Venezuela Devalues Its Currency 32%

Adam Taggart
By Adam Taggart on Fri, Feb 8, 2013 - 6:28pm

The currency wars are heating up. 

From Bloomberg:

Venezuela devalued its currency for the fifth time in nine years as ailing President Hugo Chavez seeks to narrow a widening fiscal gap and reduce a shortage of dollars in the economy.

The government will weaken the exchange rate by 32 percent to 6.3 bolivars per dollar, Finance Minister Jorge Giordani told reporters today in Caracas. Companies with operations in Venezuela, including Colgate-Palmolive Co., Avon Products Inc. and MercadoLibre Inc., fell on the announcement.

“Any tackling of the massive economic distortions, even if far more is required, is positively viewed by markets,” Kathryn Rooney Vera, a strategist at Bulltick Capital Markets, said in an interview from Miami. “We expected more and more is indeed needed to correct fiscal imbalances and adjust economic distortions, but this is something and there may be more to come.”A spending spree that almost tripled the fiscal deficit last year helped Chavez, 58, win a third six-term term. The devaluation can help narrow the budget deficit by increasing the amount of bolivars the government receives from oil exports. Chavez ordered the move from Cuba, where he is recovering from a fourth cancer surgery, Giordani said.

This serves as a reminder how devaluations are announced after-the-fact. The average Bolivian's bank account just got 32% poorer this afternoon.

This is why holding at least some gold & silver now -- in advance of a surprise currency devaluation in your home country -- is simply prudent insurance.

26 Comments

Woodman's picture
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how devalue?

How did Venezuela devalue their currency?  Simply an announcement?  Would this not be so simple int he US were we have the dollar as the reserve currency?

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currency devaluation

So it turns out that Venezuela has a nominal peg of its currency to the USD.  By fiat the government dictates the rate, but they don't support it.  Its the same game the FSU practiced - setting an exchange rate de jure that differed greatly from the market exchange rate practiced by actual people.  To enforce this, the government of Venezuela makes it illegal to exchange money at any rate other than that dictated by the government. According to Wiki, its illegal to post the black market exchange rate within Venezuela.

http://en.wikipedia.org/wiki/Venezuelan_bolivar

So when Venezuela devalued, all they did was change the fiat exchange rate.

Note that this differs from a peg enforced by the Central Bank through money printing.  China has such a peg - when the Chinese currency (RMB) strengthens against the buck, the Chinese Central Bank goes onto the market and buys the "excess" dollars with newly printed RMB, thus weakening the RMB vs the dollar.
This is generally inflationary since it puts more RMB into the economy without increasing the number of goods.

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Currency Wars

It helps me to focus on the drivers of any large social or economic movements.  As I'm currently reading Currency Wars by James Rickards, I thought I would quote a passage of the book.

http://www.amazon.com/dp/1591845564

Quote:
Battles in the Pacific, Atlantic and Eurasion theaters of Currency War III have commenced with important sideshows playing out in Brazil, Russia, the Middle East and throughout Asia.  CWIII will not be fought over the fate of the real or the ruble, however; it will be fought over the relative values of the euro, the dollar and the yuan, and this will affect the destinies of the countries that issue them as well as their trading partners.

The world is now entering its third currency war in less than one hundred years.  Whether it ends tragically as in CWI or is managed to a soft landing as in CWII remains to be seen.  What is clear is that - considering the growth since the 1980s of national economies, money printing and leverage through derivatives - this currency war will be truly global and fought on a more massive scale than ever.  Currency War III will include both official and private players.  This expansion in size, geography and participation exponentially increasses the risk of collapse.  Today the risk is not just of devaluation of one currency against another or a rise in the price of gold.  Today the risk is the collapse of the monetary system itself - a loss of confidence in paper currencies and a massive flight to hard assets.  Given these risks of catastrophic failure, Currency Warr III may be the last currency war - or, to paraphrase Woodrow Wilson, the war to end all currency wars.

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Dollar-Bolivar exchange rate

What's interesting about the devaluation is that it only goes a small way toward rationalizing the exchange rate toward what the free market (oops, I mean black market) rate is.  Noting that the new, weaker Bolivar exchange rate is 6.3 to the dollar, read this;    

source:  http://mobile.bloomberg.com/news/2013-02-08/venezuela-devalues-currency-...

Annual inflation accelerated to 22.2 percent in January, the fastest pace in eight months, led by a jump in food prices. Prices climbed 3.3 percent in January after rising 3.5 percent in December.

