Are you ready for this? A $ now is going to be 15 Cents by 2011. Read on

[gapala]

Originally Posted by gcisadawg

China's reserves are only 2T and not 4T. More than US, China is worried about USD. It will not do anything to jeopardize its reserves. China knows it has an upper hand and US is in trouble and it also knows US expects it to buy t-bills going forward.

Imagine all the factories being shut down and people's revolution breaking out in people's republic. The people's party has to either use Military or bow to the power of people.

All the posturing by China like "make SDR as global super currency" is just to pressure US to get more voting rights for it in IMF. China wants a say in global financial management and rightly so.

Once China starts dumping dollars, we would see another jolt like the one we saw when DOW was sliced in half! Will China take that step knowing that it is extremely detrimental to its well being?-GCisadawg

What you have said is true only in normal scenarios where US is growing and strong... let aside the claims by politicians "fundamentals are strong" etc... thoes are just rhetorics to appease ailing americans. These statements are far fetched and no where closer to reality in the main street. What got us in this mess was "impulse spending money that people did not have for stuff that they don't need". Now they are thinking that they will spend their way out of this?

Rest of the world including China clearly knows that this cow is sick and will not be able to milk for long because of greed and selfish interests.. Here's the link that I promised to include China's view for next 5 years... read on.

The 11th 5YP: A Turning Point in China’s Development Strategy
7. The 11th 5YP reorients policies to correct these imbalances. In a major shift from previous plans which had quantitative growth as the dominant objective, the 11th 5YP gives priority to rebalancing the economic structure as well as to environmental and social objectives. It recognizes that economic, environmental, and social objectives are intertwined. The guiding principles and policy orientation seek to rebalance China’s growth pattern, with domestic demand, especially consumption, as the main driver, and services as the leading sector. This, in turn, is expected to better balance economic growth with resource conservation, energy efficiency, and environmental protection. Moreover, rebalancing the pattern of growth is expected to help mitigate the urban-rural divide, promote more balanced regional development, and improve basic public services, especially social protection, health, and education. To meet these objectives, the 5YP sets out 15 main tasks and strategic priorities, which in turn are supported by 22 quantitative benchmarks, of which 8 are obligatory and 14 are anticipative. A three-tier monitoring and evaluation framework was developed with a large number of quantitative indicators, although this does not seem to be operational yet. The overarching goal is to deliver a more people-centered growth and development that is more sustainable and equitable, thereby creating a more “harmonious society.”

Implementation of the 11th 5YP: Progress to Date8.

This mid-term review has been undertaken to assess progress in the implementation of the 11th 5YP during its first two years and a half, raw preliminary lessons, and make recommendations for policy adjustments. The review examines the following strategic objectives: ensuring the stable operation of the macro economy and improving living standards; optimizing and upgrading of industrial structure; increasing energy efficiency; coordinating urban and rural development;

5 improving basic public services; and enhancing sustainable development.

9. During the implementation of the 11th 5YP, China has been buffeted by various exogenous shocks. Domestically, natural disasters—the severe storms last winter and the recent massive earthquake in Sichuan—took a heavy toll. Externally, global demand has slowed owing to the slump in the U.S. housing market and the related credit crisis and increased risk aversion. International oil, food, and other commodity prices have soared. These developments pose new challenges. But they also reinforce the appropriateness of the policy priorities of the 11th 5YP to increase the economy’s resilience and ensure sustainable growth.

Progress toward achieving the major objectives of the 11th 5YP has varied
• Economic growth has far exceeded expectations.
• Considerable progress has been made toward the 5YP’s most important social

Read the full report from world bank on this link. http://siteresources.worldbank.org/C...verview_en.pdf

[gapala]

LUXEMBOURG (Reuters) - A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.

Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform.

"It is a good moment to move to a shared reserve currency," he said.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.

"Speculation that major central banks would begin rebalancing their FX reserves has risen since the intensification of the dollar's slide between 2002 and mid-2008," CMC Markets said in a note.

Russia is also planning to propose the creation of a new reserve currency, to be issued by international financial institutions, at the April G20 meeting, according to the text of its proposals published on Monday.

It has significantly reduced the dollar's share in its own reserves in recent years.

GOOD TIME

Persaud said that the United States was concerned that holding the reserve currency made it impossible to run policy, while the rest of world was also unhappy with the generally declining dollar.

"There is a moment that can be grasped for change," he said.

"Today the Americans complain that when the world wants to save, it means a deficit. A shared (reserve) would reduce the possibility of global imbalances."

Persaud said the panel had been looking at using something like an expanded Special Drawing Right, originally created by the International Monetary Fund in 1969 but now used mainly as an accounting unit within similar organizations.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and indeed against those inside the basket.

http://www.reuters.com/article/newsO...52H2CY20090318

Persaud said there were two main reasons why policymakers might consider such a move, one being the current desire for a change from the dollar.

