Central bankers from Beijing to Brasilia have been acquiring a lot more dollars of late, but the overweight of the greenback has reached its limits. There is only one way left to go. It is time to sell the dollar once again.
Or so says Jerome Booth.
Booth has been in the currency and fixed income markets since 1999. That’s when he helped launch the Ashmore Group, one of the largest pure-play emerging market fund managers in the world with around $70 billion under management. Before he retired to write books and launch his new private equity firm New Sparta Limited,Booth was a regular source of mine here at FORBES. He’d talk about the wonders of emerging market debt; their relative strength compared to the Western world and how they’ve improved from their “Third World” days of yesteryear; and the day of reckoning that would come when the Chinese yuan becomes a reserve currency.
The International Monetary Fund will vote on that in December. That’s just one of the variables that has the dollar bull run unlikely to last the year.
In the short term, the dollar’s problem is not the yuan. It’s a 25% gain against the euro over the last 12 months, with investors wondering if its reached its peak. The guys who think it has not are winning. And those guys include the central banks of the developing world.
“The currency composition of reserves (in emerging market central banks) has shifted slightly from euros to dollars — from 62.4% in dollars to 62.9%. The dollar is looking toppy — a good level to take profits,” says Booth.
Dollar panic-selling is possible given the homogenous structure of the investor base in externally-held Treasuries. It’s not in Barclays' hands. It’s not in Goldman Sachs accounts. Treasurys are sitting in the People’s Bank of China . Trillions of them in fact. As they are in the Russian Central Bank, the Reserve Bank of India and every other major emerging market that requires a nice reserve cushion to save itself from the Western world’s short sellers who like to watch a nice currency bloodbath from time to time.
So far this year, there’s been a consensus view that the dollar can only go up.Interest rates are going to rise at some point later this year. Everyone and their mother will want higher yielding U.S. debt. Treasurys will have many buyers. That’s the gist of it.
But when the dollar falls, it will be because the surplus central banks have determined they have to shed some weight. Booth even goes so far as to say the central banks could dump all at once.
“A rush for the exit by them could cause a dollar crisis similar to that in 1971. They may lose a third of the value of their reserves in the process, but deployment in crisis is what reserves are for. And there comes a point in any trade when cutting ones losses is preferable to pouring more good money after bad,” he says.
Dollar: Bad?
Full story: http://tinyurl.com/j655cmw
Russian President Vladimir Putin has introduced legislation that would deal a tremendous blow to the U.S. dollar. If Putin gets his way, and he almost certainly will, the U.S. dollar will be eliminated from trade between nations that belong to the Commonwealth of Independent States. In addition to Russia, that list of countries includes Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan. Obviously this would not mean “the death of the dollar”, but it would be a very significant step toward the end of the era of the absolute dominance of the U.S. dollar. Most people don’t realize this, but more U.S. dollars are actually used outside of the United States than are used inside this country. If the rest of the planet decides to stop accumulating dollars, using them to trade with one another, and loaning them back to us at ultra-low interest rates, we are going to be in for a world of hurt. Unfortunately for us, it is only a matter of time until that happens.
It gets better > http://theeconomiccollapseblog.com/archives/tag/reserve-currency
The war on cash is escalating. Just a week ago, the infamous Willem Buiter, along with Ken Rogoff, voiced their support for a restriction (or ban altogether) on the use of cash (something that was already been implemented in Louisiana in 2011 for used goods). Today, as Mises' Jo Salerno reports, the war has acquired a powerful new ally in Chase, the largest bank in the U.S., which has enacted a policyrestricting the use of cash in selected markets; bans cash payments for credit cards, mortgages, and auto loans; and disallows the storage of "any cash or coins" in safe deposit boxes.
Buiter defended his "controversial" call for a ban on cash, as Bloomberg reports:
Read more > http://www.zerohedge.com/news/2015-04-23/largest-bank-america-joins-war-cash“The world’s central banks have a problem. When economic conditions worsen, they react by reducing interest rates in order to stimulate the economy. But, as has happened across the world in recent years, there comes a point where those central banks run out of room to cut — they can bring interest rates to zero, but reducing them further below that is fraught with problems, the biggest of which is cash in the economy.In a new piece, Citi’s Willem Buiter looks at this problem, which is known as the effective lower bound (ELB) on nominal interest rates. Fundamentally, the ELB problem comes down to cash. According to Buiter, the ELB only exists at all due to the existence of cash, which is a bearer instrument that pays zero nominal rates. Why have your money on deposit at a negative rate that reduces your wealth when you can have it in cash and suffer no reduction? Cash therefore gives people an easy and effective way of avoiding negative nominal rates. Buiter’s note suggests three ways to address this problem:
- Abolish currency.
- Tax currency.
- Remove the fixed exchange rate between currency and central bank reserves/deposits.
Yes, Buiter’s solution to cash’s ability to allow people to avoid negative deposit rates is to abolish cash altogether. (Note that he’s far from being the first to float this idea. Ken Rogoff has given his endorsement to the idea as well, as have others.)Before looking at the practicalities of abolishing currency, we should first look at whether it could ever be necessary. Due to the costs of holding large amounts of cash, Buiter puts the actual nominal rate at which the move to cash makes sense as closer to -100bp. So, in order for a cash abolition to become necessary, central banks would need to be in a position where they wished to set nominal rates much lower than that.Buiter does not have to go far to find an example of where a central bank may have wanted to set interest rates much lower to -100bp. He uses (a fairly aggressive) Taylor Rule to show that Federal Reserve rates should have been as low as -6 percent during the financial crisis.”
What is the debt ceiling?
What Is the Debt Ceiling?
Definition: The debt ceiling is a limit imposed by Congress on how much debt the Federal government can carry at any given time. The debt ceiling is currently $18.113 trillion. The U.S. Treasury estimates it will reach this new limit around November 3, 2015. (Source: "Meet the New Debt Ceiling," CNN Money, March 17, 2015)
The debt ceiling is similar to the limit on your credit card, with one major difference.
