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America: First time among equals

Stephanie Flanders | 10:50 UK time, Friday, 15 October 2010

It's not a fair fight, the currency war between the US and China - but it's more evenly matched than most of us has ever seen. And as we saw in yesterday's sharp fall in the dollar, it has the potential to cause the rest of the world a lot of trouble.

Chinese yen being counted out beside US dollars

 

Whether in the economic arena or the political one - it's been a long time since the US could pick on someone its own size. When it comes to a currency war, China's peculiar economic system lets it come pretty close.

The US spends as much on national defence every year as the rest of the G20 combined. That speaks to its unique geopolitical standing. Its economic firepower stems not just from its position as the world's largest economy but the "exorbitant privilege" of having the world's reserve currency.

As Martin Wolf argued in yesterday's FT [registration required], that means America will win this currency war - because it has a limitless capacity to print dollars. But China also has some unique weapons at its disposal - which America would not have, if the shoe were ever on the other foot. It can withstand the dollar onslaught for a lot longer than anyone else.

Why? Because there is no other country with a large economy - but a communist financial system. True, foreign banks have come to China in the past decade. True, they now have a new financial regulatory and supervisory authority that looks a bit like the FSA. But that is where the similarities end. Most banks are state-owned and all of them are still very much state-controlled.

This means that China can resist more upward pressure on its exchange rate, for a longer period of time, than any other government in the world, because it has a greater capacity to neutralise the impact on the domestic economy.

Sorry, this is complicated. But trust me, it's important.

In a normal Western financial system, governments can't hope to absorb large inflows of capital and hold down their currency and keep control of domestic interest rates. If they intervene to prop up the dollar (and keep their own currency cheap), that raises their foreign reserves, which in turn would usually push up the domestic monetary supply and create inflation. They can raise interest rates to tackle that problem, but that tends to make the inflow problem even worse, by making the country that much more attractive to foreign investors.

That is basically the dilemma being faced by Brazil, some of Central and Eastern Europe, and most of the emerging Asian economies. Thanks to loose monetary policy in the US and elsewhere, investors are flooding their economies with cash, in search of higher returns.

As I mentioned last week, this could do a lot of damage to their economies. In that sense, they are already victims in this battle to re-balance the global economy: some more innocent than others.

In Brazil, which has a flexible exchange rate, the government has put a tax on capital inflows, with only modest success. Where exchange rates are controlled (primarily Asia), there's been massive intervention to stop the currency going up - some of it even larger, as a share of their economy, than China's.

All of them try to "sterilize" those interventions, selling assets into the market to mop up the cash and prevent it turning into inflation. But there's a limit to what they can do. In a normally functioning financial system, building up hundreds of billions of dollars of reserves will massively distort asset prices and financial activity in the domestic economy, even if you prevent the immediate hit to inflation.

Which brings me to China and its repressed financial system. America would be quite happy for China's inflation rate to go up instead of its exchange rate: domestic inflation ought to make Chinese exports less competitive in the US, just as a change in the nominal exchange rate would.

But of course, that's exactly what the Chinese don't want. So, like most countries that intervene in exchange market, it tries to sterilize those flows. Here is where the repressed financial system comes in handy: not only can it require the banks to buy an enormous amount of low-interest government bonds, but it can also instruct them to hold a lot more cash in reserve at the central bank.

According to Nick Lardy, a renowned expert on the Chinese financial system at the Petersen Institute for International Economics, in the first half of 2008 alone, a three-percentage point increase in this reserve ratio forced banks to deposit an extra RMB1.3 trillion with the central bank. From 2002 to 2008, the authorities raised the reserve ratio 21 times, taking the rate from six to 17.5% (eat your heart out, Basel III).

Of course, the banks don't like this. But they don't get a choice. They can also comfort themselves with the knowledge that the money they're losing on all these forced investments in low-yield investments is at least partly offset by the profits they make on their domestic deposit accounts, which all receive interest rates far below the rate of inflation.

That low rate of return on savings is the government's doing as well, and for economists, it is the hallmark of a repressed financial system. It's a massive "stealth tax" on household savings, the proceeds of which accrue to banks, the government and, in China's case, exporters.

As Nick Lardy and others have argued, this is not safe or sustainable for China's economy. It pushes savings into the black economy, and adds to the problem of global imbalances because Chinese households are not benefiting as much as they should be from the nation's growth, and they have to save a lot more to feel secure.

But when it comes to China, we know that the unsustainable can continue for a very long time. We found out this week that China's foreign exchange reserves had risen by $194bn in the three months to September - one of the biggest increases on record (see chart below). At least $100bn of that was due to purchases of foreign exchange. (For reference, then the Bank of Japan intervened, to such acclaim, last month it spent about $25bn.)

Chart showing

 

As we saw yesterday, the longer this war continues, the greater the collateral damage will be for other economies, caught in the crossfire. And the more it will come home to the US administration that we really are living in a new world.

Comments

  • Comment number 1.

    Does this not all add pressure for the world to start thinking seriously about a global currency - a move away from dollar hegemony? Something the Chinese in particular seem to be keen on.

  • Comment number 2.

    1. At 11:13am on 15 Oct 2010, thatmcgrath wrote:
    Does this not all add pressure for the world to start thinking seriously about a global currency - a move away from dollar hegemony? Something the Chinese in particular seem to be keen on.
    ---------------------------------------------

    Shall we base that on the experience of the Euro?
    Will the World Bank have to approve every country's budget?

  • Comment number 3.

    Below is a the conclusion of a recent article on this subject by Prof Bill Mitchell from the CofFEE, New South wales.


    " The simple line being pushed by the IMF, the World Bank, the US government and others about China is really a smokescreen to avoid facing up to the fact they have failed to implement appropriate fiscal policy. They should have expanded their deficits by much greater amounts in the early days of the crisis. They still should be increasing net public spending and creating local jobs. If the Chinese want to make or assemble cheap plastic items then the US workers can do other things.

    But to say that the US government no longer has the capacity to increase employment in the US labour market unless China appreciates it currency is plainly false and amounts to the abandonment of the US government’s responsibility to manage the US economy in the interests of its citizens.

    The appropriate policy response is not to start trying to modify trade or worry about what China is doing. The US government and other sovereign governments have all the capacity they need at present to stimulate domestic demand and create high levels of employment.

