China threatens 'nuclear option' of dollar sales

[Tock]

What's y'all's take on this news story? It seems that a number of other countries have already abandoned the US dollar; and it looks like Iran is about to stop selling its oil in US$ and instead sell in Euros and Yen.
Seems to me that if the US$ keeps becoming less and less popular around the world as its value declines compared to other currencies, then the US government won't be able to borrow from other countries to pay the US debt, and that means that US taxpayers (that's us, folks) are gonna have to pay higher taxes. Of course, the US gov't could just magically print more money to pay the bills, but that would create terrible inflation, and then probably an awful recession, people would lose jobs, and the US would become a huge Detroit.

I dunno . . . something tells me the birds are coming home to roost on this problem of our National Debt. What do y'all think?
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China threatens 'nuclear option' of dollar sales

http://www.telegraph.co.uk/money/mai...nchina107a.xml



By Ambrose Evans-Pritchard
Last Updated: 8:39pm BST 10/08/2007



The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.


Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US.

"Of course, China doesn't want any undesirable phenomenon in the global financial order," he added.

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

She said foreign control over 44% of the US national debt had left America acutely vulnerable.

Simon Derrick, a currency strategist at the Bank of New York Mellon, said the comments were a message to the US Senate as Capitol Hill prepares legislation for the Autumn session.

"The words are alarming and unambiguous. This carries a clear political threat and could have very serious consequences at a time when the credit markets are already afraid of contagion from the subprime troubles," he said.

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.

Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".

Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the waters.

[Tock]

Also --

http://www.telegraph.co.uk/money/mai...cnsaudi119.xml

Fears of dollar collapse - as Saudis take fright
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 10:14pm BST 21/09/2007



Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.


"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas.

"Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.

The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.

As a close ally of the US, Riyadh has so far tried to stick to the peg, but the link is now destabilising its own economy.

The Fed's dramatic half point cut to 4.75pc yesterday has already caused a plunge in the world dollar index to a fifteen year low, touching with weakest level ever against the mighty euro at just under $1.40.

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.

The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

Mr Redeker said foreign investors have been gradually pulling out of the long-term US debt markets, leaving the dollar dependent on short-term funding. Foreigners have funded 25pc to 30pc of America's credit and short-term paper markets over the last two years.

"They were willing to provide the money when rates were paying nicely, but why bear the risk in these dramatically changed circumstances? We think that a fall in dollar to $1.50 against the euro is not out of the question at all by the first quarter of 2008," he said.

"This is nothing like the situation in 1998 when the crisis was in Asia, but the US was booming. This time the US itself is the problem," he said.

Mr Redeker said the biggest danger for the dollar is that falling US rates will at some point trigger a reversal yen "carry trade", causing massive flows from the US back to Japan.

Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure.

The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, the driving the property market into even deeper crisis.

"If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.

The Federal Reserve, however, clearly calculates the risk of a sudden downturn is now so great that the it outweighs dangers of a dollar slide.

Former Fed chief Alan Greenspan said this week that house prices may fall by "double digits" as the subprime crisis bites harder, prompting households to cut back sharply on spending.

For Saudi Arabia, the dollar peg has clearly become a liability. Inflation has risen to 4pc and the M3 broad money supply is surging at 22pc.

The pressures are even worse in other parts of the Gulf. The United Arab Emirates now faces inflation of 9.3pc, a 20-year high. In Qatar it has reached 13pc.

Kuwait became the first of the oil sheikhdoms to break its dollar peg in May, a move that has begun to rein in rampant money supply growth.

[Tock]

And -
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http://www.telegraph.co.uk/money/mai...-mostviewedbox

Dollar's double blow from Vietnam and Qatar
By Ambrose Evans-Pritchard
Last Updated: 12:12am BST 04/10/2007

Vietnam is planning to cut its purchases of US Treasuries and other dollar bonds, raising fears that Asian central banks with control over two thirds of the world's foreign reserves may soon join the flight from US assets.

The Saigon Times said this morning that the State Bank of Vietnam was abandoning the attempt to hold down the Vietnamese currency through heavy purchases of dollars. The policy is causing the economy to overheat, driving up inflation to 8.8pc.

Vietnam, which has mid-sized reserves of $40bn, is seen as weather vane for the bigger Asian powers.

Together they hold $3,575bn of foreign reserves, over 65pc of the world's total. China leads with $1,340bn, but South Korea, Taiwan, Singapore, and even Thailand all built up massive holdings.

The concern is that once one or two members of the region jump ship, it could set off a broader scramble. None of them want to be the last one left holding a devalued asset. Vietnam's central bank said this week that it would move "gradually" to a floating currency.

Separately, the gas-rich Gulf state of Qatar announced that it had cut the dollar holdings of its $50bn sovereign wealth fund from 99pc to 40pc, switching into investments in China, Japan, and emerging Asia.

