Nbadan
10-25-2004, 08:16 AM
Looks like all this debt W has gotten us into is finally catching up with us...
Central Bank stops supporting dollar
2004-10-22
The weighted average dollar exchange rate was 29 RUR/USD in the first 90 minutes of trade at a special session today. Thus, the official dollar rate for October 23-25 will decrease by RUR0.12. This is the most considerable one-day drop of the dollar against the ruble since late April. The low on the deals was even 28.95 RUR/USD at the UTS.
According to commercial bank dealers, the Central Bank has not supported the dollar despite a large selling of dollars by market participants.
Banks sold over $436m at a special session at 11:30 a.m. Moscow time. Yesterday, the trade volume was just $19m at the UTS at the same time. The average lot of dollars to be sold was $1.7m in the first 90 minutes of trading.
A Bank of Moscow expert told RBC TV that the trade volume on MICEX including a special session for today deals almost reached $1bn in the first 30 minutes of trading. The expert said that the Central Bank's activities could be attributed to the dollar's decrease on international exchanges and growth in the gold and currency reserves in Russia. However, the Central Bank's leaving the market at the end of the week was quite unexpected. The specialist thinks that the Central Bank is currently concerned about its obligations on preventing inflation.
News From Russia (http://newsfromrussia.com/main/2004/10/22/56751.html)
and...
China Dumps Dollars for Oil and Gold
by T. Stein / S. McIntyre
October 21, 2004
Safeguarding one's access to vital natural resources such as oil and gas is crucial to nation's long-term prosperity. But telling soldiers and their families that they are fighting in part to protect against the threat of $10.00/gallon gasoline is not exactly good for morale or public relations. Protestors chanting "No blood for oil" would have a field day if the White House press secretary made an announcement such as, "Good news, the Baghdad Museum has been looted, 1,000 American troops have been killed, but we have secured 90% of Basra's oil fields."
Skeptics would tell you that part of the reason why American and NATO troops remain in Afghanistan after overthrowing the terrorist-harboring Taliban is to get a foothold in the game for Caspian Sea oil. Whether or not you believe these skeptics, it is a fact that multinational energy companies have developed a renewed interest in building gas and oil pipelines linking the Caspian region with the lucrative international market of the Arabian Sea. This activity has worried the three large powers in the Central Asian region: Iran, Russia and China. All three of these countries have indirectly (or sometimes directly) supported America's enemies over the last three years with either military or financial assistance. While Iran and Russia have long supplied America's adversaries with arms, the fact that China has stepped up its efforts in this arena marks a disturbing trend.
China, which President Bush has called a "strategic competitor", will see its demand for industrial energy more than double over the next 15 years. China's electricity demand has doubled within the last decade and is likely to quadruple by 2019. Could China's recent shenanigans in the region be a small baby step for an energy-hungry power getting restless?
...
Like Britain a century ago, the United States has greatly over-borrowed in an effort to control access to the world's energy supply and at the same keep its domestic economy firing on all cylinders. As competition for diminishing oil resources threatens U.S. dollar hegemony over world oil transactions, expect to see increased Chinese political and military presence in the Middle East. The presence of Chinese PLA troops in Sudan, in our opinion, marks the middle kingdom's entrance into the great game. China's next move could come in the form of massive dollar devaluation when they decide to unload their supply of accumulated greenbacks. China just recently released six billion of those greenbacks for its purchase of Noranda Mining - Canada's biggest mining company. Keep your eyes open for stepped-up greenback dumping by China in exchange for natural resources such as oil-bearing properties or perhaps more mines. We predict that in the near future, Saudi princes will decide to denominate some of their oil transactions in Yuan (or at least something other than dollars) and invest their profits into shares of China Mobile or PetroChina instead of Citigroup.