    Ultimately China will realise that its citizens want more than bits of paper in foreign currencies and they will allow the exchange rate to float. There is already simmering pressure in China among workers to push for higher wages and a greater access to consumer goods. This pressure will not be able to be resisted by the Chinese government as time passes.

    But I don’t want to be misinterpreted. I also think the yuan should float but for different reasons than those given by the pundits in the current assault on China. The point is that I think it is a side-show for the rest of us.

    What we need to do on a multi-lateral basis is to curb the financial sector and force it to correspond only with the needs of the real sector. This would require large policy shifts which would outlaw most of the current trading behaviour and would require speculative behaviour to be advancing the stability of the real economy."

  • Comment number 4.

    China can reduce its dollar reserve by buying foreign assets as it has already been doing for some time. This will tend to reduce the value of the dollar and therefore the value of China's reserves, but if the assets are carefully chosen China will enjoy considerable capital appreciation, especially in dollar terms as the dollar appreciates. So expect China to be an even more enthusiastic buyer, in response to the US action.

    Eventually China will end up owning a substantial proportion of the world's assets, just as the UK did before World War 1, and the US has since the end of World War 2, after the UK and Europe had sold most of their foreign assets to pay for the wars.

    Just as Britain did and the US is doing at the moment it will have to spend more and more on its military, in order to put down the insurgencies which will be the eventual response to China's economic imperialism.

  • Comment number 5.

    Welcome to a re-run of the 1930s depression, with hyper inflation of the dollar getting ever closer. They think that a stronger yuan will save the American economy, but it wont, it will make goods in the shops more expensive, but it wont result in a recovery of manufacturing in the US and an increase in exports, as the only economy that could absorb that is the Chinese, and lets face it they wont be buying everything the US makes. The US is drowning in a sea of debt, and they seem to think that a dose of inflation will work to erode it, but it will just bring economic chaos around the world.

  • Comment number 6.

    One of your better articles.

    What is going on is very important.
    The US authorities are between a rock & a hard place.
    They want to avoid deflation.
    Bernanke knows that those who devalue first emerge from recession first (at least they did in the 1930's).
    But devaluation through the printing of more dollars risks debasing the currency & destroying its key advantage of being the reserve currency of the capitalist world.

    They know the risks.
    And the risks are not just economic.
    Remember Iraq was invaded because Saddam was going to sell his oil to the EU in Euros.
    Threats will apply to others thinking of accepting currencies other than dollars, e.g. Saudi oil.

    The odds are we will get dollar (& other currency) debasement, depression as everyone seeks to export unemployment & war!

  • Comment number 7.

    It is not clear that it is in the long term interests of the USA to devalue the dollar and risk its position as a reserve currency not to mention the enormous holdings of dollars by PRC. The new factor is the way the Chinese manage their economy. It is neither state controlled central planning like the old USSR but it is also not dominated by laissez faire economics. It is a hybrid and the West should burn its economic text books on international trade and think outside the free market box. Trade agreements, conscious decisions about markets even quotas, agreed specialisation, planning for mutual benefit - complete heresy but what is the alternative - return to the gold standard!
    It would be unwise to predict the outcome if the USA go for broke on competitive devaluation - political instability would follow economic chaos.

  • Comment number 8.

    Stephanie,

    I am pleased you have now 'caught up' with the situation which has been in the pipeline for some time.
    The problem is that most western Economies are dumb - they don't realise that this time the 'usual' solution to a crisis of devalue and re-invigorate the Economy through increased export demand isn't going to work (because too many nations are playing the same game) - however it's not going to stop them trying and causing terrific damage in the process.

    Whilst all the focus is on the Chinese currency manipulation - not much is said about the US, UK and Japanese currency manipulation (QE) - this is simply 'western bias' in the media - I presume so it makes it a bit easier when there is an announcement of war against China (don't think it won't happen) - I mean if they're portayed as the 'bad guys' then the dumb TV minded populous will fall back into that 'Good vs Evil' belief indoctrined in religion where the west is always 'good' and anyone who opposes the west is 'evil'.

    The US should be careful with their war of words however - after all China does hold the most US debt and dumping this into the market would collapse the US treasury price and require high yields and ultimately punative interest rates as nobody else is equipped to take up the slack.

    The real problem is there is no 'fix' available - and Governments refuse to see this. The asset devaluation must be played out - but the western Governments are determined to protect their wealthier citizens by blowing more bubbles to protect the asset rich well off. However there doesn't seem much point repeating this again as Governments have already made up their mind and have closed the door to any further exploration for solutions.

    As the currencies get more and more volatile - we will start to see the effect on our daily lives. We are a net importer (as are the US) so we're particularly vulnerable to FX movements.

    However Governments are not the only ones who have worked this out - it seems that the man on the street is putting 2 and 2 together - if bankers can rob us through currency speculation, then maybe we can speculate with bankers through currency robbery!

    http://www.thisislondon.co.uk/standard/article-23888101-heathrow-cashier-on-run-with-pound-120000.do

    It seems PIMCO has already started to offload US treasuries - a sure sign of market nerves. The discovery order in all crises is consistent, first the ruling classes, then the Government and finally the people.

    http://www.telegraph.co.uk/finance/economics/8063303/Pimco-sells-US-Treasuries-ahead-of-QE2.html

    ...which is why the people are always left with the bill!

  • Comment number 9.

    http://neithercorp.us/npress/?p=842
    an excellent article on the currency war issue

  • Comment number 10.

    The Yuan /US Dollar war illustrates why it is vital fro the UK to get inside the Euro ASAP. We have to protect ourselves against the upcoming instability the best we can and the way that is fortunately open to us is to join the Euro. If we don't the currency instability that will inevitability create havoc with world trade will severely damage our country. Whereas inside the Euro we can gain a huge advantage from the stability of the internal trade and business market.

    If we do not join NOW we will just be caught up as another piece of flotsam and suffer severe collateral damage. Sterling is a terrible contingent liability.

  • Comment number 11.

    Stephanie, although I feel there will be no real winners in a currency war between the US and China I agree that America will loose less badly. However, I don't think it is for the reasons you state. It's more fundamental than the complex economic and financial arguments you put forward. America can be self-sufficient, China can't. That's why the Chinese are traveling the world buying and forming alliances with suppliers of raw materials. They need to feed the growth monkey to keep their oppressed population in line. America does not. The Americans are capable of voluntarily pulling together and cutting back in the national interest, which they will have to do as their money looses it's purchasing power and they buy less "stuff" from abroad.

