6.15.09
Hi all – for those of you that pay quarterly taxes, today is the 2nd quarter due date!
Meanwhile, back to the main point. Russian Finance Minister Alexei Kudrin said that Russia has confidence in the US currency at a meeting of the “BRIC” countries (Brazil, Russia, India, China – the emerging powerhouses). This followed words of confidence from Japan’s finance minister, Kaoru Yosano, last week. This was, in my opinion, a staged comment and utter rubbish – a mere delay tactic. let me explain more…
Why was there need to express confidence? Let me set the scene a bit. In the past few months, as our country has borrowed and printed $5-10 Trillion (I can’t count that high), there have been increasing worries about the stability of the US dollar as a viable currency going forward (in fact, if we weren’t the RESERVE currency of the world, our dollar would be plunging). As a result, there have been incressingly frequent talks outside of the investment community (namely among political leaders – because we know what the smart investment people think about printing money to solve problems – just search Jim Rogers, Marc Faber, Bill Fleckenstein, etc on my site for more info) that the dollar might need to be replaced as a reserve currency.
The US is paying very little on interest and there is a HUGE question whether or not the US can meet its interest paying obligations especially when all of these 3 and 5 year treasury bonds expire and the government is forced to pay HIGHER interest rates. As China, Brazil, and other countries started outwardly badmouthing the dollar (the Chinese were the first major creditor of the US to voice concerns – see my past comment HERE), the dollar began to slide (the Australian dollar, Canadian dollar, Euro and other currencies have all gained 10-20% against the dollar since march).
Here’s the problem for the BRIC countries (and others), well there are a few problems:
1. Japan, China, et al are all major investors in US treasuries and the dollar. it would be hard for China and Japan to unwind their 600 billion dollar positions. Therefore, it would not be wise to talk down your OWN investment right now.
2. These other countries do not have a viable alternative yet (though they are feverishly working on one). Therefore, it makes no sense to blow a hole in your ship if there is no life raft.
3. I also think it surprised these political leaders (everything seems to surprise these people) how FAST the dollar reacted to negative comments by US creditor nations – again, such instability in something you depend on would not be helpful at the current time with all of the economic problems.
With all of that said, I do believe the Russian Finance Minister is full of BS. Japan may not be – they are a very traditional country and in my opinion may be the one country that rides down the dollar with us (to their own peril of course) because our countries have been so interconnected the last 60 years. This is possibly one way their culture could hurt them.
I do believe that Russia, Brazil and China would love to find and are diligently working on creating an alternative. I think swapping natural resources might be a small move – China could float and use their own currency which many people believe is strong. Brazil could use its vast resources of iron, soy, sugar etc and Russia could use gas and oil, which it sells in immense proportions to Europe and get Euros in return.
The world is not far from punting the dollar – ideally, we should cut ELIMINATE the deficit, cut the debt and raise rates – but when your main goal is to get reelected (Congress, President) or reappointed (Bernanke), you know that nothing that would hinder inflationary growth (such as raising rates, cutting spending, etc) will be enacted.
Therefore, in my opinion, this is a one way track – it’s just a matter of time.
Chris Grande