The other reason, he said, was the success of the euro, which incorporated a number of currencies but roughly speaking held on to the stability of the old German deutschemark compared with, say, the Greek drachma.

Persaud has long argued that the dollar would give way to the Chinese yuan as a global reserve currency within decades.

A shared reserve currency might negate this move, he said, but he believed that China would still like to take on the role.

[gapala]

China inoculates itself against dollar collapse
By W Joseph Stroupe

There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones. There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.

The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.

One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.

The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.

According to research by Rachel Ziemba of RGE Monitor, in the first two months of 2009 alone China has already confirmed such deals for hard assets worth a total of over $50 billion [2]. Clearly, China is just now opening its global strategy of pursuing such resource buys at a time when the prices of hard assets are extremely attractive and many more such buys are in the offing. If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals.

full article. http://www.atimes.com/atimes/China_B.../KC18Cb01.html

[gapala]

Geithner's remarks about currency send dollar on wild ride

WASHINGTON - Treasury Secretary Timothy Geithner sent the dollar tumbling with comments about China's ideas for overhauling the global monetary system, only to drive it up by affirming that it should remain the world's reserve currency.

Geithner was asked at a Council on Foreign Relations event in New York about People's Bank of China Governor Zhou Xiaochuan's call for a new international reserve currency. He said while he had not read Zhou's proposal, he understood it as a plan "designed to increase the use of the IMF's special drawing rights (SDR Currency). And we're actually quite open to that."

http://www.boston.com/business/marke..._on_wild_ride/

[sledge_hammer]

You have to give it to the Chinese for this one! Whether this was their plan or it happened by chance, it is indeed a win-win situation for them. Excellent point of view by Joseph Stroupe!

Originally Posted by gapala

China inoculates itself against dollar collapse
By W Joseph Stroupe

There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones. There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.

The exact size and the precise composition of China's huge forex reserves, the exact degree of China's exposure to the dollar and its viable options, if any, in decreasing that exposure are matters of intense interest, because China's policies in this regard could have gargantuan implications for the US and the global financial systems and for the dollar.

One of the foremost experts who continues to research and track these matters is the highly respected Brad W Setser, a Fellow for Geoeconomics at the prestigious Council on Foreign Relations in New York. His work is providing significantly deeper insight into the size and composition of China's reserves and is affording the world a better view of that country's options in managing its reserves going forward and what the implications of those options might be.

The first issue is to determine the actual size of China's foreign exchange reserves. Its central bank officially confirms the current figure of about US$1.95 trillion. However, Setser's work reveals that China's actual reserves are significantly higher and may actually be as high as $2.4 trillion, according to his latest figures [1]. About $2.2 trillion of this total figure is easily identifiable, according to Setser, with the remaining $200 billion being his estimate of the amount currently held in China's state banks.

According to research by Rachel Ziemba of RGE Monitor, in the first two months of 2009 alone China has already confirmed such deals for hard assets worth a total of over $50 billion [2]. Clearly, China is just now opening its global strategy of pursuing such resource buys at a time when the prices of hard assets are extremely attractive and many more such buys are in the offing. If China averaged a conversion of only $35 billion per month from dollars into resources, it could convert the entire $450 billion in little more than 12 months' time. Hence, I predict that the next eight to 15 months will provide China with sufficient time to bring its total exposure to the dollar much more in line with its strategic goals.

full article. http://www.atimes.com/atimes/China_B.../KC18Cb01.html

[suavesandeep]

Hey Guys,
This is a good video from an american perspective.
http://www.pbs.org/wgbh/pages/frontl...trillion/view/

This is a really interesting discussion. People have bought in good points. But does everybody truly believe in hyperinflation happening in the US ?

Currently we are dealing with accute deflationary conditions, And Fed is doing the right thing. Problem is Fed can keep printing money but if you look around the money is not circulating in the economy and is staying in the Fed vault..Banks are stiil not lending since they still have toxic assets.In some cases bank wants to lend but people are not ready to take credit even at 0% interest because consumers are not spending. Consumers are primarily not spending because they were using their house as an ATM aka (home equity). Since home is now in negative equity that ATM has disappeared, The remaining assets were in stocks,401k which also have disappeared, So on what basis should majority of the customers here spend, We never had a savings culture here, So we cannot bank on our savings to spend. If customers dont spend how do businesses make future investments for which they would need credit, If they do not need credit all the beautiful money printed by Fed remains in the vault. So its a vicious cycle..Basically bottom line fed is printing money but a very small part is actually circulating. So unless the money starts circulating we cannot even dream of inflation.

Another thing for inflation to kick in. Wages need to go up in US. You cant pay for something, the demand of it will go down, along with it the price. So in that respect too inflation does not make sense. In short high inflation should map to High wages. Without wages increasing exponentially inflation cannot increase exponentially.

