why I got out of dollar and those of you who didn't are doomed

http://financialsense.com/editorials/phillips/2006/1120.html


The simplest way to slow down the rate of accumulation of the U.S.$ in Chinese reserves is to insist that companies invoice customers in their own currencies only. So when Argentina or South Africa wants to buy goods from China they will be allowed to pay in Pesos or Rands. Ask for a price from a Chinese company at the moment and you can be sure that you will be quoted in the U.S. $. If they were to ask what country you came from then accepted your currency [as well as the U.S.$], then they would receive the currencies of all those that trade with them. Then at some time in the future they can pay for imports in those currencies. Meantime, the countries from whom they import will still accept the U.S.$ in payment for imports. Diversification is then achieved and without entering those markets which will rattle the exchange rates.

But the U.S.$’ left unused after that in the international monetary system will then wash this way and thus lowering the $’ value as they become excess to requirements. As in the case of Britain, the drain of capital investment will be like a tsunami hitting the state international trade. The only way they could retain their value would be for the U.S. authorities to mop these up, bringing this liquidity back to Treasury instruments and the rest. But the sheer volume of these excess $’ will prove far too great for such an exercise and will send inflation racing and interest rates trying to keep up.

As this happens, other holders of the U.S. $ will be forced to follow the Chinese to attempt to retain the value of their reserves through diversification too. The $ will be dropping like a stone at this point. It is then the U.S. will have to decide whether or not too impose Capital Controls.

At this point oil producers will be forced to follow the same route of accepting other currencies for their oil or simply raising prices to compensate for a falling $. This will exacerbate U.S. inflation enormously.

Those nations dependent on the U.S. for their trade will follow suit or lose their competitiveness as U.S. goods cheapen at the net rate of inflation minus the exchange rate fall against their currencies.

There will be rising confusion in international trade as exchange rate moves destroy stability in prices. The wounds such an event will produce in the international monetary system will be catastrophic and precipitate precious metal prices we currently may think impossible.

And the Trade deficit will continue until growth and import demand are slowed considerably, or measures are taken by the government to slow them down.

As to financing the Trade deficit, it would be most surprising if there were any [except the closest of unwise friends] nations willing to finance the deficit anymore.

Is this diversification from the $ a near term likelihood? Yes, it is for China which will diversify its $1 trillion foreign exchange reserves, the largest in the world, across different currencies and investment instruments, including in emerging markets, Chinese central bank Governor Zhou Xiaochuan said last week.

Chinese reserves are about 70% in U.S. debt securities. "(Diversification) includes currencies, investment instruments, including emerging markets," said Zhou. He then confirmed that "We do not have any new preparations for selling any currencies." China has to diversify as its future as the leading global manufacturer is pointing the way to the Yuan fully convertible at some point in the future in future. Zhou said that a mushrooming trade surplus meant China needed stronger policy adjustment both on the Yuan and through boosting internal demand. But he said any changes to the Yuan would be gradual to avoid unbalancing the domestic economy.

Photo falling money - Joachim AngeltunChina has allowed the Yuan to appreciate 2.1% since last July only. "The reason why we adopt a gradual approach for exchange rate reform is because China has a very large amount of labor working in the trade-related sector," Zhou said, “So we have to consider this. We should avoid too much or too sudden closing-down or bankruptcies of enterprises and laying-off of workers. We are trying to manage to adjust the balance of payments and meanwhile to keep domestic economy in the good (state)."

 

Interesting read. It has been speculated for some time at what point China would begin dumping their massive stash of US dollars. Seems they are beginning the move, albeit gradually, at the moment ...

 

what ios wrong with america?
you seem like you want to destroy america. However when your product prices rise, americans will be forced to develop our own goods.

 

Switching to the Fiat system was the dumbest thing that we could have done. The dollar just keeps falling in value, but prices are staying the same, so no one will notice until it is too late. Without a gold reserve backing our currency it will never have a stable value. Add to that the fact that the national debt undermines the financial stablity of the government, and we are in a lot of trouble.

 

Good points... That's why I am back on gold standard, plus some other non-dollar investments. Only keeping enough dollars to pay rent and stuff like that.
The last guy to hold the sack will lose big, which I suspect is going to be American public, not governments and banks

 

Isn't there a risk of a bit of trickery in that strategy - governments releasing gold reserves to drive the price down and force people to move away from gold and back to currency?

 

I think its time to switch over from dollar and other currencies and world should forward into a new system of trade

As I certainly feel this system is outdated

As now days exchange rates are mainly because of buying and selling

but this can be changed into like this

A american buys an product for $10 in America

But a Indian buys the same product in India for Rs 200

And we should equate this

$10=Rs200

that means $1=Rs20

this would be the exchange rate

The exchange rate should be closely related with products being manufactured in the country and it should not depend upon natural resources or other things

 

An Indian buys the product for Rs200. The American for $10.

The product is made in Nepal. 75% shipped out for export and the rest for the cities.
The Indian buys the product for Rs200, understanding that the man who made it will have recieved a percentage, and understands the cost of moving the product from Nepal (in the North) to Bangalore (in the South).
The American pays $10, thinks he's been ripped of and maybe expects a discount for cash or for bulk buying. He does care about the movement of the product.

$1 <> Rs20

Sorry.

 

Do you have to be an economist to follow this? I was doing well until we got to Rupees

 

They are not going to sell the gold they hold. What they do is try to keep price of gold down by selling gold futures, promises to deliver gold at some future date. It's rare that someone requests physical delivery, so they sell more futures than what they are actually able to deliver. In other words, the official price of gold is for paper gold rather than physical gold. It's working to a degree, yet price of gold has been going up for years.
What instead might happen is that more buyers will request physical delivery and bankers will default on their promises to deliver, sending price of gold through the roof.
But it's always good to diversify of course. If they find some way to keep price of gold down, there is silver, platinum, commodities and foreign currencies

 

This doesn't take into account the biggest factor. If the Chinese hurt the US economy it could throw a hundred million Chinese out of work.

I promise they will be very very careful in this regard.

 

OMG!

Someone with some common sense.

The Chinese need the US economy to grow to maintain their growth. They aren't going to cut off their nose to spite their face.

 

Of course they are not too happy about it, but it's obvious they are slowly starting to dump dollar. They unsuccessfully asked in the past to be paid in something other than dollar, and they can't accumulate it forever. Even if excessive foreign reserves weren't a problem, we have the new Federal Reserve chairman who jokingly threatened to print lots of money and drop it from helicopters, and is believed to be printing 20%+ of new money a year. Can he print 20%+ of new money a year and maintain 3% inflation?

 

An increase in the money supply does not necessarily result to inflation unless you define inflation as they do in classical political economy or Austrian economics.
Ultimately, what triggers inflation is an increase aggregate demand.
What do people mean when they say the Fed "prints" money anyway? Is that in reference to most of the monetary activities carried out by the Fed?

 

Well if they killed George Bush off maybe everyone would like the U.S.

 

Lets not make this too political can never go wrong with good old Pounds Sterling

 

Well, I guess this won't be poblem to a us Brits, at least for now.