…the land down under is set to say goodbye to the world’s “reserve currency” in its trade dealings with the world’s biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process “slashing costs for thousands of business” and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar’s reserve currency status until one day it no longer is.
h/t peterj
Not that the US$ is much better, but I wouldn’t be trading my coal and natural gas for Chinese printed paper…
Although if you have a trade surplus with China and they are willing to take the yuan back in exchange for cheep goods, then why not.
If you read the alternative financials, the march away from the greenback as reserve has been underway since the real estate market melt down. Ut will start impacting US currency soon and people will see their savings evaporate in dollar rationalization (currency deflation and cost of goods inflation – the Weimar effect http://tinyurl.com/ayjlexq). Many central banks find their national currency in varying degrees of looming Weimar syndrome and are actually starting a trend back to gold as reserve to soften or halt a currency hyperinflation – but of course according to the monopoly money zombie economists this is all paranoid lunacy coming from the “gold bugs”.
And Australia is not the only one. China, Brazil, India and South Africa have already signed an agreement among themselves to allow trade without US dollar mediation.
This is a significant crack in the wall. Up until this event, the Anglosphere stood together. This will be the beginning of the end of US hegemony all around the world. The costs of being the world’s policeman has bankrupted the US. Warfare like Welfare can consume like a fire left untended. http://www.youtube.com/watch?v=mvZgwtpPmLY
And then when the US has to pay its debt back in other currencies it can’t print, world war time. It worked for Germany didnt it?
No fan of Gillard but she is saving Australians a lot of pain and easing America’s monetary fall. Better to have it happen sooner than later.
I’m not sure how you can have hyperinflation when wages do not rise. As the prices of certain things rise, other things must fall since there is not enough money around for everything. Only essential things can rise in price. Even then, consumers cut back on even essentials or shorten the list of essentials. Europeans are freezing to death because they cannot afford to heat their homes. Businesses will die if consumers have no money. How does rising prices effect people who cannot afford to buy those things? They simply do without.
To me this leads to deflation as businesses compete for the little money that is in circulation. Then barter takes over because money has no relevancy. In other words, this leads to deflation and not inflation.
Thoughts, anyone?
Well, it seems to me that there are a few problems with this little thingee that China has cooked up:
1. Do these bilateral deals that she’s signing up oblige her and her counterparties to end the convertibility into USD of their respective currencies? If they don’t, then all the transactions will have to align with the F/X pairs available among the USD, the yuan and the currency of the third country; otherwise, unsustainable money-machine-type arbitrage opportunities appear, and I’m gettin’ in. And if the transactions do align, what’s, er, really changed?
2. In the same vein, how are the parties going to handle commodity prices, which are, you know, denominated in USD. To unhook from the USD, you’d need to have an alternative agreed-to pricing mechanism, which I’m quite unaware of at the moment. In any event, alternative pricing mechanism or not, all the transactions will have to align with the USD price; otherwise, unsustainable money-machine type arbitrage opportunities appear, and I’m gettin’ in. And if the transactions do align, what’s, er, really changed?
3. Call me crazy, but since China has all these USD holdings that they supposedly want to get rid of, why not fob them off on Australia or somebody in exchange for commodities. Why hold onto them and pay in your own or your counterparty’s currency? A bit like cutting off your nose…
So, yes, I think that there’s a little superpower rivalry going on and a lot of agitation about US monetary policy, but I’m not sure how close we are to an alternative, at this point. The USD did not become the reserve currency because everybody woke up one morning and said, “what a good idea!” And its demise as such won’t happen on that basis either.
Sorry, I meant “sustainable money-machine type arbitrage opportunities”, not “unsustainable” in points 1. and 2. of my previous post…
Is this a non-event. Whether currency exchange is direct or through an intermediary currency, it is probably accomplished by punching a computer key and waiting .75 seconds. People who rely on currencies other than the US dollar when making contracts have a higher likelihood of having bad things happen before the contract is finished.
Skweeker:
Hyperinflation has nothing to do with wages rising. It has everything to do with the destruction of the sovereign’s credit. A government that cannot, or will not, raise anywhere near enough revenue to meet its obligations will soon find it difficult, then impossible, to borrow from banks. This usually happens when the government has just lost or will soon lose a war. This might be, and formerly most often was, a shooting war with an enemy nation; banks that have any choice will not lend even to their own nation during wartime if the outcome is at all in doubt (the victor is rarely held responsible for the debts of the vanquished). More likely, in this day and age, the government has simply promised far more to its supporters (who, of course, are usually exempted from any meaningful taxation), including banks, than it can hope to raise from the productive classes without driving them to emigration or revolution.