The move is intended to increase long-term returns for future generations, but it can easily be seen as a vote of no confidence in US economic management.

The drastic shift by the Qatar Investment Authority is a warning that petro-dollar powers with some $3,500bn under management may pull the plug on the heavily endebted US economy -- which needs to suck in the majority of the world's savings just to stay afloat.

"OPEC and Asia have been the two blocks funding the US current account deficit," said Hans Redeker, currency chief at BNP Paribas.

"Vietnam is a relatively small country but it is symptomatic of Asia. The entire region is seeing inflation move up as a result of mercantilist policies of holding down their currencies with 'dirty floats', which are designed to help their export sectors. They need to change monetary policy, " he said.

There have been reports that China is already pulling out of US bonds to fund its new sovereign wealth fund. Foreign central banks slashed holdings by $32bn in the last two weeks of August. We will not know which country was responsible the Treasury's TIC data is released in November.

Japan also has colossal reserves, now near $914bn, but it is does not face the same inflationary threat as the rest of Asia, and is in any case an intimate military ally of the United States.

It is likely to coordinate its dollar policy very closely with Washington for geo-strategic reasons.

Saudi Arabia set off jitters in the currency markets last month when it decided not to cut interest rates in lockstep with the US Federal Reserve, raising doubts about its commitment to the Saudi dollar peg. But it too has strong political reasons to stick with America.

Kuwait has already abandoned its peg, fearing that its economy would overheat if it continued to import America's loose monetary policies.

Separately, Iran said it would soon refuse to accept dollars for its oil exports, preferring to be paid in a "more credible currency".

It already receives 65pc of payments in euros and 20pc in yen, but insisted that the remaining 15pc in dollars entailed an excessive risk of devaluation.

The demarche is largely policitcal, since oil is a fungible commodity and the currency markets are highly liquid.

However, if a number of OPEC suppliers began demand long-term futures contracts in euros instead of dollars, this would have an impact over time.

[Logan13]

What would be worse is if the US slaps a tariff on goods from these countries.

[Prada]

It is quite worrisome to say the least. The dollar keeps losing its value. I read that article Tock where countries are dumping the US$$ and nobody really seems to take it seriously.

[Tock]

The dollar dropped on Main Street, too
Wall Street isn't the only place affected by the greenback's downward spiral
By Lisa Twaronite, MarketWatch
Last Update: 6:03 PM ET Oct 5, 2007Print E-mail Subscribe to RSS Disable Live Quotes
SAN FRANCISCO (MarketWatch) -- You don't have to quaff French wine in your dining room or go skiing in the Austrian Alps. At home or abroad, all Americans are feeling the same breeze from the dollar's recent sharp drop -- and some might even catch a chill from it.
The Federal Reserve's decision last month to cut interest rates by a larger-than-expected half-percent point sent the already-weakening greenback to an all-time record low against a basket of six major currencies. In the third quarter, the euro appreciated more than 5% against the dollar, most of the gains coming in September alone.

Weakness in the dollar means prices of imported goods, particularly oil, will go up, raising the risk of inflation. American consumers will be paying more soon, with the looming threat of paying even more later on.
"The inflation risk from higher import prices will be the dominant initial effect," said Howard Chernick, an economics professor at Hunter College in New York. "The most immediate effect is imports denominated in dollars -- mainly oil. We already saw a spike in oil prices. So a bit down the line, that's 10 to 15 cents more per gallon of gas at the pump."
A weaker dollar can help narrow the U.S. trade deficit by making America's exports more affordable abroad.


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The dollar vs. This week One year ago
The euro $1.41 $1.27
British pound $2.04 $1.88
Japanese yen 117 yen 117 yen
Canada 0.98 cad 1.13 cad

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Yet it could also make funding those imbalances more difficult. The U.S. has to attract billions of dollars a day from foreign investors, and a weakening currency makes dollar-based assets less attractive because of the consequences it can have on their long-term value.
On the other hand, the pressure on the dollar is increasing the international buyout appeal of American companies and real estate -- and Main Street itself might end up on the auction block.
The weaker dollar will also affect Americans in the long term in ways they might not have even considered, if companies here have trouble affording capital goods.
Chernick cites as an example Europe's leadership in producing wind power technology. It's a cutting-edge niche market that is suddenly even more expensive for the U.S. energy industry as the euro gains more muscle.
"The cost of increased reliance on renewable energy just went up -- so more pressure to build more coal power plants," he says. The dynamic can have far-reaching consequences.
"Even though the typical person isn't immediately affected, the U.S. economy is less well off," said Chernick.
Moreover, he said, "there is a psychological effect that is hard to measure. The U.S. economy is being devalued by the world, so our sense of exceptionalism will diminish."


