The Silent Currency War

In my last article, I mentioned that China is holding vast amount of US dollars. China aint stupid. In the face of a weakening USD, it will not be beneficial for China to continue hoarding them. There had been rumours that China is dumping USD. But, how are they going to do that without alerting the community, since the amounts are huge enough to trigger people's attention when its being sold.

Selling them will cause attention. They have to do so in small amounts in staggered periods. Using these depreciating assets to purchase other assets is also a smart way. Oil, precious metals, commodities are priced in US dollar. They have a inverse relation with USD. If USD weakens, these assets will rise in their values. The commodity and precious metal market has been in a secular bull market since 2000, when USD peaked. Secular markets traditionally last 10-20 years. And this bull may still be in its infancy. Hence, with the transfer of USD into appreciating assets, even if the USD tumbles, China need not fear.

A good article by "Financial Ninja".

China is dumping dollars, but far more cleverly than you might think.

Immobilienblasen has noticed a rather curious tendency for China to overpay in "China Inc." Deal Premiums. What exactly is that all about?

Well, imagine you had a bunch of money... err... US dollars for example. You've also got a bunch more of these US dollars coming in daily. You don't believe they will hold their value. So you don't really want them. That is quite a problem.

The first trick is to get rid of them... without actually seeming to get rid of them. The second trick is to get rid of them in such as way as to not destroy their value.... yet.

The single best way to do this of course is to use your US dollars to buy hard assets. This looks "normal". It isn't nearly as obvious as "diversifying" your currency reserves. China is doing exactly that. The "China recovery" story is nothing of the sort. The Chinese demand for commodities is not a function of economic growth but rather a function of hoarding. There are Consequences to this Phantom Commodity Bull Market which will become apparent soon enough.

China has been buying into oil with size and at a premium. This has analysts puzzled:

"Sinopec’s offer is equivalent to $34 a barrel of proved reserves and $14 a barrel of proved and probable reserves. The African transaction average in 2007, when the average crude price is similar to current prices, was $14.40 a barrel for proved reserves and $9.90 for proved and probable reserves, respectively. On a proved basis, the 2007 average suggests $3.1 billion total value for the deal. Therefore, $7.2 billion implies a 135% premium."

But when it becomes obvious to investors the world over that a US dollar devaluation is the only possible way to manage the kind of debt burden the US has accumulated, those premiums will vanish instantly. Oil quoted in US dollars could easily make new highs beyond $147 in such a scenario. China will not only have safe guarded the wealth of its citizens by owning oil fields, but will also have increased the global political power of the country thru the acquisition these strategic assets.

While the US empire has stumbled and is desperately trying to avoid a faceplant, the Chinese have taken the opportunity to break out into a sprint. Even in a best case scenario where the US pulls off a miraculous recovery, valuable ground will have been lost and the global balance of power will never again be the same.

China Reiterates Call for New World Reserve Currency (Update4): "China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.

The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record.
“Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.

President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent."

What About Me

Kenneth posted in his blog to ask me to talk more about myself instead of some boring federal government stuff. Hahaha. I never intend to blog about my personal life too much on public blogs. Maybe I am a shy person lol. Its just kinda weird. Anyway, I will try to write something here.

Talking about myself, let me think....hmmm.... Ok, here it is, I was an ambitious person. WAS. But actually, I still am. It depends on the definition of ambitious. I was a career minded person in the past. I seek to excel, perform and achieve more than what I was supposed to do. I was a top telecollector for 2 years consecutively and remained in the top rank every month. It was no easy feat. The agents would asked me how I achieved that.

Yes, I was ambitious, I wanted to climb the corporate ladder. Performance wise, I shared my experience that speed and negotiation skills were key to achieving good performance. But it was more than that. I remembered there was something more than just trying to hit the top targets. I had a persistent voice in my mind that is even more so important than just my personal incentive. It was this thought that kept me going, pushing my limits and exceeding them month on month. CE (Collection Efficiency) is always knocking in my head. It is the focus, the centre of every action and speech that I execute. I watched CE closely, and if they were lacking behind the targets, I pushed myself to work even harder to help the company meet them. Working cohesively as a team is extremely important. No one person, no matter how efficient he or she is, can help company achieve a good CE by himself. Everyone in the team must be united in thought, speech and action. Every member of the team needs to do his job properly and even more so, for the one whose scores are leading. If his scores are leading, he too needs to lead the team to achieve company's targets. I remembered when I wanted to give a particular customer a final reminder call, even thoughh I knew he would be paying, I would still place a review call to be made 2 or 3 days later. I knew doing that means sacrificing my incentive, but not doing that, customers may forget to pay and ultimately, CE suffers. I placed a higher priority on the company's profits then my own incentive. Responsibility is the word. Being responsible to the team members, our customers, our shareholders. With these thoughts in mind, I did not really watch my incentive closely or monitor my scores. It somehow just fits into place nicely.

A good website which I came across few years back by Jim Collins, I bought the book as well, but I think I left it with Adit. Oop. Here's the link.

When I subsequently got promoted to the role of Dialer Specialist, I learned not only how to manage the dialer operations efficiently, but also on managing the team. It was a different experience. There are more complicated issues such as managing human relations, customer relations, interdepartment relations. It is also in this role that I started to experience the word called "power".