The last inflation peak happened in US in 1980. That was mostly related to unionization.
http://en.wikipedia.org/wiki/File:US..._Inflation.svg

With more acceptance of capitalistic philosphy in US, Unions have basically dissapeared here. What this means is your income depends on the market dynamics and cannot be fixed by the Union.. Look whats happening in the auto industry in Detroit. The gov wants to get rid of the auto union so that the Detroit industry can get better compete with the Japanese and international auto manafacturers. I believe with Globalization in the long term there will be stagnation or downward pressure on wages in the US. Unless US closes the border and introduces more protectionist measures which i dont think will happen.

So i would think HYPERINFLATION should be the least of our concerns for a long time.

[gapala]

Thanks suavesandeep for posting the link.

If you look at the latest retail consumer spending index, it rose in past months.
The Deloitte Research Leading Index of Consumer Spending rose in January, driven by strong growth in real wages
http://www.deloitte.com/dtt/article/...249101,00.html

Is that assumption in the article which says comsumers are not spending, accurate?

How are they planning to stimulate economy by keeping the tissue paper in Fed vault?

I believe below article is also relavent in this context which predicts that consumer spending will go down further after the US comes out of recession. .that means less demand and prices down south. I guess the potential savings may actually provide long term stability to econony rather than spending the way out which will dig the hole deep down..

March 31 (Bloomberg) -- Annual consumer spending in the U.S. may decline by more than $1 trillion after the recession ends and shoppers adjust their spending habits, according to a survey conducted by AlixPartners LLP.

Americans may save 14 percent of their earnings and focus on replenishing retirement savings, according to the survey of 5,031 people released yesterday. Last year, the savings rate was 1.6 percent, AlixPartners said, citing U.S. government statistics.

http://www.bloomberg.com/apps/news?p...gSM&refer=home

[nirenjoshi]

Simplistically, say the dollar's worth reduces to 15 cents...
Lets say I own a house, currently valued at $200K and I have a loan amount of $150K (lets say 30 yr fixed). If there is hyperinflation, it wont change the amount I owe the bank - that will still be $150K in nominal terms. But due to the hyperinflation, my house will be worth !!! $1.4 million!!!
It would basiclly mean that from a 75% LTV the loan goes to about 10% LTV and I increase the equity in my home to 90% - something doesnt seem right.

[gapala]

Originally Posted by nirenjoshi

It would basiclly mean that from a 75% LTV the loan goes to about 10% LTV and I increase the equity in my home to 90% - something doesnt seem right.

This is what happens even in the bubble scenarios in specific sectors. Lets say realestate, bank provided you 500K for a house worth 600K... at the peak of the bubble and then in the down turn, home prices goes down to 300K, Loan To Value rises more than 100% of the market value right? you equity of 20% would rise to 33% on down payment and rest set aside. But you still owe 500K right? Now that banks plays with the debt as a security in the market and sells it to interested guys before the market collapse. Home owner, defaults due to low equity. These guys who bought somethings which does not have same value that it was bought for, gets screwed. That is why they are calling them "toxic assets". They will never be able to recover the debt by re-possessing the asset. In short, it work both ways..

[hopefulgc]

http://www.reuters.com/article/BANKS...37405620090331

[gapala]

Originally Posted by hopefulgc

http://www.reuters.com/article/BANKS...37405620090331

This is the first solid sign of $ stability. Hopefully they will follow up with action and everything will be fine.

[suavesandeep]

Gapala,

Fed is basically throwing everything at the sink. They basically want the customers to go back to their old habits where they start buying things they don't need etc. But this will not happen for a long time. As i explained all the savings here was in the form of home equity, stocks, 401k. And people were making buying decisions based on them. I am sure American people are not stupid and wont spend their money without any basis.

If Home prices go back to their bubble peak values, Stocks go back to their peak values i.e. People get back their so called lost paper wealth. I see a remote chance of people going back to their old habits. Other than that it is wishful thinking. This is more of gov talk where they want to show people that gov is doing something to solve the problem. And the good part is if all the money stays in Fed Vault as i expect it would, It does not hurt the economy in the long run. So it is a WIN WIN.The beauty is Fed does not even publish publically how much money it has. So all this generated money could magically disappear from its vault too if needed.

IMHO US needs to forget about excess customer spending fueling the economy in the long term, And needs to be more innovative to figure out other ways to simulate the economy and increase the country's wealth. There has to be a balance in spending and saving for the country to prosper in the long run. And i think this event will force the country in this direction. My 2 cents.

Originally Posted by gapala

Thanks suavesandeep for posting the link.

