Further Updates from the Currency War Front

Well, folks, it’s official – mark November 22, 2010 in your calendars.  With yesterday’s $8.3 billion POMO monetization, the Fed’s official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion.  The Fed is now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won’t. In other words, the Ponzi operation is now complete, and the Fed’s monetization of US debt has made it not only the largest holder of such debt, but made external funding checks and balances in the guise of indirect auction bidding, irrelevant. China is now not the one having the most to lose on a DV01 basis on that day when the inevitable surge in interest rates finally happens. That honor is now strictly reserved for America’s taxpayers.

In addition, Tuesday China and Russia sent a loud message to the FED.

Source: Asia One – Su Qiang and Li Xiaokun

St. Petersburg, Russia – China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.  Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities. The yuan has now started trading against the Russian rouble in the Chinese interbank market, while the renminbi will soon be allowed to trade against the rouble in Russia, Putin said.

“That has forged an important step in bilateral trade and it is a result of the consolidated financial systems of world countries,” he said.

Putin made his remarks after a meeting with Wen. They also officiated at a signing ceremony for 12 documents, including energy cooperation.  The documents covered cooperation on aviation, railroad construction, customs, protecting intellectual property, culture and a joint communique. Details of the documents have yet to be released.

Wen said Beijing is willing to boost cooperation with Moscow in Northeast Asia, Central Asia and the Asia-Pacific region, as well as in major international organizations and on mechanisms in pursuit of a “fair and reasonable new order” in international politics and the economy.

Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.

Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.  Wen arrived in the northern Russian city on Monday evening for a regular meeting between Chinese and Russian heads of government.

In related news on the situation in the EU comes the grim but expected news that the Spanish 3-month bill auction failed.  The debt agency sold only €3.26bn of the €4-5bn that was offered, at average yield of 1.743% vs 0.951% prior. What people must understand is that is nearly double the interest rate.  This debt service is the back breaker to the economy.  Tensions are surely going to start boiling over on the Emerald Isle.  If Greece was a big bomb to the EU and ECB stability, and Ireland was Greece’s big brother, then the Spanish economy is their bigger brother Bubba.  These three countries WILL require further bailouts and quite frankly more than the ECB can handle.  The death of the EU is like watching a shot buffalo go down in a Sam Peckinpah movie.

Finally, back in the US, in addition to the impacts of QE2, the mortgage situation as related to the big banks is far from going away.  To put things in clear perspective, the banks bundled, and sold to investors, junk paper consisting of bundled questionable mortgages.  In most cases, those same banks kept the seconds on those mortgages.  However, now the investors do have recourse.  These bundled packages required the banks to “buy back” any equity that was in default or foreclosure.  The bottom line to this is that the top five banks, between the bad second mortgages and the default clauses on the crap they dumped on investors, are on the hook for nearly $400 Billion, which is more than the equity value of those top five banks.

In view of the fact the currency wars have unquestionably erupted, these elements represent the perfect storm.  As a side, the “fear” index on Wall Street today was the highest recorded since 1987.  These events are moving along the worst case scenario lines.  Watch very carefully.

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Here Comes the Currency Wars! Is It What Kicks Off the Final Crash?

Regardless of all of the happy talk, I have continued to insist that firstly, this is the second great depression.  It is definitely global and extended. Secondly, we haven’t seen the bottom yet and I believe we will be dealing with this economic crisis for at least another 5-10 years.  I have contended that the real numbers and facts that count have NOT improved and to say the recovery has begun and more outrageous to say that it started in June of last year is mind-boggling.

There is no more vulnerable area to precipitating the “second leg” down than a global currency war.  The impacts of such wars are never anything good for struggling economies.  It seems that is exactly what is beginning to happen.  Consider this from Peter Simpson in Beijing for VOAnews.com

http://www.voanews.com/english/news/China-Warns-US-Yuan-Bill-Could-Damage-Ties-104071274.html

China Thursday expressed its anger at legislation in the United States aimed at punishing Beijing for not letting its currency rise in value and failing to address trade imbalances.  Foreign Ministry spokeswoman Jiang Yu says the United States should avoid steps that could damage relations. She says her government opposes what she says is Congress using the currency issue to launch protectionist measures against China.

On Wednesday, the U.S. House of Representatives passed legislation that would allow Washington to treat what the bill describes as fundamentally undervalued currencies as an illegal export subsidy.  Jiang says the bill would harm commercial relations between China and the U.S., and says it could affect the economies of both countries, and the world.