I am not a powerful person nor do I wish to be one. However, power comes naturally to those seated in higher positions. Power, to me, is a privilege. It is an honour to have, for its ability to create goodness. It is so important that power must always lie in the hands of the morally ethical person. If power is abused, suffering will ensue. However, the illusion of power sometimes mislead people to think they have the authority to do what they want irregardless of others. This thought perpetuates their minds and they forgot they are a person, a being, no different from any others.

Customers have the power to complain and grumble. Some think customers are always right. I do not agree. When I was a telecollector, from time to time, I would lecture my customers on their poor money management skills. There was this customer who was the solebreadwinner, he had couple of kids, and took loans from a few banks. His pay was meagre and he was practically paying one bank for one month and delaying another 3 months, just enough to keep himself going to avoid bankruptcy charges. I asked him why he took our loan. He told me he wanted to pay his installments for his furniture. Not only that, he had also bought some other expensive stuff. I was fuming mad when I heard it. He was being so irresponsible.

In my current role as a team lead, I do not seem to have changed much haha. When customers wanted to speak to manager, they probably would have thought they can get anything their way. Not through me. I probably would have gotten a few of them in shock. Of course, the way to structure my words and tone would have to be slightly different depending on circumstances.

Yes, I am still ambitious. But perhaps, in a different way. My learning path changes as I grow. Leading to goodness, I hope. I do not have a desire to climb the corporate ladder. I realised the higher I climb, the worse I see in people. It is a complicated and complex web up there and I have no wish to participate in it. I loved the simple things in life, the simple people who talks about mundane things (of course, without silly gossips). I seem to find myself happier that way. I am not trying to avoid seeing the bad side of things, they do exist as and they will exist so long people exist. Humans are naturally imperfect and with imperfection, both good and evil will be on the surface of Earth. This is the natural way of life.

Trade Imbalances

Are we fighting a trade war ? Perhaps. A shift of economic power ? Maybe.

The Westerners love to spend, and the Asians love to save. Both have virtues of their own. Except when it gets out of hand.

Spending. There are different forms of spending, government spending and consumer spending. Money is spent on goods and services, thereby stimulating the economy. when the economy weakens, government usually spends in the form of infrastructure, heathcare, education etc to create jobs. Just as during this current crisis, the Obama administration has pledged to spend to inflate the ecomomy and create jobs. There is a huge supply of money in the capital markets, but banks are not lending as much as before, and until they do, some of these funds will not be filtered into the rest of the economy.

There is a difference when someone spends using credit or when he spends on what he can afford. Spending on credit means using future money at this moment. It can get out of hand when proper controls are not enacted and monitored. Most banks now operate on a fractional reserve banking system. Problem arises where there is excessive leverage and credit. It becomes a monstrous bubble when people turned greedy, leveraging to an excessive and unreasonable limit, rather than what they can truly afford.

Markets will always find their way into maintaining equilibrium. In a credit bubble, deflation must take place to wash away the excesses that had piled up. This is what is happening now. I will talk about cycles in another article.

In Asia, manufacturing and exports are important sectors of the economy. China exports its goods to the rest of the world, and US is one of its biggest importer. So US is spending (mostly on credit), and China is earning and saving. It becomes a problem when the dollars earned are not spent and rotated back. So, now China holds a vast amount of US Treasuries.

US has a widening trade deficit with the rest of the world, in particular China. The US dollar has weakened considerably since year 2000. With a weakening dollar, the trade debts that it owes will shrink and hence, the trade gap tightens. The markets will always find its way back into equilibrium naturally.

The Fed & Debt

Recently, I read an article about The Federal Reserve of New York. Only then did I realise they are not part of the US government. The Fed was created in 1913 by a group of private bankers. Rothschild, Bank of America, JP Morgan, Goldman Sachs belongs to the Fed. Or can I say, they are the owners of Fed. So in essence, they are a private entity or corporation that controls the money supply of US.

I recalled these events that took place. JP Morgan bought Bear Sterns at a initial proposed amount of $2 per share. Bank of America took over Merill Lynch. Paulson (ex chairman of Goldman Sachs and ex treasury secretary) allowed AIG to tap into bailouts, but let Lehman go. Both happened in the same week. The collapse of Lehman caused an enormous amount of panic and volatility in the global markets. Short-sellers were everywhere, shorting the shares of banks and of course Lehman. However, just as the short-sellers target Goldman Sachs and JP Morgan shares, SEC halted short sales temporarily. How clever.

There had been rumours that this financial crisis is pre-mediated to consolidate the powers of banks and their the elite owners.

I wondered why the creation of money and control of interest rates are left to a Central Bank that does not belong to the government ?

I particulary like a quote by Thomas Jefferson "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

The Fed is created as a Central Bank. It controls the money supply, interest rates and having control over these equates to having control over the entire economy, the lives of American people. The US dollar is the reserve currency of the world and it makes the FED even more important as any decision made now influences the global economy.

As a bank, it supplies money to the US government. But, it comes with a interest rate. So now, this supply of money becomes a form of debt to the taxpayers. Everyone knows US has huge amounts of trade deficits.

And how are they going to resolve this imbalance ? I'll probably talk about the trade deficits, the currency markets and inflationary pressures in the next post.