in to American political desires.

Instead, the decision to remove the peg is a simple recognition of a global economy that has stabilized. The Chinese government recognizes that market volatility has dissipated, allowing economic growth to stabilize and advance.

Those in the financial industry may remember the July 2005 plan to initially allow the Chinese yuan to trade in a managed float. The decision was accompanied by a 2% revaluation in the US dollar/Chinese yuan exchange rate and a mild promise for further appreciation in the future.

This managed float was then repealed in 2008 as market volatility and recessionary dangers prompted Chinese officials to revert to a US dollar peg. The reversion ensured a stable – and lower – exchange rate. Chinese exports would still remain competitive even if a worse recession emerged in both the United States and Europe – major trade partners of China.

However, now with economies on the rebound and expansion on the way, China is once again confident in the recovery of their own country, as well as the global economy.

Moreover, Chinese officials are looking for ways to combat inflation. Costs have been increasing in China – most recently coming in at 3% percent on an annualized basis. And prices are not expected to slow down, especially when it comes to raw materials. A higher currency will help mitigate some of the price increases, making imported materials slightly less expense for the country’s producers. This strategy of currency appreciation should help to lower consumer price increases after previous measures by the People’s Bank of China, the nation’s central bank, were ineffective. Since the beginning of the year, China has raised bank reserve requirements in an effort to aggressively limit the amount of money in the economy. Higher amounts of money tend to support rising prices in the short term.

So, what can be expected of the Chinese going forward? The currency exchange rate will remain a managed float – barring another economic catastrophe. Additionally, appreciation of the currency will, unfortunately, remain tepid in the long run. This is a major point of contention. US policymakers and the US Treasury have been pushing for further appreciation through a one-off revaluation since the delay of Treasury Secretary Timothy Geithner’s currency report back in April. But because of Beijing’s conservative nature, the underlying currency isn’t expected to gain more than 3-4% in the next two years. The advance only amounts to a sum of 20% over the last six years – or half of what US politicians want. Given the slow pace of the yuan’s imminent move higher, further US political jawboning is likely to fall on deaf ears as China continues to move at its own pace.

In other words, while China’s move may have the short-term effect of getting the G-20 off its back a little, that wasn’t its primary goal. China will do what it wants and when it wants – and any sign that it’s doing what other nations want is an illusion.

Richard Lee
for The Daily Reckoning

The Truth Behind China’s Latest Currency Move originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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China to Put Renminbi in a Currency Basket

Jun 21st, 2010
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Things heated up in the currencies this weekend… Yes, while everyone was wiping the milk from their mouths from their cereal they ate for breakfast on Saturday morning, the Chinese made a BIG announcement… Rather than tell you in my own words… Here is the official statement from the People’s Bank of China (PBOC)…

“In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People’s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.” (They say RMB for renminbi.)

So… After many months of having the renminbi pegged to the dollar (although it was not an official peg, it was a de-facto hedge), the PBOC will resume the ascent of the renminbi (CNY) versus the dollar that took place for three years after the “official peg” was dropped in July of 2005… But, the financial meltdown of August 2008 put a governor on the renminbi that has now been removed, per the statement from the PBOC.

The PBOC also said that the “new currency regime” would be to value the renminbi versus a basket of currencies (that’s how they did it 2005-2008), but this time they mentioned that they would allow the markets some say in the movement of the currency. Now… Please pay attention to what I’m about to say… There are a lot of people that believe that this will mean a HUGE one-way street for renminbi versus the dollar… I’m not one of those! While I think at the moment renminbi should move higher versus the dollar, there’s no “guarantee” that it will always move higher versus the dollar! The renminbi is now “flexible”!

So… How did the Asian and European markets react to the news when they opened overnight and this morning? Well… They like it! Especially the Aussie (AUD) and New Zealand dollars (NZD)…

OK… So… Remember when I said that I just didn’t believe that China’s economy was going to collapse like many so-called “experts” were saying? Listen… China would not have done this if their economy were on the edge of collapse! So… That sent a signal that it was “back to business” for these two South Pacific currencies.

The euro (EUR) traded all the way up to 1.2490 when the markets opened in Asia last night. But that euphoria faded and the euro is back to attempting to move past 1.24! The single unit tried three times last week, and was “shot down” April Wine style… But with this newly acquired appetite for risk that the markets now have, we just might see the single unit move past 1.24 and remain there for more than a couple of hours!

The Swiss franc (CHF) has returned to the 90-cent club, and the Canadian dollar/loonie (CAD) is pushing the envelope of parity once again!

There is a lot of “event risk” in the markets this week… By that I mean, we’ve got a Fed FOMC meeting, a Norges Bank (Norway) meeting, the UK will announce an emergency budget, and a G-20 meeting at the end of the week… Speaking of G-20… They won’t be able to point fingers at China this time!