Safe Haven (http://www.safehaven.com/article-2102.htm)
Meanwhile, the USA has finally revealed some nervousness in connection with the successful decline of the national currency. By the way, the situation is actually disturbing. Since election of George W. Bush to the presidential post, the USD has dropped by 18% concerning other major currencies of the world. And the dollar has particularly fell in price with respect to euro.
If it becomes a trend -- specifically if China stops supporting the dollar -- then it could have large effects. We can maintain our low interest rates without inflation only when a lot of investors want to buy up our debt. This is what Russia has stopped doing.
In an extreme scenario where everybody loses their appetite for US debt, then interest rates will skyrocket. The rate is the incentive to buy a bond, and the incentive is quite low now because there is such a huge demand for them (among other reasons.) With less demand, the bondholder has to offer more to make it worth the risk of giving the government money now for a potential future payoff. If we were not running deficits that wouldn't be as big of a problem as it is now -- because to keep the government running we have no choice other than to keep issuing bonds at a price that people will buy.
Well, there is one other choice -- print money. However it does exactly the same thing as bond buyers will demand higher rates to cover the expected inflation. Nobody likes to lose money, and if you have a bond at less than the current inflation rate you are losing money.
So... the effects to worry about. The stock market will become less attractive; if you could get a guarenteed %15 return on a bond would you take the risk of investing in something that could lose you money?
The property bubble will finally burst; house prices are now set assuming a low interest rate. In the expectation of always increasing property values, a rational person has bought as much house as they can afford at their salary. Raise the interest rate and they can no longer afford that house (hope they have a fixed mortgage!) but more importantly neither can other people in their wage category. When they go to sell, they may find that there are no buyers. Where it gets really bad is if a lot of people lose their jobs at the same time. Then the houses have to be sold at a loss and the banks are screwed.
The economy in general will slow down even more; businesses will be less able to afford loans to expand their businesses and consumer debt will cost more, so we have less purchasing punch
None of this is the end of the world, stuff like this happens all the time to a greater and lesser extent. Only sometimes does it become a depression. You would need to have other factors such as extremely high energy prices and a record current account deficit to make a perfect sto.... oh wait. Nevermind...
Central Bank stops supporting dollar
2004-10-22
The weighted average dollar exchange rate was 29 RUR/USD in the first 90 minutes of trade at a special session today. Thus, the official dollar rate for October 23-25 will decrease by RUR0.12. This is the most considerable one-day drop of the dollar against the ruble since late April. The low on the deals was even 28.95 RUR/USD at the UTS.
According to commercial bank dealers, the Central Bank has not supported the dollar despite a large selling of dollars by market participants.
Banks sold over $436m at a special session at 11:30 a.m. Moscow time. Yesterday, the trade volume was just $19m at the UTS at the same time. The average lot of dollars to be sold was $1.7m in the first 90 minutes of trading.
A Bank of Moscow expert told RBC TV that the trade volume on MICEX including a special session for today deals almost reached $1bn in the first 30 minutes of trading. The expert said that the Central Bank's activities could be attributed to the dollar's decrease on international exchanges and growth in the gold and currency reserves in Russia. However, the Central Bank's leaving the market at the end of the week was quite unexpected. The specialist thinks that the Central Bank is currently concerned about its obligations on preventing inflation.
News From Russia (http://newsfromrussia.com/main/2004/10/22/56751.html)
and...
China Dumps Dollars for Oil and Gold
by T. Stein / S. McIntyre
October 21, 2004
Safeguarding one's access to vital natural resources such as oil and gas is crucial to nation's long-term prosperity. But telling soldiers and their families that they are fighting in part to protect against the threat of $10.00/gallon gasoline is not exactly good for morale or public relations. Protestors chanting "No blood for oil" would have a field day if the White House press secretary made an announcement such as, "Good news, the Baghdad Museum has been looted, 1,000 American troops have been killed, but we have secured 90% of Basra's oil fields."