If you look at the latest retail consumer spending index, it rose in past months.
The Deloitte Research Leading Index of Consumer Spending rose in January, driven by strong growth in real wages
http://www.deloitte.com/dtt/article/...249101,00.html

Is that assumption in the article which says comsumers are not spending, accurate?

How are they planning to stimulate economy by keeping the tissue paper in Fed vault?

I believe below article is also relavent in this context which predicts that consumer spending will go down further after the US comes out of recession. .that means less demand and prices down south. I guess the potential savings may actually provide long term stability to econony rather than spending the way out which will dig the hole deep down..

March 31 (Bloomberg) -- Annual consumer spending in the U.S. may decline by more than $1 trillion after the recession ends and shoppers adjust their spending habits, according to a survey conducted by AlixPartners LLP.

Americans may save 14 percent of their earnings and focus on replenishing retirement savings, according to the survey of 5,031 people released yesterday. Last year, the savings rate was 1.6 percent, AlixPartners said, citing U.S. government statistics.

http://www.bloomberg.com/apps/news?p...gSM&refer=home

[gapala]

Originally Posted by suavesandeep

Gapala,
So it is a WIN WIN.The beauty is Fed does not even publish publically how much money it has. So all this generated money could magically disappear from its vault too if needed.

IMHO US needs to forget about excess customer spending fueling the economy in the long term, And needs to be more innovative to figure out other ways to simulate the economy and increase the country's wealth. There has to be a balance in spending and saving for the country to prosper in the long run. And i think this event will force the country in this direction. My 2 cents.

I agree that not spending but savings would provide stability.

Here's a scenario where money disappeared as you suggested the possibility.

Accrual based financial reporting is critical to gaining a comprehensive understanding of the U.S. Government's operations. For fiscal 2001, our results were an accrual-based deficit of $515 billion in contrast to a $127 billion budget surplus reported last fall," said O'Neill (Secretary Paul O'Neill) that is on a total federal budget of $2.1 trillion (1/4th)

Here's the link to complete report. http://www.fms.treas.gov/fr/index.html
Download it. Its on page 5

[Pagal]

Hello,

Good discussions....

Here is another look at this issue... http://www.iousathemovie.com/

[gapala]

Pento on Bernanke's Permanently Expanded Balance Sheet
April 15, 2009

"Ben's Un-shrinkable Balance Sheet"

As he stated again clearly today, the Chairman of the Federal Reserve has deluded himself into thinking that when the time comes, he will be able to shrink the size of the Fed's balance sheet and reduce the monetary base with both ease and impunity. He also has deluded himself into thinking inflation will be easily contained.

It is very important that he does not fool you as well.

The Fed believes low interest rates should not be the result of a high savings rate, but instead can exist by decree, a conviction which has directly led consumers to believe their spending can outstrip disposable income.

The result of such thinking has been a rise in household debt from 47% of GDP in 1980 to 97% of total output in Q4 2008. As a result of this ever increasing burden, the Fed has been forced into a series of lower lows and lower highs on its benchmark lending rate. Keeping rates low is an attempt to make debt service levels manageable and keep the consumer afloat. Problem is, this endless pursuit of unnaturally low rates has so altered the Fed's balance sheet that Mr. Bernanke will be hard-pressed to substantially raise rates to combat inflation once consumer and wholesale prices begin to significantly increase.

Banana Ben Bernanke has grown the monetary base from just $842 billion in August 2008 to a record high of $1,723 billion as of April 2009. But it's not only the size of the balance sheet that is so daunting; it's the makeup that's becoming truly scary.

Historically speaking, the composition of the Fed's balance sheet has been mostly Treasuries. And the Federal Open Market Committee would typically raise rates by selling Treasuries from its balance sheet into the market to soak up excess liquidity. However, because of the Fed's decision to purchase up to $1 trillion in Mortgage Backed Securities (and other unorthodox holdings), it will not be selling highly-liquid US debt to drain reserves from banks. Rather, it will be unwinding highly distressed MBS and packaged loans to AIG. Not to mention the fact the Fed would have to break its promise of being a "hold-to-maturity investor" of such assets.

Moreover, not only are the new assets on the Fed's balance sheet less liquid but the durations of the loans are being extended. According to Bloomberg, the Fed is contemplating extending TALF loans to buy mortgaged backed securities to five years from three after pressure it received from lobbyists and a failed second monthly round of auctions. That means when it finally decides it's time to fight inflation, the Fed will find it much more difficult to reverse course.

But because of the extraordinary and unprecedented (some would say illegal) measures Mr. Bernanke has implemented, only $505 billion of the $2 trillion balance sheet is composed of U.S. Treasury debt. Today, most Fed assets are derived from the alphabet soup of lending programs including $250 billion in commercial paper, $312 billion of Central Bank liquidity swaps and $236 billion in mortgage-backed securities.

Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!

Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.

In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him.

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