Meet the World's New Currency: the Chinese Yuan
- From: periodistalibre@xxxxxxx
- Date: Tue, 28 Oct 2008 10:36:59 -0700 (PDT)
By MIKE WHITNEY /
Things are getting worse. Since September, $16 trillion has been
erased from global stock market value. Losses in the US--where the
financial turmoil originated--have been much smaller than other, more
vulnerable markets. The Dow is down less than 40 percent from its peak
of 14,000, whereas Hong Kong, Poland and China have all tumbled more
than 60 percent. Its a bloodbath.
The Chicago Board Options Exchange Volatility Index, "the Fear
Index", surged to 79.13 on Friday, the highest in its 18-year
history, The massive blow-off in stocks is mainly the result of
ongoing deleveraging among the hedge funds which are dumping shares in
at a record pace to cover the dwindling value of their asset base.
According to the New York Times: "Hedge funds lost an estimated $180
billion during the last three months and some are near collapse.
Investors are demanding their money back, and Wall Street is bracing
for a shake-out in the $1.7 trillion industry." If a large fund, like
Citadel, goes down, it will create a black hole in the financial
system, similar to the loss of Lehman Bros. and, once again, the US
Treasury will have to come to the rescue by providing a multi-billion
dollar taxpayer bailout.
The dislocations caused by the unwinding of the hedge funds creates
the possibility that US markets will have to be closed while assets
are dumped on the market. New York University Professor Nouriel
Roubini summed it up like this:
"Policy makers may soon be forced to close financial markets as the
panic selling accelerates.
Indeed, we have now reached a point where fundamentals and long term
valuation considerations do not matter any more for financial markets.
There is a free fall as most investors are rapidly deleveraging and we
are on the verge of a capitulation collapse. What matters now is only
flows - rather than stocks and fundamentals - and flows are
unidirectional as everyone is selling and no one is buying as trying
to buy equities is like catching a falling knife. There are no buyers
in these dysfunctional markets, only sellers and panic is the ugly
state of this destabilizing game.
“We have reached the scary point where the dysfunctional behavior of
financial markets has destructive effects on the financial system and
- much worse - on the real economies. So it is time to think about
more radical policy actions and government interventions."
(Nouriel Roubini's Global EconoMonitor)
The stock market rout has triggered gigantic swings in the currency
markets, too. The dollar has surged 16 percent against the euro in a
matter of weeks while every other currency in the world has steadily
lost ground, excluding the yen. The sudden fall in commodities and the
unwinding of dollar-based bets in foreign capitals has bolstered the
dollar and made US Treasurys the preferred "flight to safety"
investment.
The volatility is causing problems everywhere, particularly where
foreign companies must pay back loans in dollars which have risen
steeply in relation to their own currencies. Emerging "commodities
based" markets are getting clobbered. The stronger dollar also
threatens to make it harder on US exports which have been the one
economic bright spot in recent months. If present trends continue,
then foreign governments will have to allocate more of their reserves
to prop up their own currencies which will make it even more difficult
for the US to fund its current account deficit as well as the
Treasury's expanding balance sheet. In other words, these violent and
unprecedented currency swings foreshadow a funding crisis looming just
ahead as credit is drained from the financial system and capital
becomes even scarcer. For now the dollar is flying high, but the
future is looking grimmer by the day.
The financial crisis is wringing credit from the system and pushing
prices downward across the board. No asset class has been spared,
including gold which posted its biggest one week loss in 28 years and
has plummeted from $1,040 in March to $734 at Friday's market close.
Oil has also been hammered by speculative bets made by the hedge funds
which are now forced to sell their positions to cover downgrades on
their mortgage-backed assets. The erratic movement in oil prices makes
it possible to see the real destructive power of the unregulated
market, particularly the opaque buying and selling by the hedge funds.
In just 14 months oil went from $70 to $145 and back to $67 again on
Friday. Wall Street speculators drove up prices with money they
borrowed from the investment banks and delivered a knockout blow to
the US consumer. The Fed played a critical role in this "gaming the
system" by providing the low interest credit that created burgeoning
profits for the investment class and falling living standards for
everyone else.