Skeptics would tell you that part of the reason why American and NATO troops remain in Afghanistan after overthrowing the terrorist-harboring Taliban is to get a foothold in the game for Caspian Sea oil. Whether or not you believe these skeptics, it is a fact that multinational energy companies have developed a renewed interest in building gas and oil pipelines linking the Caspian region with the lucrative international market of the Arabian Sea. This activity has worried the three large powers in the Central Asian region: Iran, Russia and China. All three of these countries have indirectly (or sometimes directly) supported America's enemies over the last three years with either military or financial assistance. While Iran and Russia have long supplied America's adversaries with arms, the fact that China has stepped up its efforts in this arena marks a disturbing trend.
China, which President Bush has called a "strategic competitor", will see its demand for industrial energy more than double over the next 15 years. China's electricity demand has doubled within the last decade and is likely to quadruple by 2019. Could China's recent shenanigans in the region be a small baby step for an energy-hungry power getting restless?
...
Like Britain a century ago, the United States has greatly over-borrowed in an effort to control access to the world's energy supply and at the same keep its domestic economy firing on all cylinders. As competition for diminishing oil resources threatens U.S. dollar hegemony over world oil transactions, expect to see increased Chinese political and military presence in the Middle East. The presence of Chinese PLA troops in Sudan, in our opinion, marks the middle kingdom's entrance into the great game. China's next move could come in the form of massive dollar devaluation when they decide to unload their supply of accumulated greenbacks. China just recently released six billion of those greenbacks for its purchase of Noranda Mining - Canada's biggest mining company. Keep your eyes open for stepped-up greenback dumping by China in exchange for natural resources such as oil-bearing properties or perhaps more mines. We predict that in the near future, Saudi princes will decide to denominate some of their oil transactions in Yuan (or at least something other than dollars) and invest their profits into shares of China Mobile or PetroChina instead of Citigroup.
Safe Haven (http://www.safehaven.com/article-2102.htm)
Meanwhile, the USA has finally revealed some nervousness in connection with the successful decline of the national currency. By the way, the situation is actually disturbing. Since election of George W. Bush to the presidential post, the USD has dropped by 18% concerning other major currencies of the world. And the dollar has particularly fell in price with respect to euro.
If it becomes a trend -- specifically if China stops supporting the dollar -- then it could have large effects. We can maintain our low interest rates without inflation only when a lot of investors want to buy up our debt. This is what Russia has stopped doing.
In an extreme scenario where everybody loses their appetite for US debt, then interest rates will skyrocket. The rate is the incentive to buy a bond, and the incentive is quite low now because there is such a huge demand for them (among other reasons.) With less demand, the bondholder has to offer more to make it worth the risk of giving the government money now for a potential future payoff. If we were not running deficits that wouldn't be as big of a problem as it is now -- because to keep the government running we have no choice other than to keep issuing bonds at a price that people will buy.
Well, there is one other choice -- print money. However it does exactly the same thing as bond buyers will demand higher rates to cover the expected inflation. Nobody likes to lose money, and if you have a bond at less than the current inflation rate you are losing money.
So... the effects to worry about. The stock market will become less attractive; if you could get a guarenteed %15 return on a bond would you take the risk of investing in something that could lose you money?
The property bubble will finally burst; house prices are now set assuming a low interest rate. In the expectation of always increasing property values, a rational person has bought as much house as they can afford at their salary. Raise the interest rate and they can no longer afford that house (hope they have a fixed mortgage!) but more importantly neither can other people in their wage category. When they go to sell, they may find that there are no buyers. Where it gets really bad is if a lot of people lose their jobs at the same time. Then the houses have to be sold at a loss and the banks are screwed.
The economy in general will slow down even more; businesses will be less able to afford loans to expand their businesses and consumer debt will cost more, so we have less purchasing punch
None of this is the end of the world, stuff like this happens all the time to a greater and lesser extent. Only sometimes does it become a depression. You would need to have other factors such as extremely high energy prices and a record current account deficit to make a perfect sto.... oh wait. Nevermind...