The Dollar! As Good as… Lead
China to “Diversify Reserves”


“The dollar slid today against all 16 of the most-actively traded currencies Bloomberg tracks as People's Bank of China Governor Zhou Xiaochuan pledged to keep diversifying the country's foreign-exchange reserves. European Central Bank President Jean-Claude Trichet and Bank of Japan chief Toshihiko Fukui this week suggested they will raise rates.

‘We saw the comments from the People's Bank of China,'' said Niels From, a currency strategist at Dresdner Kleinwort in Frankfurt. ``The talk about central bank diversification gives a final push this week for the dollar to go weaker.'… Zhou said China will maintain its policy of diversifying foreign-exchange reserves, the world's biggest at about $1 trillion, because of ``safety, efficiency and liquidity.' ” Bloomberg.com 11.10.06

Did you ever wonder why the U.S. has been able to run budget and trade deficits of the magnitude that we do? Maybe a little, but let’s be honest – we Americans now think that it is our G-d given right to enjoy cheap access to capital, cheap imports because of our relatively strong currency, and cheap and abundant energy.

The entire world must pay for their oil imports with U.S. Dollars. Oil is priced in Dollars the world over (for now) and if Italy, Estonia, Nigeria, Japan, or Argentina wish to buy some Oil, they must have some dollars on hand. Where do these Dollars come from? By mathematical necessity, these Oil importing nations (all importing nations) must run a trade surplus with the U.S. if they want to have Dollars on hand. The mathematical necessity of that is that the U.S. must run a trade deficit with them. This is where the Dollars (Petrodollars) that the importing nations use to buy Oil comes from. But where do the Dollars come from? They come from U.S. Dollar “printing press”.

How great has it been to be in a position to print the world’s reserve currency at will and at terms so favorable?

If it were not for the “printing press” our lifestyle would not be anything near what it is today. How long can the printing press operate? That depends on how long the rest of the world will be required to acquire Dollars to make their international purchases of Oil. Ever hear of the Euro? Ever wonder WHY those fractious, infighting, backstabbing Europeans got together and united under one currency (not being an “ugly American” here, just recalling my European history)? Think it was just for fun, or cool, or some Continental Pride kind of thing? Nope. It was designed to challenge Dollar hegemony, and China just dropped the first shoe (sort of, the Euro was probably the first shoe, and there will probably be many more shoes dropping over the next few years).

John Q. American Public would be in for the surprise of his life if Saudi Arabia started to accept Euros from Japan and China in payment for its Oil. For those of you who have read my stuff over the years I have often questioned how long it will take Russia, now the world’s largest exporter of fossil fuels, and Europe, Russia’s largest customer, to start settling their energy transactions in their respective currencies – INSTEAD OF THE U.S. DOLLAR - or, at the least, have a dual currency Oil trading system.

Once the Dollar loses the total hegemony it now enjoys, the price of nearly all commodities, relative to us dollar holders, will rise DRAMATICALLY (think oil). The cost to finance those twin deficits of ours will rise DRAMATICALLY (think interest rates). The value of the Dollar will fall DRAMATICALLY versus our major trading partners currencies (think inflation).

What can we do about it? We could always invade Russia or Saudi Arabia to keep them from accepting other currencies (just kiding! I acutually received email from people who thought I was advocating this silly idea. I was just being sarcastic, folks!) Iraq planned to accept Euros instead of Dollars in their food for oil program back in 2001 or 2002 – and was invaded shortly thereafter, and now accepts only Dollars for its Oil. I doubt this is a coincidence (I have been a lifelong Republican, but I call it as I see it). Now Iran is setting up an Oil bourse to compete with the New York and London commodities exchanges – all the trades of which are to be settled in EUROS. Syria, while not a big oil exporter (maybe 200,000 bpd) is moving to accept Euros. These guys are setting examples to other exporting nations some of who don’t like the U.S. very much at the moment.

With all of this now freshly in your mind, consider the Fed’s decision to cease publication of M3 earlier this year. For those of you unaware of this development:

“On March 23, 2006 the Federal Reserve ceased publication of the M3 monetary aggregate, in line with an announcement it made in November, 2005. The M3 is a measure of money supply in the United States, The M3 is most general of the many measures of money supply, the quantity of money available within the economy for purchasing goods, services, and securities. The money supply is monitored and adjusted by a central bank, to keep inflation in check, because money supply has to change in tune with real Gross Domestic Product (GDP) to prevent inflation (or deflation).

In November last year, the US Federal Reserve announced that it would cease publishing M3 data, saying, "[the] M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years", adding that the costs of collecting the data required for the index outweighed its benefits.

Some commentators have questioned this decision and have speculated that this would allow the Federal Reserve to covertly fund the US budget deficit and its negative balance of trade or hide the fall in international demand for the US dollar. In March, 2006, Rep. Ron Paul introduced a bill (HR 4892) requiring the Federal Reserve to reverse its decision.” – Wikinews

Coincidence?

Mentatt (at) yahoo (dot) com