Now that the currency bubble has popped, its effects are being felt
worldwide. Countries that benefited from the high commodities prices
are now getting slammed everywhere from Russia to the Persian Gulf.
Ethanol producers are facing bankruptcy if things do not turnaround in
the next 12 months. As the Wall Street Journal notes:
"The tragedy of the second bubble is that it has left the economy in
a weaker position to ride out the housing slump and credit panic. The
American consumer has been whipsawed with $4 dollar gas and food
inflation, while entire industries have been put on the edge of
bankruptcy. Detroit's auto makers have spent the last year taking down
their truck and SUV assembly lines while gearing up to make hybrids
and electric cars, even as their cash flow has been ravaged. Their new
investments are based on the expectation that oil will stay high
permanently, but will the market for hybrids exist if oil is $50 a
barrel?
“As Congress plumbs the causes of our current mess, the main one is
hiding in plain sight: Reckless monetary policy that did so much to
create the credit mania and then compounded the felony with a
commodity bubble and run on the dollar whose damage is now becoming
apparent."
The effects of low interest rates and credit contagion are not limited
to "bottom line" considerations. As Marketwatch's Thomas Kostigen
points out, monetary policy can be a death sentence for poor people
across the planet who are invariably its biggest victims:
"The harsh reality of the economic fallout isn't that Joe the plumber
can't buy his business or that people's retirement funds are being
lost or that unemployment is rising; the harsh reality is that people
will die.
“Already, since food prices began to rise 100 million more people have
been pushed into poverty, according to the World Bank, with as many as
two billion on the verge of disaster. Almost half the world's
population, let's remember, live on less than $2.50 per day. Millions
die annually of hunger and starvation, and more than a billion do not
have access to fresh water.
“These numbers are poised to rise dramatically with population growth,
dwindling natural resources and higher consumer prices across all
goods and services. So as the stock market tumbles and the world
economy falters, it's important to remember that it's more than
financial losses we are talking about, it's the loss of life.
And increasingly it isn't just people in far-off places around the
world who are succumbing to such extreme hardships. Note this: Job
losses in the state of Indiana have caused the child poverty rate
there to spike 29 per cent since 2000. The wealth gap in the United
States and around the world is at record levels -- and it has serious
consequences.
The Organization for Economic Cooperation and Development reported
this week that the gap between the rich and the poor is getting bigger
around the world, and that the U.S. is experiencing the biggest
dichotomy.
We are experiencing the largest wealth gap in history. Further erosion
of the economic floor will only send more people plunging into
destitution.
This is why it's so important to fix the economic crisis -- now.
We're all linked." (MarketWatch)
The Bush administration has called for an economic summit to be held
by the 20 largest economies sometime after the presidential elections.
US and EU officials are hoping to stitch together another Bretton
Woods wherein control of the global economic system was delivered to
those same nations. It's likely, however, that the outcome will turn
out considerably different than anticipated. Already, under China's
leadership, 12 Asian nations have agreed to set up an 80-billion-
dollar fund to protect their economies from currency-runs, capital
flight or other financial disruptions. China has the world's largest
reserves at $1.9 trillion followed by Japan at more than $1 trillion.
Clearly the two richest nations will set the agenda and play a central
role in deciding how best to deal with the global recession.
The November summit in Washington could produce some unwelcome
surprises which were hinted at by Thailand's Deputy Prime Minister,
Olarn Chaipravat, who told Bloomberg News:
"The message of this initiative is for China to consider whether or
not China would open up its banking system and allow the strongest
currency in the world, which is the Chinese yuan, to be the rightful
and anointed convertible currency of the world."
Surely, the present financial malaise which has its roots in Wall
Street and at the Federal Reserve, has demonstrated that the dollar
must be replaced as the world's "reserve currency" and that America
must be deposed as the de facto steward of the global economic system.
Leadership implies responsibility and the US must be held to account
for its failings. It's time for a change.
-------------------------------------------------
Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@xxxxxxx
.
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