In desperation a government who has not been foolish enough to grant a complete monopoly of credit to banks can buy time by “borrowing” from the central bank, printing money and spending it. Of course, prices soon start getting completely out of control, and people stop holding any more central bank-confetti than they can help.
The banksters themselves often end up doing very well out of the situation. It is easy for them to avoid the “inflation tax” by funneling their capital into anything that will hold its real value (gold, foreign currency, blue-chip stocks, real estate…). Meanwhile, the banksters’ own debt obligations are wiped out, including bank deposits, with banksters only obliged to re-pay in worthless central bank-confetti.
Like all taxes, the “inflation tax” is only seriously levied against the plain people of the nation, whose pay loses its value almost as soon as it comes and whose life savings quickly disappear to the banksters’ benefit. Wages do not, in fact, rise in any meaningful way. (To the contrary, all an unscrupulous employer has to do to cheat his employees out of their pay is to put off paying their wages as long as possible. If he can put them off long enough he’ll be able to pay them nearly nothing.)
As demand for the central bank-confettu shrinks, prices soon start outrunning the already astronomical growth in the money supply, the real value even of tax revenues begins to shrink, and the process feeds on itself. It is only a matter of time before the central bank-confetti is completely rejected. At that point, the government has no choice but to put its books into some semblance of order by defaulting on obligations contracted beyond the people’s ability and willingness to pay. If this happens during war, it is at this point that hungry soldiers start to mutiny or desert, and at that point the government has no option but to sue for peace on the enemy’s terms.
(That, by the way, is why the socialist “class war” always ends with the unconditional surrender of the socialists. Sooner or later the socialists always run out of capitalist money.)
Good points David Southam.
But my gut says it is likely that some occupants of the theater are smelling smoke, and they are starting to quietly move closer to the exits before someone inevitably yells “fire”.
A fine April fool’s from Zerohedge – h/t Paco
http://www.zerohedge.com/news/2013-04-01/guest-post-bernanke-breaks-down-whole-thing-kleptocracy
What Scar and Mr. Southam said.
The currency in which they do their exchange is irrelevant; notional postings in NZ$ vs. US$ vs. Renminbi make no difference in today’s electronic clearing market.
(Same thing for “regional” pacts to avoid “dollar intermediation” per cgh; hell, they don’t need a pact to “allow” non-dollar-denominated trade, do they? Was there some law in all of them requiring USD denomination of trade?
It’s purely a convenience for price-setting purposes, to use what happens to have been the common money [in the sense of ‘that thing which we use to measure prices’] of the world. If they stop using dollars entirely – even as a reference in exchange – well… all that means is they’ll be using something else to calculate their prices and notionally exchange for goods. Because nobody actually ships money around, and in an electronic account currency exchange rounds to free.)
It’s the same as the perennial nonsense about “Iran/Iraq selling oil not-in-dollars and that’s why there’s gonna be WAR!” – the people involved neglect the fact that it doesn’t make a God-damn bit of difference.
It makes no difference what we use for money in international trade*, as long as the exchanges are floated – and if they’re not, arbitrage will fix that one way or another, exactly as Mr. Southam said.
(The other issue is – in this particular case – that China’s own economy is a basket-case, and their banks are all actually bankrupt by any sane accounting. The only thing making anyone have any desire for Renminbi at all is either for trade right back to China for goods or … knowing that they have dollars to back them up in the worst case.
If you think the dollar is a “weak” currency, you ain’t seen nothing yet – take a close look at the renminbi and the dollar starts to look like gold.)
Recall that just after the Fall Of France…the Royal Navy pulled off one of it’s greatest feats. London held the gold repository for virtually all Europe….in bullion…this was spirited away in utmost secrecy, loaded on RN ship(s) and sent under close, secret escort to New York.
On arrival in New York the problem was security to unload, haul all that bullion to vaults lacking the space. Then the process of transferring it all by train to Fort Knox….
Gold was a strategic asset then and still is….
High security undergound vaults…in a bomb proof building…surrounded by layer security…within the base of an armoured division.
Hard to take by guile…worse yet by force….
Gold Finger was a good yarn…..