    However, they can adapt their energy usage and survive from their natural resources, and they can feed themselves from their own agricultural output. They will put up trade protection barriers very soon.

    I expect America to be much more inward looking in the next generation and take part much less in being a global policeman. They have experienced and failed at doing this in the past few decades and they are coming to realise that they can't turn the rest of the world into an extension of America, and they have to get off of being dependent on energy supplies from hostile regimes.

    Hopefully the coming depression will make nations collectively examine sustainability and investment in new energy sources and methods of agriculture. I only hope we survive it and emerge wiser and with a firm resolve to use our intellect rather than our instincts.

  • Comment number 12.

    Excellent blog Stephanie, as usual! Just a thought: If the currency war really takes off between US and china, then US protectionism seems a danger BUT what if dems do badly in mid term---republicans don’t support protectionism! Hence no hope of getting legislation through?

    http://www.mindfulmoney.co.uk/1868/economic-impact/currency-wars-threaten-global-economy.html

  • Comment number 13.


    The quicker society faces the reality of the black-hole that the western world finds itself in. STOP....!!!!! What

    is the point of continuing with this line of thought, when we all know the ONLY solution to our situation is

    CONFLICT and more CONFLICT................until their is no other alternative ,(you can't change history ) can you?

  • Comment number 14.

    Martin Wolf’s opinion of America having a limitless capacity to print dollars maybe a little flawed.

    It’s only limitless if you can print as many as you want and not suffer a consequential currency crisis, which does seem a little unlikely to say the least.

    There is a limit, the question is, where does it lie?
    Here in the UK, ‘investors’ have converted currency into such things as gold, shares and index linked savings certificates.

    But, I’m not wholly convinced that ‘investors’ can cause a currency crisis; but people certainly can.

    When the average Joe and Jane starts ‘thinking’ about stocking up on ‘things’ rather than keeping ‘currency’ for future use, perhaps that’s where the limit lies.

    Because once thinking turns into doing, it’s too late and the games up.

    So in theory:
    If you knew what percentage of people were out there ‘thinking’ about it.
    And
    At what percentage point thinking turned into doing.
    You’d have a good idea as to whether you were close to the limit or not.

  • Comment number 15.

    #8. writingsonthewall wrote:

    "The asset devaluation must be played out"

    Quite right.

    And what is more I believe that the central bankers, regulators and even the bankers know this. But what they are unable to do is to figure out a way of managing the deflating of the loans secured on these over-priced assets without collapsing the whole capitalist system. I believe, and it is only a belief, that the parallel collapse of the apparent security for the loans on the balance sheets of the banks can be handled, and indeed it must be handles for normal conditions to resume in our national and global economy.

    Let me speculate on the size of the unsupported debt (that is where loans exceed the proper price of the assets upon which the loans are secured.)

    My rough estimate is that there is about 350 £Bn of supposedly secured debt on the books of lenders that would not be realizable in a re-possession sale. (Assumptions 20 M houses valued at 230K with 15% overly indebted and a 50% overvaluation.) For the USA say 2.5 £Tn - but I suspect well over half of this figure has already been absorbed by the financial sector- so let's say 1 £TN, Spain £150bn more to be absorbed. Others incl. Japan say £200Bn. Total say in the range of 1.7 to 2.0 £Tn (2-2.3 €Tn, or 2.5 to 3.0 Tn US$.

    Is 3Tn US$ too big to absorb? No, I don't think so. The UK's particular problem is that as we have far more than a fair shore of the World's global banks we will have to absorb more than many countries - and this is what frightens the Bank or England (I think).

    I am sure that we could absorb 0.5 to 0.9 £Tn without our banking system collapsing it is just that the gutless wimps in Threadneedle Street are not yet ready to go the David Cameron and argue the case that we have to do so - but the reality is that this is exactly what we will have to do over then next years or decades before we can get back to business as normal.

    What we really need to do is to persuade our 'wonderful' global banks to leave the UK so that all we need to pick up is our own overvaluation of 0.35 £Tn. It would be best to do this before it become obvious that they are bust.

    By the way the hole we are in is entirely the result of our 'wonderful' regulators letting property prices in the UK get completely beyond any rational level.

    The other side of the coin is of-course that we have to protect small and medium sized depositors and savers for we will be absolutely reliant on these people for the capital to fund the recovery. To that end we must also return to a rational price for money. (Indeed returning to a rational price will be the driver of de-leveraging debt!)

    (PS sorry about mixing currencies above. I used 1.5 US$-£ and 0.87 £-€)

  • Comment number 16.

    Still ignoring "foreclosuregate" then Stephanie?

    Even your beloved hero Ben Bernanke has had to "address the "issue":

    http://www.reuters.com/article/idUSTRE69C5KO20101013

  • Comment number 17.

    The US have the most to loose. The Chinese could easily dump its US T Bills and that would be the end of the Dollar, as reserve currency. However, they wont want to do that without being provoked first (doesn't look good), which is why the US are playing a dangerous game.

  • Comment number 18.

    http://www.google.co.uk/search?hl=en&source=hp&q=foreclosuregate&aq=f&aqi=&aql=&oq=&gs_rfai=

    "About 1,240,000 results (0.11 seconds)"


    None of them BBC links.........

  • Comment number 19.

    15. At 3:30pm on 15 Oct 2010, John_from_Hendon

    I think that is a fair assessment of the situation - but the risch don't want to see their assets devalue - which is why central bankers (run for the rich by the Government) are much keener on an inflatory solution (QE and easy money)

    Unfortunately this coalition doesn't seem to be choosing either - it's in a right muddle with it's QE2 coming and it's deflationary cuts - the poor old Economy won't know which way to turn...

  • Comment number 20.

    Sometimes my previous career in international finance gives me reason to be depressed.

    In response to #1, here is a universal currency, still in place I believe, called an SDR (Special Drawing Right). It is used within the IMF and World bank, but has become a bit archaic. Its value is expressed as a weighted basket of international convertible currencies, including USD, GBP and EUR. please don't go there, it would blow your mind trying to work outwhat anything is worth against it, plus of course you can't own one as an individual.

    In response to #10, it is vital we stay out of the EUR, spcially if there is going to be a fight.

    What China is doing to regulate its own economy is not a lot different to what we are doing. The B of E is HOLDING rates at 0.5 percent, despite the realistic cost of moeny being higher than that and, guess what, the beneficiaries of this action are the same as in China - the government and the banks, oh, and guess what, the US is doing the same, as is the EU.