Some cheer dollar's drop

To be sure, some Americans stand to benefit from the weaker dollar and could end up with more money in their pockets, even if inflation eventually erodes the buying power of that cash.
Some of the beneficiaries own or work for businesses whose products are exported abroad. Their goods stand to get cheaper, making them more competitive, in overseas markets.
Earlier this week, Pepsi Bottling Group Inc. said that its third-quarter profit grew by more than 25%, noting that the lower dollar contributed about two percentage points of growth in net revenue growth. Athletic-shoe maker Nike Inc. also cited the weaker currency as a factor helping its international sales.
U.S.-based tourism-related industries are also cheering the dollar's drop. Everyone's cousins in the Old Country can finally afford that long-awaited U.S. family reunion, combined with some bargain shopping. And Americans themselves are more likely to take domestic trips rather than head overseas, where their vacation dollars won't go as far.
Moreover, while the weakening dollar and inflation threat will deter some foreign investors, once the greenback stabilizes, bargain hunters will flock to U.S. assets like shoppers to a fire sale.

Cross-border transactions are already picking up pace in the financial sector, which was battered by this summer's credit crisis. A big factor is the surging Canadian dollar, which in September reached parity with its U.S. counterpart for the first time since 1976.
This past week, Canada-based TD Bank Financial Group U.S. unit agreed to buy Birmingham-based Alabama National BanCorporation for about $1.6 billion.
From there, a spate of foreign purchases could well spread to support other sectors distressed by the credit crisis, such as housing and real estate, say analysts.
"As the U.S. dollar continues to fall in lockstep with house prices, foreign buyers could provide the support that the U.S. housing market needs to avoid a major crash," Kathy Lien, chief strategist for DailyFX.com, wrote in a research report.
"If the dollar continues to fall, foreign investors may begin to load up on companies with sound fundamentals that are also less vulnerable to a U.S. economic slowdown," Lien said.
China is an up-and-coming player on the international stage. Last week, Beijing formally launched its state investment company which is intended to manage about $200 billion of its $1.4 trillion foreign exchange reserves, to diversify the nation's sovereign portfolio. The funds already are holding a big stake in Blackstone Investment Group.

U.S. politicians have shown they're sensitive about Beijing's bid to own high-profile American assets. Look for more protests if China goes after strategic assets. Even so, there are plenty of industries in which it could purchase stakes without running afoul of security risks.
If the Chinese sovereign fund were to buy the operator of the supermarket where Americans buy their bread, or the agricultural conglomerate that grows the wheat for it, very little is likely to change on a day-to-day basis. But it's impossible to predict the long-term effects on America's collective consciousness if the pace of such cross-border buyouts accelerates.
Savers into losers
For its part, the Federal Reserve has sought to prevent the fallout from the subprime mortgage market meltdown from dragging down economic growth. But the weaker dollar that resulted in recent weeks means the central bank will be even more vigilant against rising prices, which had been its primary policy focus before the credit crisis.
That fear of inflation came into focus on Friday when a top Fed official suggested policy-makers have already cuts rates enough, a view reinforced by fresh data showing U.S. employment grew at a steady clip in September.
Inflation, as the late economist Milton Friedman once wrote, is taxation without legislation. Rising prices rob consumers of purchasing power, destroying the value of their savings over time.
Inflation turns savers into losers, at a time when America desperately needs more savers to fund its imbalances -- particularly if foreign investment starts to taper off. But fears of rising prices will keep consumers cashing their paychecks and heading to the mall, rather than depositing the funds in accounts whose returns might lag the inflation rate.
The latest inflation data were benign, and well within the Fed's comfort zone. Core consumer price inflation, which excludes food and energy prices, fell 0.1% in August, bringing core inflation over the past year down to 1.8%, the lowest since early 2004. See Economic Report.
But commodities prices have trended higher in recent months. Crude futures gained nearly 15% in the third quarter, and gold gained 13%.
Higher materials costs have pushed up the prices of finished goods in U.S., even those imported from countries such as China, with its strictly controlled foreign-exchange policies. China began to widen the range in which it allows its national currency, the yuan, to trade against the dollar in 2005.
Since then, the yuan has appreciated by more than 8% vs. the dollar.
"The yuan is being allowed to appreciate by about 5% per annum and this will slowly but surely raise the U.S. price of Chinese made goods, particularly in an environment of high commodity prices that is raising raw materials and transportation costs for Chinese producers and U.S. importers," said Michael Gregory, economist at BMO Capital Markets.
The U.S. current account deficit was as high as 6.6% of gross domestic product a year ago, but dropped as the weakening dollar lifted exports. The latest data from the Commerce Department showed the deficit arrowed to $190.8 billion in the second quarter, or 5.5% of GDP. See full story.
Still, few economists believe a current account deficit of 5.5% of GDP is sustainable, and say the U.S. deficit is a major threat to growth.

[Logan13]

I dunno . . . something tells me the birds are coming home to roost on this problem of our National Debt. What do y'all think?

You can always hope Tock..........