Reader Thoughts On “Us Dollar Exchange Rate Anchors ”
Daneackerman Excellent essay JC. Thank you. I feel a sense of the first mobilization for a big project. There is a similar “micro level” feel at the point that “no stopping now” is realized.
I’m sure the worst has been planned for so I’m hoping for the best and that all the unforeseen circumstances are handled smoothly.
Tony Graupp Greetings JC. Love reading your posts, and think you are mostly ‘spot on’…. There is one ‘outlier’ you just maybe overlooking….
On ZeroHedge, they noted that China may be dumping thier US Treasuries to manage the Yuan peg… Is it possible, that by the time the IMF finally decides to accept the Yuan, there will be few if any Treasuries held by China ???? Just a thought ??? Tony
Jcollins Thanks Tony. China can drop what will amount to a marginal amount of Treasuries in order to manage the peg. The level of coordination it would take for China to rid themselves of all Treasuries can only be achieved by some form of exchange or substitution.
China cannot just dump over a trillion dollars worth of Treasuries without substantial losses themselves. With that being said, the “dumping” of Treasuries could force the process of substitution that would be required. Interesting as all hell. Let’s see how it plays out.
Tony Graupp Greetings again JC. According to the latest Bloomberg article I read, they are forecasting the Chinese to dump upto $40 Billion a month….By my estimates, that would be upto $ 1/2 Trillion a year..
My guess, at that rate, it could cause interests to possibly backup, with the ‘supposed’ tight liquidity market they’ve been talking about… anything could happen….
The big conundrum, would be, what happens to all the interest rate Derivatives, if, in fact they do backup above, say 3%…. Potential problems blowing in from China ??? Take Care Tony
Tony Graupp Greetings once again JC. I come forward with this article from ZeroHedge which I don’t fully understand, as how it pertains to the IMF, SDR conversion… The article is listed here;
“”What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse””
Please help me understand in this matter, as it seems over whelming to me at times… Take Care Tony
Jcollins Tony, I read the article and the use of the phrase “QE in Reverse” is somewhat disproportionate to what it will realistically entail. Any Treasuries that China sells someone is being purchased by someone else. In the post Meet the Asian Monetary Fund which I posted 3 days ago, I wrote the following:
“Two, the reversing of QE will begin. There are a few different ways this could happen. The QE assets that were sold could be sold back into the market, but this would be unnecessarily disruptive and would likely add to the growing volatility.
The more practical path forward on reversing QE would be achieved by not replacing the QE assets as they mature. This would be a gradual and progressive unwinding of QE.”
Outside of finding it interesting that Zero Hedge would use the same terminology 3 days later, the Treasuries which China purchased were not QE instruments, as the QE instruments acted as liquidity exchange with other banks and institutions.
China could never unload all of their Treasuries without causing the whole international monetary system to collapse, including their own, as it would destroy their own domestic liquidity.
QE will reverse, but it will be in the manner described in my post. There is a different play taking place here, and it has more to do with the diversification of foreign reserves as opposed to the “dumping” of those reserves. The back and forth between the US and China is described in the post from May titled The Sovereign Debt Complex.
Make no mistake about it, the Fed will raise rates and China will be forced (conveniently so) to establish a formal exchange of their reserves through some prearranged method.
Whether this method is through the SDR or ACU is yet to be determined. At least by us. It’s drama of the highest order my friend.
Rodriguez Perez You have said, JC, in some recent post that may be this is a good time to invest in “Yuans”. Are you thinking in terms of American investor point of view or european view is included too? Regards
Jcollins For all, I would reckon.
Dripfood JC, with regard to your predictions of reversing QE, should I assume you don’t see the introduction of OMF coming through infinetely extended maturity dates?
As proposed in the famous apeech by Adair Turner:
Jcollins We’re getting deep into monetary framework territory with OMF, or Overt Money Finance. This is the one area which so many don’t recognize as the future of monetary evolution.
The Fed QE assets will be reversed, but the OMF is the architecture by which supra-sovereign SDR assets will be distributed to central banks in the years to come.
This will happen, but will act as a form of macro QE, which I have mentioned previously on a few occasions. There will be multiple levels to this framework, which is why I’m adamant that the European Union countries will revert back to their own domestic currencies, but still use the euro for eurozone trade and commerce.
As such, the euro, and other regional currencies (forthcoming) will be tied into the SDR, and future bancor. OMF money will be allocated based on the economic and financial performance of the regional and national tiers which exist below. This is the simplest method of understanding this future architecture.
The best post on this is the one titled The Globalization of Central Banks which was written last December. Sometimes I forget how much material I’ve actually accumulated here.
Dripfood Thank you for the explanation. You sure have treated us to a wealth of insights. And I remember them all ! :-)
Dripfood JC, the one thing of all you insights that I have a hard time following, is the necessity (and likelyhood) of the European countries reverting to their original domestic currencies.
Although sharing the single Euro currency have proved to be a challenge, a lot of heavy weight reputations are tied to its success.
The reversal would cause more political damage than the continuation of the original idea of integrating the European continent into a truly United Community. On top of that, most normal Europeans are satisfied with the Euro and the ease of use in neighbouring countries, which are visited regularly by many.
Let’s say it will take quite a dramatic crisis and even true desperation for your prediction to materialize.
Jcollins I also think so at times, but I’m sticking to it brother. Perhaps that desperation will materialize just in time. The sovereign debt crisis is only now getting geared up.
Dripfood Well, we know for a fact that the northern countries have prepared for the scenario in detail since 2012. But still… We’ll see…
Rodriguez Perez How the European QE remain in this situation of increasing rates, JC? Has it been diluted o still working? I think Mr. Draghi wanted to spend money until Septbre-16. Nobody talks too much about it here. Regards