Economic Charts

All economic charts are at the bottom of the page.

Friday, August 27, 2010

Currency Wars

Behind the scenes major changes are happening in fiat currencies and reserve currency. Many countries (China, Russia, Japan, France, Arab nations) have already suggested an alternative currency or basket of currencies (including gold) to obtain reserve status instead of the dollar (here).  Thou the link is to an older article, this has been articles published throughout 2010 as well on this reoccurring issue.  Recent moves by China have added to the currency wars of the past two years, see video.

Certain areas of Malaysia have somewhat given up on fiat currencies and have allowed gold and silver to be traded as currency, along with their fiat currency (here).  The IMF is pushing an idea of using SDR (Special Drawing Rights) short term and then move to an new reserve currency called the bancor later, as SDRs are not currency and have limitations (here).   There have also been rumors of China backing its currency with Gold (which may be difficult due to supply in the world and price, price would have to skyrocket from here to do this).  China has been buying sources of gold (mining companies) and gold itself (here).   India also in the race for gold bought 200 tonnes from the IMF during the IMF's effort to raise more cash.  Now I am not trying to make this about gold, but gold does play into this whole equation from an international point of view.  Continuing on the theme of diversification from the dollar as a reserve currency some oil producing nations, over the past 2 years, started selling oil in Euro's instead of dollars (even though the dollar is the reserve currency.  Iran has done this and Iraq did but was changed back to the dollar after US occupation).  Russia even started trading its oil in Rubles.  US officials over the past few years have been trying to get China to unpeg from the dollar to allow the yuan  to free, they thought it would make the Yuan appreciate vs the dollar (makes US products cheaper, but wait we don't produce anything).  Unfortunately, and it may be too soon to tell, the unpeg from the dollar has not appreciated the Yuan.
So what does all this mean to us?  Well the little guy is stuck in this international currency war that is much more far reaching that I have had time to portray.  We have yet to see how this plays out.  If the dollar is removed from reserve currency status, it could mean rapid depreciation of the dollar.  From where I am sitting the US continues to borrow(increasing debt), solidify that outcome.   Now this is not to say China wants rapid depreciation (if they did they could have pulled out of our debt overnight and stopped lending to us), lets face it they owns 843 billion in our debt.   They don't want to see that go down the tubes quickly, but they have been maneuvering silently in efforts to hedge risk (buying short term bonds instead of long term, selling some bonds and buying the Euro and the Yen and the increases in gold supply and sources).  What this does mean, is that we need to think about our exposure to fiat currencies and how we can diversify our currencies (Do your homework).

No comments:

Post a Comment