    Gold, gold, gold, thats what you want, gold.

  • Comment number 21.

    15. At 3:30pm on 15 Oct 2010, John_from_Hendon wrote:
    #8. writingsonthewall wrote:

    "The asset devaluation must be played out

    I am not so worried about property as you John. In fact I'd rather have my dosh in Bricks & Mortar than anything else right now.

    No mention of Credit Default Swaps. Surely if anything is going to explode, its this asset. Ask a financial genius what they are and they will tell you its a hedge or an insurance. What they don't tell you is that one guiding prinicple of insurance is that you can only take a position if you have an interest in the underlying asset. Otherwise it's like your neighbor betting that your house will burn down. He has an incentive to make it happen.

    I know little else about them but I understand there are tens of trillions of dollars of these things floating about the financial sector, still unregulated. Can you believe it? It gives me the willies.

  • Comment number 22.

    14. At 2:21pm on 15 Oct 2010, Dempster wrote:

    "Martin Wolf’s opinion of America having a limitless capacity to print dollars maybe a little flawed."

    I agree - what Mr Wolf seems to have glossed over is that the arab states are already preparing to launch their own currency - and once oil is no longer priced in Dollars - it's bye bye to the reserve currency as it will be as worthless as ticker tape.

    http://www.middleeastforex.com/news/articles/55/UAE-committed-to-Gulf-single-currency-idea-says-C.html

    ...or didn't anyone tell Mr Wolf this?

  • Comment number 23.

    16. At 3:39pm on 15 Oct 2010, stopsupportingcriminals wrote:

    "Even your beloved hero Ben Bernanke has had to "address the "issue":"


    ....in the only way he knows how.....MAN THE PRESSES!

    Clearly Economic history wasn't Ben's major at college then!!

  • Comment number 24.

    15. At 3:30pm on 15 Oct 2010, John_from_Hendon

    I think there is likley a good deal of truth in that. Not sure I would agree that the 'hole' is purely down to regulation of UK house prices though.

  • Comment number 25.

    Afternoon Stephanie,
    thank you for your explanation of some of the effects of the current currency crisis.
    However, as an economist, you know that these things do not happen in isolation. For example, all currencies are traded in pairs and the Yuan is not traded publically at all! We have the disaster about to happen to Europe...the interbank rate for the Euro says it all, it's high because banks don't want to lend to each other in Europe....now where have we seen this before? We have Bernanke (who I think is misguided) about to print $100-200 Billion per month (but that's not currency manipulation because only the Americans can decide that). The US housing market is in freefall because of alleged corrupt practices by the banks, so the supply of mortgages in the US will stop altogether (not just reduce).
    We have massive capital inflows to the developing countries, who will be swamped, all chasing a return for greed.
    The 100 richest men in the world made 8% on their money last year, greed just begets more greed.
    My view, and I've said it before, is that we are currently living at the most dangerous time (apart from world wars) in our history. If you put all the pieces together it's a very scary situation which will require Statesmanship to overcome and I don't think Obama nor Cameron, nor the leaders in Japan or China have the experience or expert guidance to steer a path through this.
    The most likely outcome is several concurrent wars will break out (or be manipulated). Don't forget only Politicians can take us to war.

  • Comment number 26.

    15. At 3:30pm on 15 Oct 2010, John_from_Hendon wrote:

    "Is 3Tn US$ too big to absorb?"

    But that's only the actual loans secured on actual assets.

    Just the tip of the iceberg.

    You're forgetting all the derivatives, CDSs and CDOs....

    The actual write-down could be 100x that.

    $300Tn.....

  • Comment number 27.

    An excellent analysis which I think deserves to be carefully considered. Though as has been pointed out the US is probably more self-sufficient than China, but it should be borne in mind that China probably has considerable undiscovered reserves of minerals which at the moment it is more economic for them to buy from elsewhere.

    Also China seems to have a knack of overcoming problems by making use of technologies either borrowed or homemade.

    If countries want to keep up they have to pay their way in the world, and so far China has done better than most people expected. It might be argued that this is because of the strategic planning probably only possible in a dictator-directed country as compared to the tactical approach adopted by democracies.

  • Comment number 28.

    #15 JFH,

    Sorry John but it is not a simple as that.

    You are concentrating upon the cash. There are a whole range of factors that have to be taken into consideration at the same time. The financial imbalances are a reflection of the trade imbalances. Until you fix them, you fix nothing. At the same time we have to establish new international finance structures and new regulations for world commodity markets.

  • Comment number 29.

    JFH, I usually agree with pretty much all of your postings, but this time I feel you are wrong on a couple of key points and missing the big issue with the world economy.

    Firstly, I agree that assets are overpriced, particularly houses. This is what happens when people invest in them with a primary view of them being assets rather than simply a home. Assets do go through crazy bubbles and subsequently can and must drop massively in price when this is realised. The price of houses should be in the region of ten times the annual income you could get from them if you owned them and rented them out. So I agree they are around double the price they should be on that basis.

    The second point I disagree with you on is about regulators missing "controlling" the price and is tied into where I think you are missing the big issue for the economy. The selling of cheap mortgages to many sub-prime customers for over priced housing was perceived to be viable as long as interest rates could be kept low which could have been achieved if there was low inflation and low essential commodity prices. Basically boom and bust was believed to have been abolished, right? Now you and I both know this was complete rubbish, but I think it is because we have been running a growth model economy without thought for the depletion of non renewable resources, particularly oil, and not thinking through the "what if" consequences of this together with a runaway world population.

    I don't agree that taking the hit on asset prices alone will do it and get us back to business as usual as you believe. $147 oil price caused the increase in inflation and subsequent rise in interests. This pricked the bubble and caused the debt defaults and crashing of the house of cards ponzi sub-prime mortgage schemes.

    Taking the asset price hit is required but don't expect business as usual growth because I believe this is not possible due to us having exhausted cheap oil and not invested the abundant energy we had from it wisely enough. We paid no mind to sustainable population or fuel usage or mineral extraction or water conservation or soil conservation etcc...

    A new collective mindset is, I believe, required. That mind set must abandon the "growth is everything" mantra and employ our talents to achieve sustainable prosperity.

  • Comment number 30.

    #24. Squarepeg wrote:

    "15. John_from_Hendon ... Not sure I would agree that the 'hole' is purely down to regulation of UK house prices though"

    I don't think I said it was 'entirely' due to the housing bubble, but the fact that there was unconstrained creation of money(credit) should have alarmed the regulators.

