Beginning of the end for King Dollar?

As markets keep tumbling around the world – including the US - it is becoming clear that the picture of the US economy being painted by the media as “robust”, is in reality something different: it  is not “robust” at all but just a house of cards that was propped up by the massive intervention by the Federal Reserve injecting vast amounts of money created out of thin air, and the massive spending and construction boom led by China which brought the so-called myth of economic recovery in which everybody reveled.

But as with all the good things that come to end, the Chinese economic miracle has run out of gas and is sputtering.

Investors are pulling out their money from the Chinese markets. Chinese government is selling US paper (i.e. bonds) to inject foreign currency into the market to prop up the Yuan.

China Sells U.S. Treasuries to Support Yuan …… The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt – according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts. The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought Yuan to stabilize the currency. …….

China seems to have no other alternative.  Here is what I wrote in earlier article:

The number one factor that is causing the turmoil in the market is China which acted as a savior of the world economy in 2008. By implementing a massive stimulus package, China fueled a massive construction boom pulling all the sectors of the economy with it – ranging from commodities to other resources. But now the Chinese economy has hit a bump and slowing down. Its economic growth this year is going to be below 7 percent. Given the totalitarian nature of the Chinese media, one can safely assume that the growth would be much lower than that. And, that is a scary scenario to assume. In order to stimulate its economy and flagging export sector, China has devalued currency which has sent shock waves throughout the world. By devaluing Yuan, China has effectively started a currency war.

China does not seem to have any more leverage on the markets and its policy of cutting rates won’t be of much help either. If it cuts the rates then Forex would still flee the Chinese market as there would no point in holding Yuan – cheap and diminished in value. But if it raises the interest rates, then its export sector gets hammered as the cost of Chinese produced goods will be expensive compared with other competitors – an outcome, I am sure, President Xi would not tolerate.

China’s policy of fueling massive growth by injecting tremendous amount of liquidity seems to have run its course. Its market will keep see-sawing keeping the world economy on pins and needles.

But what truly matters – and is the most important – for the global economy is this: Federal Reserve’s decision regarding rate hike.

Fed’s talk of rate hike has caused major problems among the emerging market economies as it has sucked Forex out of these markets.

We will not discuss what are the effects of flight of Forex from emerging market economies but focus solely on Fed’s Shakespearean dilemma: To raise or not to raise.

This is what I mentioned in my earlier article regarding Fed’s rate hike dilemma.

…… Last, and perhaps the most important, factor is the dithering by US Federal Reserve regarding the interest rate hike. Many investors are nervous over the ambiguity shown by Federal Reserve and are fleeing the market in droves for the safe haven assets like Swiss treasuries, gold etc. Investors, who were hoping for strong dollar and had invested in it, are becoming aware that the Federal Reserve is not going to increase interest rates – despite the constant talk of carrying out a rate hike – as they do not want to pressure the economies of its trading partners. In addition, the stronger dollar would also kill US exports as they become uncompetitive. The Federal Reserve is thus caught in a bind. If it raises interest rates, then saving cash in a bank would be an attractive proposition. In that case, stocks would suffer. It would also create tighter credit condition – another damper on the corporations. On the other hand, if it does not raise interest rates, then there would be no point in investing in dollar which would simply spark a flight into safe haven like Swiss treasuries, gold etc. Stocks would again get hammered. The Federal Reserve is thus caught between a rock and a hard place. And, there is nowhere else to go. ……..

Feds are trying to justify the rate hike by pointing to growing economy, improving job market and falling unemployment rate.

Even though Friday’s job numbers were dismal – employers added only 173,000 jobs vs. the expectation of 218,000 jobs – unemployment rate still fell to 5.1%, inching closer to the mark where economy can be said to be humming with full employment.

And, here is the funny part. Optimal unemployment rate ranging between 4 to 5% is considered good as it signifies economy operating with full employment.

If that is the case, then what about the astounding number of 94 million Americans who are unemployed and cannot find jobs as there are no good jobs left? The jobs that are getting created are in health, hospitality industry and most of them are part time jobs. Also, what about those who are unemployed for a longer amount of time – more than six months – and cannot find jobs and have fallen out of statistics?

Something about the BLS statistics – its falling unemployment rate but dismal job creation number – just does not smell right.