There is some data to print this week… Home Sales data dominates here in the US. In Germany, there will be an IFO confidence printing, and in Canada, we’ll see CPI (consumer inflation)… This Canadian CPI report, I think, has the potential to be the straw that stirs the drink for the loonie… The Bank of Canada (BOC) next meets on July 20, and there won’t be any inflation data between this week and that meeting. So… A higher than expected CPI could lead the markets to believe the BOC would hike rates on July 20… And vice versa should the CPI be lower than expected…

Even if Canadian CPI is strong, I don’t believe it will be enough to move the BOC to hike rates. The BOC made it quite clear after becoming the first G-7 country to raise rates, that it was not going to be an aggressive rate hike cycle… But… Just because I believe that, doesn’t mean the markets will follow… I still think they will get all juiced up on a strong CPI.

Well… China’s announcement HAS to be a shot across the bows of US Treasuries… A stronger renminbi, means less currency reserves, which means less money that the Chinese will have to buy Treasuries… And the rot on the Treasuries’ vine is being exposed already, with the long bond down over 1 point overnight… And the 10-year? Well, last Friday it traded with a yield of 3.17%, today… It’s 3.28%…

Remember when I told every US Treasury Secretary and lawmaker that went to China and demanded that they allow more flexibility in their currency, that they should be careful what they wished for? Unintended consequences… And US Treasuries are going to see those unintended consequences up close and personal.

And gold… The price of gold is ,260 this morning… WOW! I was told last week that there were quite a few trades at ,255 to sell, a line of resistance, if you will… Looks like gold didn’t care too much about that line of resistance… There are some funny thoughts I had go through my mind about historic weak resistance lines, but those are better kept in my head!

With the renewed appetite for risk… The Japanese yen (JPY) doesn’t look so perky any longer. And in my mind, that’s exactly how it should be! Japan and the US are the two largest debtor nations on the planet…

And… With the renewed appetite for risk… The Brazilian real (BRL) is back in the driver’s seat… Sniff-N-The Tears style! The real has gained over 2% in the past 5 days, which nearly brings the real back to the same level it began as we turned the calendar on the year! And with the HUGE interest rate differential real enjoys, that’s manna from heaven for some investors!

Then there was this… (From the NY Times – which I despise – but that’s where the story was…

“Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits.

“Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at 6,800 a year. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week.”

But get this… “Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money.”

Hey! I don’t make this stuff up!

To recap… China made a HUGE announcement on Saturday, saying they would return to allowing the renminbi to be moved by the markets (to a degree) using a basket of currencies as their guide. This announcement has fired up the risk takers, and almost all currencies, save dollar and yen, are gaining ground this morning.

Chuck Butler
for The Daily Reckoning

China to Put Renminbi in a Currency Basket originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Moving Away From Fiat Currency Dependency

Jun 14th, 2010
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Culture, politics, and economic matters are always intertwined. The rise of relativism, secularism, and socialism will continue to shape the attitudes of central bankers, whether or not they as individuals subscribe to these modern liberal doctrines.

Pedigreed from the large institutions that they protect and manage, and ultimately exposed to a media that is also very influenced by shifting cultural values, tolerances for pain of any kind are so reduced that support for moving to any other system of money is nil.

Moreover, trading off some added inflation for maintaining high employment is a political winner, so hopes for heightened consideration of controlling monetary aggregates look dim.

Indeed, it took double digit readings in the CPI-U before Fed Chairman Volcker, appointed in August 1979, took strong action and abandoned interest rate targeting despite political attacks and protests such as the blockading of the Eccles building on C Street by indebted farmers.

In fact, as undersecretary of the Treasury for international monetary affairs, Volcker had played an important role in suspending gold convertibility in 1971.

There is a human and moral problem with operating a faulty system and legitimizing it at every turn. Academic studies embolden market participants to invest their life savings, only to see these vaporized either through a collapse of asset prices, inflation, or even more dangerously, through putting in place a cure that accomplishes both in sequence.
It is like imposing slavery — after the fact, because a life’s worth of labor is lost.

Inflation of the money supply is the electricity of relativism and this modern brand of socialist capitalism, for it courses through our circuitry and transfers the energy of producers and savers to consumers and borrowers, lights the darkness of business depressions, sparks bubbles and purportedly economic growth also, discounts looming entitlement liabilities through sleight-of-hand CPI measurement, and negates the theism of rewarding prudent institutions and citizens.

To move away from fiat currency is to reject socialism.

Like the mighty Mississippi River, which periodically through nature’s wrath breaks free of government’s dikes and levies, once again gold, the natural money of the millennium, might freely meander through commerce and stop the erosion of the rich delta soil lost each year to corrosive incursion of the salt water of socialism.

Regards,

Bill Baker,
for The Daily Reckoning

[Editor's note: This passage is reprinted from William W. Baker's book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy here.]

Moving Away From Fiat Currency Dependency originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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