In the unregulated market, the bolivar weakened 6 percent yesterday to 19.53 bolivars per dollar, according to Lechuga Verde, a website that tracks the rate. Venezuelans use the unregulated credit market because the central bank doesn’t supply enough dollars at the official rates to meet demand.

It is also worth noting that this same thing happened three years ago... so I guess you can't fault the Venezuelans for turning to dollars for their relative stability;

source:  http://www.runtogold.com/2010/01/chavez-evaporates-venezuelan-bolivar-an...

Hugo Chavez, president of Venezuela, started 2010 off by devaluing the Venezuelan bolivar by 50% from 2.15 per dollar from 4.3 per dollar, along with several other silly little limits.

I think that Woodman is right.. it's not possible to simply dictate a devaluation of the reserve currency... what would you devalue it against?  Thinking about this gives us another lens through which to view the Gold and Silver price suppression... the suppression is the banking cabal's way to stave off devaluation of the dollar, the worlds reserve currency, against all things real.  The currency wars are really a sideshow in my opinion.. Yen weakening... Euro strengthening.. blah, blah, blah...  just the meaningless jockeying of infinitely printable fiat currencies against each other.  

The only meaningful barometer is real stuff... especially real stuff that is not renewable...  especially real stuff that is not renewable and has a long and continuing history as money.  My contention is that the true, free market value of Gold is Silver is presently hidden behind a curtain of derivatives, leases, rehypothecation, and unallocated fractionally reserved ETF's and investment accounts that cause investors and entities to believe they own Gold when they really just own an IOU.  My contention is that the true, unmasked value of Gold and Silver is more like Venezuelas black market dollar exchange rate for dollars.. i.e. three times the current pricing, at least.       

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I don't reckon there will be any announcement...

...as the devaluation is already underway (what hasn't gotten more expensive in the last three-four years [that one actually needs]?)...

I suppose if I think about it for a moment, every FOMC meeting ends with an announcement of the devaluation of the US$ these days.  They just weasel words instead of saying it directly.

One man's opinion...

VIVA -- Sager

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Crazy?

Crazy? 

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Woodman wrote: How did

Woodman wrote:

How did Venezuela devalue their currency?  Simply an announcement?  Would this not be so simple int he US were we have the dollar as the reserve currency?

Printed up ~35% more and bought US dollars?

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Dollar Crisis

When the US $ goes into crisis the prop that helps these kinds of countries will be gone.  When was the last time this happened?  Roman Empire? (then the Dark Ages).

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Doug - you stole my thunder -

Doug - you stole my thunder - I'm reading it myself!

Doug wrote:

It helps me to focus on the drivers of any large social or economic movements.  As I'm currently reading Currency Wars by James Rickards, I thought I would quote a passage of the book.

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Tiny bills and Bolivarians

Thanks for this post.  When I was in Venezuela in 1989/1990, during the Carlos Andres Perez presidency, the currency had lost so much value that metallic coins were taken out of circulation and replaced with progressively smaller (in size) bolivar bills that were used as small change.  The smallest bills were about maybe 3 inches by two inches, but they were very colorful.

While the supporters of Chavez, and in a more historic sense, all Venezuelans may consider themselves Bolivarian, the Bolivians probably won't see much of a change in the value of their bank accounts due to this move.

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Another Rickards passage (sorry joemanc)

I think this passage ties together the energy issue, currencies and an old geopolitical nemesis.  Russia keeps popping up in these discussions.  Although it is no longer a superpower (except in nuclear weapons terms) it has not lost its lust for power or taste for devious political shenanigans in reuniting its old SSR states.

Quote:
New Years Day 2009 saw another Russian shutdown of deliveries (NG) to Ukraine.  This time the consequences were more severe, with widespread factory closings in Eastern Europe and unheated homes in the dead of winter.  By January 7 the gas war had escalated and direct Ukrainian supplies were reduced to zero.  But then Ukraine diverted the transit supplies to its own use, and the shortages spread throughout Eastern Europe, seriously affecting Hungary, Poland and other states.  Russia was holding Ukraine hostage, but Ukraine held the rest of Europe hostage to protect itself - a result that might have been foreseen by Russia.  Finally, on January 18, an all-night summit conferrence between Putin and then Ukrainian prime minister Yulia Tymoshenko produced a new pricing plan, and Russia resumed supplies.

