Dr. Pinna is a Director of Currency Exchange International CEIFX.COM
Currencies are like clothes – if the person wearing them is weak, haggard and old – they don’t look good. If that person is strong and healthy – they look excellent. The USA is weak, haggard and old and the US DOLLAR is looking tired and fake.
CHINA and RUSSIA are the two new upcoming power-houses in the world and their currencies are becoming attractive to world traders and investors. Most importantly, the US DOLLAR is infected with a deadly virus called DEBT. The trillions of dollars that the Obama Team has thrown at the Great Depression (and at their friends), has not gone unnoticed in this world of Nobel Prize Economists and World Class Investors.
Geithner, Bernanke and Rahm Israel Immanuel, have not persuaded the Geniuses and Money Gurus that the US DOLLAR is the key to future prosperity. Even the EURO is infected with the same virus. We see the major and minor banks of Europe holding bonds that are falling apart in value.
The fact that the European Politicos and Trichet, the head of the European Central Bank, swear that all will be well, does not keep me or other hard headed investors from buying GOLD. No one with half a brain thinks the the US DOLLAR or the EURO can last as WORLD RESERVE CURRENCIES.
TIME FOR A CHANGE
Dmitry Medvedev announced it today:
Only three, five years ago it seemed like a fantasy to create a new reserve currency, Medvedev said yesterday in a speech in St. Petersburg, Russia. Now we are seriously discussing it.
And, why not? The RUBLE is not infected with the deadly DEBT VIRUS. Neither is the YUAN. The countries backing these currencies are economically strong. Russia has immense supplies of commodities, such as gas and oil and timber. China is the world’s largest manufacturer.
The U.S. and Europe are the worn out countries of the world. They transferred their factories to Asia in the 1970′s and now they have nothing but mountains of debt. And, the only serious thing their workers think or talk about is RETIREMENT.
THE BRIC COUNTRIES
The international world of finance is watching Russia and China in terms of their currencies, but it is also watching Brazil and India. These four countries are the new pillars of the world economy. In contrast, Europe and the US are the old retirees of the world economy. CHINA is ready to unpeg its YUAN from the US DOLLAR.
June 19 (Bloomberg) – China said it will allow a more flexible yuan, signaling an end to the currency’s 23-month-old peg to the dollar a week before a Group of 20 summit.
The decision to “increase the renminbi’s exchange-rate flexibility” was made because the economy has improved, the central bank said in a statement on its website today. It added that there is no basis for “large-scale appreciation.” The yuan’s 0.5 percent daily trading band will remain unaltered.
“China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui, an adviser on the People’s Bank of China’s policy board, said in an interview. “The yuan’s future trend depends on the euro’ s movement, and the trends of other major currencies.”
What we are witnessing in the world of foreign currencies, is a decoupling of the younger currencies from the older currencies.
A reserve currency has an added value that is independent of the country that issues it.
Because most commodity countries use the US DOLLAR as their means of trade, that DOLLAR is more valuable in terms of bond issuance and financial settlements across the world. Small countries, almost always, use reserve currencies for bonds or other financial transactions rather than their own currency, because of the fungibility (ease of exchange) of the reserve currency.
This, in turn, implies that the American Government can borrow more on the world market than it could if its currency were not a Reserve Currency. The devolution of the US DOLLAR from its position as a Reserve Currency to an ordinary currency will hurt the American economy and US Government policies in the International Arena.
At the moment, the US Government can fund Wars and the sale of Armaments using the US DOLLAR. It can also purchase oil easily on the world market. As the US DOLLAR drops in use by being replaced with the RUBLE and the YUAN, that privilege of being universally acceptable will rapidly disappear.
Costs for the U.S. economy will rise in terms of imports. These added costs will impinge on the U.S. recovery and slow such a recovery (if there is one) down or stop it entirely.
BASKET OF CURRENCIES
What we are witnessing in 2010 is a rebellion of the growing countries of the world from the yoke of the U.S. and Europe. The BRIC (Brazil, Russia, India, China) countries do not want to subsidize the economic failure of Europe and the U.S.
Although China and Japan are holding two trillion dollars of U.S. Treasury Bonds, they have reached a level of fear which is stopping them from expanding their holdings. Russia is apprising the situation accurately and is offering Asia a way out.
Drop the US DOLLAR and the EURO and move towards the RUBLE and the YUAN and, even more effectively, develop a Basket of Currencies. The International Monetary fund has such a basket of currencies.
Here is their comment:
The ruble and the yuan may by 2015 be added to the basket of currencies that set the value of International Monetary Fund units called special drawing rights, Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill said. O’Neill coined the BRIC term in 2001 to describe the four nations — Brazil, Russia, India and China — that he estimates will collectively equal the U.S. in economic size by 2020.
No matter where we look, we are hearing about the demise of the DOLLAR and the EURO. This will not happen overnight. But, for foreign currency traders, positioning in the Ruble and Yuan must take place before their values rise or any profit will be lost.
As for the American and European Governments, the handwriting is on the wall: It’s a Brave New World!