    I was mainly concentrating of secured debt and the likelihood that it is not as secure as we are being told.

    Let me move on to the impact of this and too low interest rates on the need to create synthetic financial instruments such as CDOs and CDSs.

    The CDO was in essence nothing but a mis-sold fraud if it had been in a consumer market. Duff and slightly better loans were grouped together and miraculously they all became good - this never made any sense at all and everyone trading in them must have known this.

    #21. MetalGasket wrote: précis: worried about CDSs

    CDS allow anyone to gamble on someone else not being able to meet their obligations and could be created by parties who had no interest in the original transaction. The valuation of these was entirely fictitious and the business should have been curtailed by the regulators as soon as it started. Basically this type of insurance should not be permitted and needs to be outlawed and made legally void ab-initio. The whole industry needs unwinding.

    I'll not go on through the even more exotic instruments, but I will just note the likely effect of the real economy running interest rates that got even lower.

    As I see it in market terms the higher the interest rates to more money banks can make. If interest rates are lowered the banks will lend more to maintain their profits. Now banks found they could create an essential unlimited sum of money (for a while - see Northern Rock/Granite). so the banks lend (sorry invest) more and more) and then the rates go down and down so the create more money and then lend more and more. This is fine so long as the lending still performs .... Which of course it didn't so the CDO market stopped and there was a liquidity crisis - that is what we have had. The problem we have in the UK is that we haven't de-leveraged our debt or seen a significant drop in asset prices - but this is essential. We are thus in a trap and means that when we try to reflate our economy all that happens is that asset price go up (as we have seen) but the real economy continues to decline - as we haven't put up interest rates.

    Now CDSs and interest rates are of course linked as there will be increased defaults when loans and debts go bad. Of course as we know there are far more debt that are actually bad than are admitted in public as being bad as there is still a huge amount of non-performing debt that may have been 'insured' by a CDS. As to the size of the market: it is likely that there are more trillions out there than can be counted - but unlike CDO and as these instruments were not traded in an open market the error in estimating its size is huge.

    I see no other mechanism but to globally declare that the contracts are void and unenforceable in law as they are just gambling contracts.

  • Comment number 31.

    America: Is no longer first among equals, a situation which has been completely American generated.
    It's not a fair fight, the currency war between the US and China; it’s skewed towards China where
    - the production of which is going up,
    - the balance of trade is going up,
    - China holds the bulk of American bonds, upon which the United States will has to pay interest.
    This is why the United States is so very leery about China’s success and why the United States is so planning ways to interfere, even bring China down.
    The US spends as much on national defence every year as the rest of the G20 combined; the United States cannot continue to do so without creating civil unrest at home. The United States is in terrible debt: $13,619,575,050,357.67. The estimated population of the United States is 309,298,372; so each citizen's share of this debt is $44,033.78.
    The National Debt has continued to increase an average of $4.14B per day since September 28, 2007, mostly on military spending.
    The debt is now what marks the US’ geopolitcal standing. Its economic firepower is all that keeps its economy going. She cannot even afford to get out of the war business because there are no jobs for her military at home...but they will come home armed...
    The US' "exorbitant privilege" of having the world's reserve currency is in serious jeopardy. There are already plans underway to replace the American dollar with other “basket” currencies upon which there will be drawing rights. Expect this to be a hot topic at the upcoming G-20.
    Contracy to Martin Wolf’s argument, I don't believe that America can win this currency war with China because It Has A Limitless Capacity To Print Dollars. But every dollar printed becomes worth-less; it is fiat money: PAPER that represents less and less real value or even gold reserves.
    China is a smart country; it has new financial regulatory and supervisory authority that looks better than the FSA, and certainly much better than the lacklustre reforms put forth by the United States. This means that China can resist more upward pressure on its exchange rate for a very long period of time.
    There is a need for drastic re-think on the American dollar, a new peg, and how the world proceeds financially. Most of this re-thinking is occuring within the EU (at Brussels).
    When it comes to the United States of America, this country has yet to deal with its foreclosure/mortgage problem, which could cost into the billions; it has yet to generate any meaningful financial reforms; it has yet to raise its interest rates from zero, and the country is literally stagnating.
    In short, the United States is in terrible economic shape. The future looms more towards bankruptcy than prosperity; in fact, there is no prosperity in sight.

  • Comment number 32.

    #28. foredeckdave wrote:

    "#15 JFH, Sorry John but it is not a simple as that."

    Sorry if I implied that my response to #8. writingsonthewall who wrote: "The asset devaluation must be played out" made you think that this was my view of the entire problem. I was just examining the asset devaluation problem and the loans secured thereon.

    #26. the_fatcat wrote: "The actual write-down could be 100x that. $300Tn....."

    See above, but I doubt for the reasons I have given above that the losses would be that huge as that requires that there are a few real idiot banks and financial institutions who held all of the liabilities side and don't hold any of the assets - I think a lot will cancel out. From our point of view, the British taxpayer I can't believe that the four banks that we have have been so mindbogglingly inept and stupid as to be completely on the wrong side of every deal.

    My view is that provided we can sustain a real economy in real assets and loans thereon and real deposits and run a real trade in good then we can recover. This may involve the abandonment and default on these exotic instruments - the good bank / bad bank solution!.

    As I have said before I am an optimist!

  • Comment number 33.

    #29. Sage_of_Cromerarrh wrote:

    See #30 and #31 - my posting was a response to assets only and #8 from WOTW. I tried not to imply that this was a sufficient requirement merely that it was necessary.

    I didn't think I implied that the regulators should have 'controlled' asset prices, just that policy should have understood, as I have said many times before, that asset price inflation is just inflation and requires that the mechanisms of control are used to push down on it, just as any other kind of inflation.

  • Comment number 34.

    From #20
    "In response to #1, here is a universal currency, still in place I believe, called an SDR (Special Drawing Right). It is used within the IMF and World bank, but has become a bit archaic. Its value is expressed as a weighted basket of international convertible currencies, including USD, GBP and EUR. please don't go there, it would blow your mind trying to work outwhat anything is worth against it, plus of course you can't own one as an individual."