It seems unllikely the world has seen the end of the natural gas wars.  Putin has recently suggested that the rest of Europe should help Ukraine with its cash shortages to protect itself from the consequences of future supply disruptions.  This regionalizes the problem and shows how aggressively Russia is willing to use the gas weapon and the currency weapon in combination.

Russia recently released its official "National Security Strategy of the Russian Federation up to 2020," an overview of the global strategic opportunities and challenges confronting Russia.  In Addition to the usual analysis of weapons systems and alliances, the strategy draws the link between energy and national security and considers the global financial cirsis, currency wars, supply chain disruptions and struggles for other natural resources, including water.  The strategy does not rule out the use of military force to resolve any of the finance - or resource-related struggles.

The perfection of Russia's use of the blue fuel weapon arises in the midst of the global financial crisis.  This provides Russia with its own force multiplier - something that amplifies offensive power beyond its normal value.  Russia's cuitoffs of natural gas are devastating at the best of times.  Coming amid a European sovereign debt crisis and housing market collapse, the next gas cutoff could have a catastrophic impact.

Of course, victims of blue fuel warfare have a remedy.  They can turn their backs on NATO, the euro, the dollar and the West, and rejoin the Russian sphere of influence in exchange for secure, dependable and reasonably priced energy.  Russia does not require its new vassals to adopt the totalitarian political systems of the Soviet past.  It only requires that they be dependable allies in geopolitical matters and join a regional ruble currency bloc while maintaining a facade of democracy, as does Russia itself.

Russia also speaks openly of the dethroning of the dollar as the dominant reserve currency.  While the Russian ruble is in no position to replace the dollar in international reserves, it could become a regional reserve and trade currency for Russian and Central Asian gas suppliers and Eastern European gas customers, dislodging the dollar to that extent at least.  For now, it is enough to say that Russia has warned the world of the coming blue fuel wars in both words and deeds.  Energy is a wedge used to forge a regional economic bloc with a regional reserve currency, the ruble.  The dollar will be left out in the cold.

Of course, the increasing ties between Russia and China cannot be ignored in these calculations.  It appears the the USD may lose it reserve currency status to a death by a thousand cuts rather than a lethal strike.

Doug

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Jim

Quote:
I think that Woodman is right.. it's not possible to simply dictate a devaluation of the reserve currency... what would you devalue it against?

All other fiat currencies, particularly the Yuan and the Euro.  This is a tripolar game.  Although, as you suggest, throwing gold or a gold backed currency into the mix, certainly would make things interesting.

Doug

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Currency crosses

My point was that viewing the value of any infinitely printable currency against another is meaningless these days.. it's just a way to keep score of the currency wars.  Case in point is the Swiss Franc, which was getting stronger and stronger based on European flight out of the Euro.  So what did the Swiss do?  They announced a peg of 1.2 Francs per Euro and started printing... building up huge (relative to their GDP) reserves of Euros in the process.  

So, whereas the Franc may have been the canary in the coal mine, a relatively hard currency amongst a sea of nations printing.. they chose instead to join the printfest.  With Gold and Silver so manipulated via derivatives and fractional reserve schemes... what then is the canary?  Well, oil for one.  That's not been getting any cheaper, right?  I would argue as well that Bitcoin is providing a canary.. because the free market has decided over the last year that Bitcoins are increasingly more desirable than dollars;

http://bitcoincharts.com/charts/mtgoxUSD#rg360ztgSzm1g10zm2g25zv

Why Bitcoin is acting the way it is makes perfect sense to me.  See my other recent post on this topic;

http://www.peakprosperity.com/comment/147315#comment-147315

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fiat currencies

Quote:
My point was that viewing the value of any infinitely printable currency against another is meaningless these days.. it's just a way to keep score of the currency wars.

You contradict yourself a bit.  You say that comparing fiat currencies is meaningless, then point out the way that it is very meaningful.  It is a way to keep score.  It is the way to keep score until some better monetary system comes along that is generally accepted.  That will happen some day, but not now.

I plead ignorance of the bitcoin, but unless I'm mistaken, it does not make up a significant portion of any country's currency.  It may be a terrific idea for the future, but the currency wars are being conducted with fiat currencies and they might bring down the world's most important fiat currencies, or at least reshuffle the deck.

I don't mean to be argumentative.  You're a very bright guy and I learn a lot from your posts.  To me its a little like getting interested in Arthur's notions of saving humanity by moving to space.  It isn't today's reality.  That's what we have to live with.

