Dollar Falls Most in Month, China Urges New Currency ... Obama begins to stumble

TheDailyBell - Issue 332 • Monday, June 29, 2009

"Democracy is the theory that the common people know what they want, and deserve to get it good and hard." Dollar falls most in month as China urges new reserve currency


Phil Ashley/Getty Images

Russian Finance Minister Alexei Kudrin said on June 13 after the Group of Eight meeting in Italy that his country had full confidence in the dollar and that it's "too early" to speak of alternative reserve currencies. Japan has "unshakable" trust in the strong-dollar policy of the U.S., Finance Minister Kaoru Yosano said in Tokyo yesterday. China called on the U.S. to guarantee the safety of its assets in March, when Premier Wen Jiabao said the nation was "worried" about its holdings of Treasuries. People's Bank Governor Zhou Xiaochuan urged the IMF that month to expand the functions of its unit of account and move toward a "super-sovereign reserve currency." Russian President Dmitry Medvedev proposed on June 5 that nations use a mix of regional reserve currencies to reduce reliance on the dollar. "There may be signs here of tensions mounting between the PBOC's economic concerns over China's holdings of dollars and the Chinese government's diplomatic reasons for doing so," Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, wrote in an e-mail. - Bloomberg

Dominant Social Theme: The dollar on the way out?

Free-Market Analysis: We have been skeptical of any immediate changes to the position of the American dollar as the world's reserve currency. But long-term it is certainly possible. In fact, as trends develop, a pattern emerges. As with central banking itself, The Daily Bell is dedicated to following the conversation and providing appropriate explanations. It is difficult to see the forest for the trees sometimes, but the same names do continue to come up. One of the most prominent is Zhou Ziaochuan. Here's what we wrote about Ziaochuan back in March.

Zhou, is apparently considered perhaps the most "academically capable" of the current Chinese leadership and has been called "China's most able technocrat" (Wikipedia). His most famous motto: "If the market can solve the problem, let the market do it. I am just a referee. I am neither a sportsman nor a coach." Additionally, Zhou is said to be known for hiring Chinese who have been trained overseas and have real Western market experience. But from our point of view, perhaps Zhou's most interesting feature as a Chinese leader is his participation in the Group of Thirty.

And this from Wikipedia:

"The Group of Thirty, often abbreviated to G30, is an international body of leading financiers and academics which aims to deepen understanding of economic and financial issues and to examine consequences of decisions made in the public and private sectors related to these issues. ... The group is noted for its advocacy of changes in global clearing and settlement. The group consists of thirty members and includes the heads of major private banks and central banks, as well as members from academia and international institutions. It holds two full meetings each year and also organizes seminars, symposia, and study groups. It is based in Washington, D.C. The Group of Thirty was founded in 1978 by Geoffrey Bell at the initiative of the Rockefeller Foundation, which also provided initial funding for the body. Its first chairman was Johannes Witteveen, the former managing director of the International Monetary Fund. Its current chairman of trustees is Paul Volcker." (Wikipedia)

The first trend we can see, then, is a campaign involving the East and West that may involve some level of participation or orchestration by the Group of Thirty. This campaign is pro-IMF when it comes to replacing the dollar. In fact, the debate seems to be positioned so that options for a new kind of money will devolve to the IMF and "other." The IMF would seem to be continually being positioned as the controller of such a currency.

Another trend would seem to be that the world's powers-that-be will not actively or seriously consider paper money backed by metals. While we believe in fact that a worldwide currency would be absurdly easy to offer were any nation willing simply to step up and back currency formally with precious metals, the replacement of the dollar with another paper currency remains a formidable task. The dollar's pre-eminence rests on formal agreements within the Middle East whereby oil is only to be bought or sold using dollars. This is ultimately an authoritarian environment, as those in the Middle East that would seek to contravene the dollar must consider the American military presence.

Absent the will to offer a currency with, say, gold backing, the creation of a new currency becomes intimately involved with international politics and power entities such as the IMF. And if this is then the case, then the long-term scenario probably involves some sort of international currency that gradually supersedes portions of the dollar's presence. It could be, in fact, that the dollar remains a domestic currency with lessened international presence.

A third trend involves US domestic circumstances - which continue to conspire against the dollar. The current administration's reshaping of the American economy shows no signs of abating. The results of the current stimulation, the additional taxes to the American electorate via potential "universal" health care, green "cap-and-trade" programs and over-reaching financial and industrial regulation will be to depress economic vitality in the United States for years to come. Additional dollars will need to be printed and it is here that the dollar as a viable reserve currency will start to fail. The wounds will be entirely self-inflicted but will be portrayed by the mainstream press as an inevitable outcome of serious policy debates.

These three trends constitute a kind of slow-motion pincer movement that certainly has the dollar in its sights. One can even see the pincer begin to close. A few years? A decade? Eventually, given these trends, the dollar will come under considerable pressure.

Conclusion: The above process seems highly orchestrated, if one is willing to look closely. It seems no accident. It implies an eventual replacement for the dollar with something more universal - and thus terrific currency fluctuations and a good deal of pain for savers and investors with dollar exposure. The safe haven in this case will not prove to be bonds, certainly not US Treasuries, but precious metals, both gold and silver, in our opinion. If the Anglo-Saxon monetary elite has in mind replacing the dollar with something less parochial and more "global," then the upside of precious metals over the next few years becomes generous indeed.




They say Obama is starting to stumble. The hell he is!


Alex Wong/Getty Images

Indeed he has been catching - catching flak, that is, from critics on left and right and over both his foreign and domestic agendas. As he approaches the six-month mark of his presidency, his job has become less glamorous and more grueling. Allies in Congress are restive and for the first time, the whiff of failures and defeats is in the air. Thus the new tone from the White House press corps, which, like animals in the wild, preys on the weak. But don't be fooled by this dark patch. Obama's long-term prospects remain bright. - Guardian

Dominant Social Theme: Obama continues with a serious agenda.

Free-Market Analysis: We tend to agree with this analysis. The Obama administration has two vast initiatives on the table and has done well so far with a fairly radical leveling agenda as regards banks, car companies, Wall Street and the mortgage industry. The American president's efforts are unyielding and his goals are increasingly obvious. What are they? He wants to bring about change, but the change he is seeking puts the federal government ever more clearly in control of the major segments of his nation's industrial and financial base.

While this seems somewhat incredible given the track record of centralized government when it comes to providing services and resources, the drumbeat of change goes on. Obama and his Democratic congress still have more than a year before US congressional elections provide a referendum on what is currently taking place. The chances are that news won't be good for them. But by then the vote may be moot. Large programs once created and funded are notoriously difficult to root out. The change that Obama has initiated, no matter how shallow is without question broadly based, and will continue to be so.

When fully revealed, Obama's first few months will include a broad swathe of leveling policies that may set the United States on a course towards fully socialized health care and an environmental program that penalizes citizens for using energy, especially certain kinds of energy that have been the staples of Western civilization for more than 100 years (oil and gas). This is in addition to Draconian regulatory fiats and other sorts of industrial taxes and regulation that will have considerable monetary and fiscal impacts (see other article, this issue).

Conclusion: While there are many of the opinion that Obama will come acropper as regards this ambitious agenda, there is no gainsaying that pieces of it are in place and that there is much more to come. Republican leaders who try to alert their base to what is occurring (mostly for fund-raising purposes) have no one to blame but themselves. If the Bush presidency had hewed even to the vaguest tenets of modest government, voters would have been less infuriated with the results of his presidency. And they would have been less likely to vote for the Obamanite change that has resulted in a Bush-on-steroids regime.