    I wasn't thinking of a currency used by the public (addressed to #2) but of one to replace the present global currency, the USD. SDRs might fit the bill if they had the power of agreement behind them i.e. various bodies - governments and businesses - used them to purchase commodities and if they were pegged to gold might also help. As things are, it is very unsatisfactory that an organization like the Fed can dictate to the rest of the world and only be really answerable to the American people, if they are.
    All I am asking is one biased world trading currency be replaced with a more rational trading currency. I believe this is possible and indeed necessary if the present currency war turns nastier.

  • Comment number 35.

    Stephanie

    Question. Why is Martin Wolf not rich?

    "As Martin Wolf argued in yesterday's FT, that means America will win this currency war - because it has a limitless capacity to print dollars."

    Yeah right like Germany won their currency war in 1933 and Zimbabwe kicked the worlds backside in their currency war a couple of years back. Print money get inflation. Get inflation the poor get much poorer, the weak and slow get robbed of much of their savings and the smart get much richer trading and speculating.

    Traders are simply using the virtually free money being lent to them to invest in real assets or foreign currency. The last thing that the banks were ever going to do is give it to poor and insolvent people to bale them out when they can give it to their traders to make billions.

    Next January's bonuses are going to be biggest ever i think. Many hundreds of traders are well into 7 figures. The hedge fund boys upstairs are in a different league altogether having traded gold all year. Even with a 50% tax it is going to be amazing. Its been the easiest money in years. The Ferrari dealership has literally sold out down the road. They having literally nothing until next October and forget buying a new Audi R8.

    No inflation my foot.

    2007 Oil price $80 per barrel price at pump 80p per litre.
    2010 oil price $80 per barrel price at pump £1.25 per litre.

    2007 loaf of named brand bread at supermarket 90p
    2010 loaf of named brand bread at supermarket £1.40

    2007 Sachet of instant soup 34p
    2010 Sachet of instant soup 53p

    Only the foolish have sat there watching the spending power of their cash being wasted away while receving no interest. The really stupid have bought houses in the past 18 months which is the one asset that was overpriced before money was printed. We really are very likely to experience a monster property crash over the next couple of years as the US, Ireland, Spain etc, etc etc have.

    Every cloud.

  • Comment number 36.

    #15 John_from_Hendon
    precis: house prices should drop by half
    So, are you proposing that the amount owed to lenders should be adjusted accordingly? What about the older people who have paid off their mortgage so would be losing their own money; would they be compensated?. Or people who have offset mortgages with some, most or all of the mortgage offset by a credit balance?

  • Comment number 37.

    Stephanie said

    Of course, the banks don't like this. But they don't get a choice. They can also comfort themselves with the knowledge that the money they're losing on all these forced investments in low-yield investments is at least partly offset by the profits they make on their domestic deposit accounts, which all receive interest rates far below the rate of inflation.

    That low rate of return on savings is the government's doing as well, and for economists, it is the hallmark of a repressed financial system. It's a massive "stealth tax" on household savings, the proceeds of which accrue to banks, the government and, in China's case, exporters.

    =========================================

    So, are you saying that the UK too has a 'repressed financial system' as, excepting the capital reserves, it strikes me that all the other 'hallmarks' could apply to the UK Banking system.

  • Comment number 38.

    "[America's] economic firepower stems not just from its position as the world's largest economy but the "exorbitant privilege" of having the world's reserve currency."

    Oh dear Stephanie....

    Bretton Woods collapsed....every country that issues and controls it's own currency is a reserve currency now! Anyone of these (US, Japan, UK, Australia, Canada, lots of others but not EU countries) can spend without financing this spending through debt or tax revenue! If you learned economics from any text books written by Mankiw, then you'll have to give up and start again. Any text book which teaches you the following erroneous theories must be discarded immediately:

    Quantity Theory of Money
    Ricardian Equivalence
    Say's Law
    Theory of "loanable funds"
    Rational Expectations (RATEX)
    Natural Rate of Unemployment (NRU /NAIRU or similar)

    None of them has any serious empirical evidence to support them, and plenty of evidense against them:

    QTM and "loanable funds" theory has already been disproved during this crisis by the fact that gilt yields went down not up!

    Rational Expectations - people aren't rational - we know that now!

    NRU - proved incorrect by WW2 and is just unemployment denial, and an abdication of UN signatory's commitment to pursue full employment.

    As for Ricardian Equivalence - anyone who claims that ordinary households plan their spending around how much tax they might pay in 10 years time clearly has never had a proper job!
    I was actually hoping Steph was not a neoliberal.

  • Comment number 39.

    #36. AnotherEngineer wrote:

    "#15 John_from_Hendon
    precis: house prices should drop by half
    So, are you proposing that the amount owed to lenders should be adjusted accordingly?"

    No, you know very well that if payments are not maintained your house is at risk. Keep paying or get repossessed - that is the reality of the law and the loan agreement that a borrower signs. Negative equity or not that is the risk of borrowing money - it is made clear to every purchaser and that is the reality.

    I am not saying prices should drop by half I am saying that they are out of line with salaries by a factor of more than two times, and that a proportion of this will be recovered as the market works it through - that is inevitable.

    Unless you are proposing that society completely collapses and the several thousand year body of law is done away with? I don't recommend revolutions they are generally unpleasant - do you not recall the slaughter of the Civil War and the Glorious Revolution - we can't go there can we - or is that what you are proposing? Once you break the law, there is no law and what is to stop anyone taking anyone's property?

    Borrowers were fully aware of the risks and the risk will crystallise. The austerity will start the collapse of house prices and this will be compounded by graduate having gigantic loans before the get round to buying a house - so get ready for social discomfort and the consequences! If anyone purchased a house in the last decade with a big (> 50% loan) they should be planning for the collapse and preparing themselves - to do otherwise is just stupid and flying in the face of reason - the lenders are and so should the borrowers!

  • Comment number 40.

    The US deficit with China is up to 60% of America's total trade deficit, and over 80% if you subtract energy and raw materials. This obviously can't go on for much longer.

    At some point, rather than bringing everyone else into a trade war by aggressively pushing down the US dollar, America will have to slap an import tariff on Chinese products.

    Saying the US shouldn't tariff Chinese imports is no different than saying China shouldn't hold down the value of their currency.

  • Comment number 41.

    The really only "smart" part of the Chinese financial policy is to stay away from the economy-devouring financial derivatives industry. Having been burnt in a couple of embarrassing cases involving international derivatives trading, where the SOEs lost billions, the Chinese banks and SOEs were basically ordered to refrain from participating further, until Beijing could figure out what this beast is.