The bill is primarily aimed at China. The U.S. and other countries say it keeps its currency, the yuan, artificially low to give its exports an unfair advantage. Many U.S. politicians, businesses and labor groups say this has contributed to the United States’ massive trade deficit with China. Congress says the deficit causes jobs losses in the U.S.  The bill would allow the U.S. to set tariffs to offset China’s price advantages.

It must be passed by the Senate and signed by President Barack Obama to become law, and neither is certain. But the latest move has rattled China.  State media quoted the Commerce Ministry as saying the bill contravenes World Trade Organization rules.  Jiang, the Foreign Ministry spokeswoman, would not say if Beijing will seek to retaliate.  But Beijing is not alone in its opposition to the bill.


The American Chamber of Commerce in China on Thursday said the bill would not achieve its objectives and would not create significant U.S. job growth.  Chairman John Watkins Jr. says the group opposes the bill because it will make the trade deficit worse, and will likely shift some China production to other low-cost countries.

“We believe that it will actually reduce exports and thereby good jobs,” Watkins says. “I think it will add further tension to the U.S.-China relationship. We think that Congress would be better focused and better advised coming up with a response to deal with China’s web of indigenous innovation policies, weak intellectual property protection, and tightening market access for foreign firms here.”  Any vote on the bill in the U.S. Senate will not come until after congressional elections on November 2.

If this was the only issue, it may be manageable, but the focus is just not on the US and China, although these countries are 1 and 2 respectfully economically.  There is a great concern on how the EU is going to manage its joint austerity programs.

Russian President Dmitri Medvedev has urged the European Union to stabilize its common currency, saying a stable euro is important for EU trade partners, including Russia. Mr. Medvedev told reporters in Germany Saturday that Russia is not indifferent to the fate of the European single currency, because it keeps part of its foreign currency reserves in euros.

The Russian president arrived in Germany Friday to discuss global and bilateral issues with German Chancellor Angela Merkel.   After speaking with the German leader, Mr. Medvedev expressed confidence that a package of EU measures put in place to help stabilize the euro will work.  Later this month, leaders from top 20 economies will meet in Canada to discuss ways of stabilizing the world economy and financial system.

This comes at the same time as we are seeing the working classes of the EU countries most affected take to the streets en masse.  Workers across Europe took part in coordinated actions to protest government austerity measures, shutting down much transport in Spain and filling the streets of Brussels with tens of thousands of marchers.

Spain’s first general strike in eight years left few buses running in Madrid and about half of underground trains out of service, Reuters said. The government said an agreement with unions guaranteed minimum service. Sky News reported that Iberia, Spain’s largest airline, expected only a third of its scheduled flights to take place.  Unions claimed that more than half of the Spanish work force, or about 10 million people, were on strike, Reuters reported, though the government downplayed any problems.  “So far the strike is taking place with normality and without incidents,” said Celestino Corbacho, the Spanish labor minister, The New York Times reported. “Citizens are fulfilling both their right to strike and work.”

The day of labor action across Europe was led by the European Trade Union Confederation. The group represents trade unions from 36 European countries and claims 60 million members, CNN reported.  “Cutting in a recession is crazy, and we must fight it,” John Monks, European Trade Union Confederation’s general secretary, told CNN.  In Brussels, union organizers said they had achieved their goal of drawing 100,000 people to march on European Union buildings, The Associated Press reported. Union workers are rallying against higher taxes, a delayed retirement age and longer work day, the Times said.

In Greece, which has been trying to fight off bankruptcy, some transportation workers had walked off the job, national rail workers were stopping work later, and hospital doctors were on strike for 24 hours, AP reported.


Irish police arrested a 41-year-old man after he drove a cement-mixer emblazoned with the words “toxic bank” to the gates of the Irish parliament in Dublin, which is due to authorize billions of dollars of further funding to bolster Anglo Irish Bank, which was nationalized last year. Authorities took more than two hours to remove the truck, according to the Irish Times, because the protester had taken measures to immobilize it.  CNN said protests are also planned in Portugal, Italy, Latvia, Lithuania, the Czech Republic, Cyprus, Serbia, Romania, Poland, Ireland and France.

Although the UK seems aloof from the EU, it cannot escape the reality of mandatory “austerity” measures, but like the US the new government seems reluctant to tell the public the truth of the nature and depth of the austerity programs.  The point of all of this is that we are not immune from these wars and in fact we are already engaged fully in the “prosecution” of this war.  I, for one, am very concerned that these tensions will build and the resultant tariff wars that will be imposed because of a lack of response from country X or Y to valuation demands will set off hyperinflation and more unemployment globally.  This may well be the biggest story of the year and few media outlets are putting in front of us.  Hmmmmmmmmm.