But it is this statistics – absolutely disappointing – the Feds are relying upon to justify the rate hike. They seem to be oblivious to the fact that raising the rates would severely restrict the credit market thereby impacting the corporate sector and eventually the export sector.

Low oil prices have already devastated shale oil industry and caused numerous job losses. The tightening credit would also devastate real estate market. I am sure Federal Reserve is aware of all this but are still insisting on rate hike.

Even Alan Greenspan, former Federal Reserve Chairman who is intimately familiar with bubbles – Dotcom and Sub-prime mortgage bubbles,  and which blew up spectacularly with the latter almost bringing down the world financial system in 2008 – is baffled by the Fed’s incessant talk of rate hike.

With China and Russia dumping the treasuries at record pace, the pressure seems to be mounting on the Feds to make them more attractive and hence the rush to raise the rates citing all sorts of questionable statistics.

The dollar, the reserve currency of the world – and exactly this excuse utilized by US Justice Department to meddle in the sovereign affairs of other countries – thus seems to be getting unattractive day by day.

And, President Putin - along with President Xi – seem to be doing everything he can to make it completely unattractive and fully dethrone it.

Here is RT……

Putin says dump the dollar Russian President Vladimir Putin has drafted a bill that aims to eliminate the US dollar and the Euro from trade between CIS countries. This means the creation of a single financial market between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries of the former Soviet Union. “This would help expand the use of national currencies in foreign trade payments and financial services and thus create preconditions for greater liquidity of domestic currency markets”, said a statement from Kremlin. Today, some 50 percent of turnover in the EEU is in dollars and Euro, which increases the dependence of the union on countries issuing those currencies. Outside the CIS and EEU, Russia and China have been trying to curtail the dollar’s dominance as well. In August, China's central bank put the Russian Ruble into circulation in Suifenhe City, Heilongjiang Province, launching a pilot two-currency (Ruble and Yuan) program. The Ruble was introduced in place of the US dollar. In 2014, the Russian Central Bank and the People’s Bank of China signed a three-year currency swap agreement, worth 150 billion Yuan (around $23.5 billion), thus boosting financial cooperation between the two countries. …….

The currency swap agreement that Russia has signed with China, its oil and gas deals totaling $400 billion to be transacted in Yuan and Ruble, the bilateral trade agreements that Russia and china are signing with other countries bypassing dollar, the AIIB, the BRICS bank etc., all seem to be pointing to only one conclusion: that the King Dollar is on the verge of getting dethroned.

And, in its place we are witnessing the rise of a new reserve currency and the new global financial structure based on the principles of Multipolarity, Equality and – most important – the respect for the sovereignties of various nations and the rule of international law; unlike the current and old repressive system based on World Bank and IMF designed to perpetuate the oppressive neo-colonialist hegemony of US-UK Anglo-axis and its predatory capitalist policies.

Even Japan also seems to getting in the game of bilateral currency swap.

Japan Bank: US Sanctions Could Lead to Direct Ruble-Yen Swaps VLADIVOSTOK (Sputnik) – Japan Bank for International Cooperation (JBIC) is turning to currency swaps as using the US dollar in transactions is difficult because of the Western anti-Russia sanctions, the bank’s senior managing director said answering a question from Sputnik. "We’re now studying that [the effects of Ruble devaluation]. We need some of the swap arrangements with the local banks. We are elaborating opportunities with Russian banks such as Gazprombank, VTB, VEB… Because of the US sanctions, we cannot use the US dollar anymore, we have to switch to other currencies," Tadashi Maeda said on Thursday, speaking after a conference at the Eastern Economic Forum (EEF) in the Russian city of Vladivostok. …….

This brings me to the conclusion that I wrote in my earlier article.

Does that mean, Federal Reserve has thrown in a towel and are preparing for the global crisis? I don’t know and – I hope – I am wrong to draw this conclusion, but the ambiguity certainly seems to be pointing in that direction. All the talk of suspense is just to try to keep the current chaos from descending into uncontrolled frenzy. As a matter of interest - think about it - if there is a flight out of dollar as they are no longer attractive, does that mean we are seeing a slow death of petro-dollar? All the bilateral agreements happening between nations bypassing dollar also seem to be pointing in that direction.

Dark clouds certainly seem to be gathering on the empire of King Dollar. The months of September and October are turning out to be crucial. The market chaos could decide whether the King Dollar remains atop the perch or gets dethroned by way of great economic reset.