    And just in time too. In the most recent round of financial debacle around the globe, China came out doing relatively well mostly because of the refusal of the Chinese banks to "play" in any big way in the derivatives arena, despite the convincing salesmanship of the likes of Vampire Squid. But going forward, that alone is not sufficient, at least as far as saving the world is concerned. In the West and Japan, the derivatives cancer is continuing to grow unabated, and is projected to reach A QUADRILLION DOLLARS (US$1,000,000,000,000,000.00) in a few short years.

    It is hard to understand why derivatives are not banned. Today the casino is already close to $700 Trillion. Derivatives began decades ago as ways of spreading business risks, and thus serve a legitimate function. So if certain parties in a real world business transaction (e.g., sale of commodities) want to offload some risks in the transaction, they can enter into derivative contracts, essentially betting arrangements with others who think they know better. While it is possible for a real world business transaction to benefit BOTH SIDES, it is the nature of a derivative to be a zero sum bet - one side wins, and the other loses. That is O.K. when they are used in moderation - e.g., you do one derivative contract for one real world business transaction.

    BUT when the bets (at US$700 Trillion) are almost 50 TIMES the size of the total GDP of America (standing at US$14.5 Trillion), it is no longer an economic activitiy - it is pure gambling and FRAUD. It is no longer legitimate risk spreading - the derivatives themselves generate new and much more substantial risks, enough to swallow entire economies.

    On paper (no pun intended), derivatives are the ideal vehicles to propel the West into the post-industrial nirvana. They require sophistication (which lends instant respectability), and concentration of intellectual capital. They are not constrained by natural resource (ores, oil, rare earths) availability, and there are no labor issues to deal with. Unlimited quantities can be conceived and "generated" out of thin air - constrained only by the ability for the investment bankers (salesmen, con men, take your pick) to find the bigger fools (clients).

    Narcotics share the same characteristics – cost little to produce, and can generate humongous profits for the "players". But the external costs are insidious and horrible from society's viewpoint. So narcotics are criminalized and drug dealers routinely jailed and their assets confiscated. Why not criminalize banksters and derivatives?

    From the standpoint of the West, there was probably the calculation that there is money to be made if you run the house - act as croupier and collect a fee coming and going. Therefore if there is trade in these same derivatives, the Western financial houses, especially those of Anglo-American persuasion, long being dominant in banking and investments, would and should again enjoy total domination. In the last decade, American and other Western banksters were out in force to sell derivatives all over the globe, and today their efforts continue – derivatives grew unchecked even after the 2008 debacle.

    New banking reforms governing derivatives are taking place in certain countries, but not for the real players in America or the U.K. China and any nation interested in "vaccinating" against such massive financial fraud should immediately adopt legislation that criminalizes financial fraud, such as mandatory jail sentences for the CEO of the entities involved, death penalty for frauds above US$10,000,000 (at least in jurisdictions where capital punishment is still allowed), and treble damages measured by the face amount of the fraudulent instruments. You'd see the like s of vampire squid withdraw in a flash.

    The last hiccup in the derivatives casino, which was a lot smaller in size back then, cost America 8 million jobs, and created such international turmoil that the world is still slowly trying to climb out of it. With the gambling reaching new heights every day, with the quadrillion dollar “market” coming, the question is what will that wrought. It is not if, but when the next meltdown will happen.

  • Comment number 42.

    As long as China sticks to being the workshop of the world, continuing to crank out affordable goods with acceptable quality, the world will survive, even if the West is swallowed by the unchecked avarice of the banksters. People will still be able to afford the little luxuries of life.

  • Comment number 43.

    #42 Zhuubaajie

    "As long as China sticks to being the workshop of the world, continuing to crank out affordable goods with acceptable quality, the world will survive, even if the West is swallowed by the unchecked avarice of the banksters. People will still be able to afford the little luxuries of life."

    That is simply not true. The West is clearly displaying that it cannot afford the price. China can manufacture all that it wants but if its customers cannot pay then it's output is just waste. That situation is not in the West's best interest and ultimately not in China's. How soon after the finance wars start does the physical war begin?

  • Comment number 44.

    #42 foredeckdave:

    Using threat of war to force China to change trading practices - now why does that sound familiar??

    Last time it was over opium, and it turned out rather badly for China. This time around, will the Anglo-American banksters use nukes to force China to buy financial derivatives? Are you counting on the result being the same this time around?

  • Comment number 45.

    #45 Zhuubaajie,

    What a totally facile comment!

    If you can actually think for a moment and re-read what I wrote you will find that I am not supporting any wars - financial or military. My warning was that allowing one to start would inevitably lead to the other.

    If you are capable then re-read what you wrote. Volume production with no customers would lead China into a very perilous position both financially and probably socially.

    Whilst in no way seeking to promote such a thing, a war between China and the Western powers would still probably end badly for China. China would face the same problem as Britain in WW2 - think about it.

    Now take your propoganda elsewhere

  • Comment number 46.

    foredeckdave #42, #45.

    do you not think that the sheer size of China's internal market is enough to absorb most of her industrial output for long enough to 'ride it out'?

  • Comment number 47.

    #46 jr4412,

    With great size also comes great problems and if the reports are right then China's abilities may be more constrained than they first appear. You have to remeber that China is not as well endowed with raw materials as say the USA. Her internal development response to the first financial shock has caused her significant problems as well.

    Obviously, if the storm phase of a fiance war were prolonged then China would face significant difficulty.

    If China's response were to be military then she faces being surrounded by hostile countries - some also nuclear armed. Even if say Russia remained neutral she would still be considered as a potential threat. But for all of our sakes let us pray that we never have to test this theory out.

    The other factor that is rarely considered is the ability of the Chinese authorities to cope with large scale civil unrest that would come with mass unemployment. Central control may be sorely tested in such circumstances.

    As the USA is finding out, you are strategically at you most vunerable when you actually believe that you are at your most powerful.

  • Comment number 48.

    foredeckdave #47.

    while I agree that the "internal development response" would need to be re-thought, I've faith in China's relatively greater social coherence, making such adjustments less of a problem than in any of the western nations.

    wrt raw materials, China has most of the African nations to use as suppliers and could get additional oil from Iran, again, less problematic than would appear.

    also, I doubt that China is perceived to be a military threat as such, they haven't a history of belligerence like so many prominent NATO members. the US of A (and her lapdogs) however benefit from giving us the impression that we 'need' to fear China because it helps justify the continuation of the current (unworkable) policies without making necessary changes.

  • Comment number 49.

    "As Nick Lardy and others have argued, this is not safe or sustainable for China's economy. It pushes savings into the black economy, and adds to the problem of global imbalances because Chinese households are not benefiting as much as they should be from the nation's growth, and they have to save a lot more to feel secure."

    Why couldnt US stop thinking for helping others? US must think about her own people. Stop helping Iraq or Afghanistan having democracy and bring her troops back home could be a start.

    Cutting the military budget could help to a more balanced public budget and with it to direct the resource to helping the economic sector, v.g., the small and medium enterprise are asfixiated from cash, because all those printed money either go to the financial institutions or to speculation in foreign countries for better return.

    If US cut 3% to 4% of defense budget, it would be an almost 50% cut in deficit, isnt it?

    By the way, UK coalition government is showing a good lesson for US.

  • Comment number 50.

    Well, i could only copy and paste this comment as by small contribution to its merit.


    "At 12:55pm on 15 Oct 2010, writingsonthewall wrote:
    Stephanie,

    I am pleased you have now 'caught up' with the situation which has been in the pipeline for some time.
    The problem is that most western Economies are dumb - they don't realise that this time the 'usual' solution to a crisis of devalue and re-invigorate the Economy through increased export demand isn't going to work (because too many nations are playing the same game) - however it's not going to stop them trying and causing terrific damage in the process.

    Whilst all the focus is on the Chinese currency manipulation - not much is said about the US, UK and Japanese currency manipulation (QE) - this is simply 'western bias' in the media - I presume so it makes it a bit easier when there is an announcement of war against China (don't think it won't happen) - I mean if they're portayed as the 'bad guys' then the dumb TV minded populous will fall back into that 'Good vs Evil' belief indoctrined in religion where the west is always 'good' and anyone who opposes the west is 'evil'.

    The US should be careful with their war of words however - after all China does hold the most US debt and dumping this into the market would collapse the US treasury price and require high yields and ultimately punative interest rates as nobody else is equipped to take up the slack.

    The real problem is there is no 'fix' available - and Governments refuse to see this. The asset devaluation must be played out - but the western Governments are determined to protect their wealthier citizens by blowing more bubbles to protect the asset rich well off. However there doesn't seem much point repeating this again as Governments have already made up their mind and have closed the door to any further exploration for solutions.

    As the currencies get more and more volatile - we will start to see the effect on our daily lives. We are a net importer (as are the US) so we're particularly vulnerable to FX movements.

    However Governments are not the only ones who have worked this out - it seems that the man on the street is putting 2 and 2 together - if bankers can rob us through currency speculation, then maybe we can speculate with bankers through currency robbery!

    http://www.thisislondon.co.uk/standard/article-23888101-heathrow-cashier-on-run-with-pound-120000.do

    It seems PIMCO has already started to offload US treasuries - a sure sign of market nerves. The discovery order in all crises is consistent, first the ruling classes, then the Government and finally the people.

    http://www.telegraph.co.uk/finance/economics/8063303/Pimco-sells-US-Treasuries-ahead-of-QE2.html

    ...which is why the people are always left with the bill!"

  • Comment number 51.

    #49 ifigeniaa,

    "Cutting the military budget could help to a more balanced public budget and with it to direct the resource to helping the economic sector, v.g., the small and medium enterprise are asfixiated from cash, because all those printed money either go to the financial institutions or to speculation in foreign countries for better return.

    If US cut 3% to 4% of defense budget, it would be an almost 50% cut in deficit, isnt it?"

    You obviously understand very little about the drivers of the US economy. isn't it!

  • Comment number 52.

    Interesting article, Stephanie, but

    "That low rate of return on savings is the government's doing as well, and for economists, it is the hallmark of a repressed financial system. It's a massive "stealth tax" on household savings, the proceeds of which accrue to banks, the government"...

    Are you sure you aren't referring to the UK there, rather than China?

  • Comment number 53.

    #51 foredeckdave

    "You obviously understand very little about the drivers of the US economy. isn't it!"

    Could you explain better why USA could not cut its defense budget (all expenses) to just 3% or 4% of its GDP?

  • Comment number 54.

    how big is the US economy and the Chinese economy?

  • Comment number 55.

    China must float the yuan... it is in the best interest of the global economy... US needs more traction on monetary policy and China needs to stop relying on a cheap currency for growth.

  • Comment number 56.

    Macroboy #55.

    "China must float the yuan...it is in the best interest of the global economy.."

    arguably, ending the Dollar hegemony would be better still. ;)

  • Comment number 57.

    Does the reduction in the dollar mean that the USA effectively reduces its debts to countries that have substantial dollar holdings if the debt amounts to trillions of dollars it seems a simple way "print more dollars"

  • Comment number 58.

    Money is God in the world! Thus all the problems...
    So called 'experts,' (economists) complicate the problem, in order to write and about and make money from... Ad nauseum...

  • Comment number 59.

    It is not the first time that the war between USA and P.R. China among equals. Korean War (June 1950 to November 1954)[1] was end in equals.

    At this moment, RMB appreciation might be a solution, but not good solution, since 2/3 of Labor cost in China almost equals to the "slavery" cost, comparing with Western standard of living. In any economics models, the RMB appreciation might or might not be working since the low cost of labor in China would reduce dramatically the sensitivity of RMB appreciation in the models. Chinese people are hardworking people who would endure extreme hardship. The only way to avoid the next global recession is to find out the pitfalls of the globalization, which can only be continuous for democratic nations.



    [1]http://en.wikipedia.org/wiki/Korean_War#Armistice_.28July_1953_.E2.80.93_November_1954.29]

  • Comment number 60.

    "abandonment of the US government’s responsibility to manage the US economy in the interests of its citizens"
    The US Government now occupies a lower tier in the power hierarchy than Corporations do, particularly the Trans-national Bank and Financial Speculation Industry. See www.csper.org for a good clarification. This is what happens when nations outsource the management of their currencies to bankers.
    The interests of Bankers and Corporations (the "Economy") now trump the interests of the citizens (the "Humanity"). If Polanyi is correct (The Great Transformation), the inevitable eventual swing of the pendulum in the opposite direction will be a violent correction.

  • Comment number 61.

    there already IS a global currency - lots actually. They are commodities. The most famous currencies and historically the most used currencies are gold and silver. GBP Pounds Sterling - It even MEANS a pound of sterling silver!

 

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