Doug

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Thank you Doug

for your comment...  I can see that I am not making my point clearly.  What I am saying is very simple:  If all currencies inflate together.. or at slightly differing rates such that there is this "currency war jockeying" going on.. then you will miss the real inflation entirely, or at least for the most part.  Gold and Silver are manipulated precisely so that you cannot see this process by which all fiat currencies are inflating against real things... so that you will keep your eye on the magician's left hand.. where he wants it to be, vs. the hand that is palming the card.  The inflation is being masked short term in many ways, most of them unsustainable; labor's share of corporate profits going down (financial sector profits as a share of GDP back up to all time highs), package sizes going down, lower quality raw materials going into foods (read articles about horse meat in European hamburger), etc, etc.  The last resource left to exploit by the monetary elite is the middle class.. and we are being strip mined right now - but you won't see this happening in the dollar:Euro cross, or the Euro: yen cross.  That is my point.  Currency crosses are simply the result of short term manipulations, and contain very little information of real importance.. if you keep your eye on them, as the governments would like, you will boil slowly;

"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens...and while the process impoverishes many, it actually enriches some.... The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose." --John Maynard Keynes (1883-1946) From "Economic Consequences of the Peace" 1920

If there is one currency to watch, it is the dollar.. because we have the reserve status to lose.  This is ongoing, as you have commented on yourself.  The big news of recent is that China is now the biggest export economy in the world;

  http://www.alt-market.com/articles/1329-this-is-it-china-surpasses-us-as...

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When populations finally realize they are being boiled....

This is what happens.. expect the same type of stampede on coin stores in the US someday soon.. and on our grocery stores thereafter;

http://www.youtube.com/watch?feature=player_embedded&v=_Kp-kUHdJ00

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On Bitcoin...

I should have taken more time to respond to Doug's point that Bitcoin is not part of any countries reserves.. indeed, it never would be.  Bitcoin is free market.. it is not the product of any country, and no central bank would acknowledge its existence in this way.  That does not mean it isn't real.. quite the opposite..  I am saying that it is presently the most pure expression available of what the free market has to say about the relative value of other currencies.  Because all of the commodity markets are subject to various forms of manipulation, including things like release of US strategic petroleum reserves... and the aforementioned Gold and Silver price suppression... how does one know that we are being boiled?  What unadultered signal exists?  I suggest Bitcoin is a one such signal. 

  To go deeper... Bitcoin is NOT fiat currency.  The meaning of Fiat is that a government forces you to use the currency.. you have to pay your taxes in the form of the currency, hence you must use it.  Bitcoin is forced on no one... its value relative to anything else.. a dollar (see current price at MtGox.com) , or a pizza, or a month of Wordpress usage (http://en.blog.wordpress.com/2012/11/15/pay-another-way-bitcoin/) is dictated by that anachronism called the free market.   

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Jim H wrote: This is what

Jim H wrote:

This is what happens.. expect the same type of stampede on coin stores in the US someday soon.. and on our grocery stores thereafter;

http://www.youtube.com/watch?feature=player_embedded&v=_Kp-kUHdJ00

Jim,

A friend and I were just discussing the issue of what will happen when there is a food supply crunch.  He had gone to all the local stores and was unable to find any ammunition of certain kinds.  No .223, which isn't surprising.  However, the complete absence of 22 long rifle shells took us a bit by surprise, even though someone had posted an article online just a couple of days ago about a 22 LR shortage.  He did find reasonably priced .30-30 shells though.   I've seen ugliness in gas lines and even at holiday retail store sales.  Goodness knows what people will act like when their bellies are empty.  

It does continue to amaze me how few understand the importance of PMs or other simple preparations.  I can understand those with less money storing water, food, and other supplies first.  That only makes sense.  But these same folks who don't have PMs also generally don't have any water stored, no food stored, no water filtration or purification system, no alternative sources of water and food, no alternative form of generating electricity and heat, no fuel stored, etc. 

What will it take to wake them up, BEFORE crisis time?

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But, but...

But, but.... if a lot of people "wake up," that dynamic by itself will initiate the crisis/collapse, won't it?  The mathematics of our situation (that is of the 3 E's) is already passed the tipping point.  Even in the absence of an EVENT that initiates a crisis/collapse, a critical mass of people who understand the situation and accept it (ending their denial) will itself be enough to initiate the crisis/collapse.  In fact, it might be said that THE EVENT that initiates the next crisis will be nothing more than a pinprick which bursts through the denial of large numbers of people.  In the meantime, the 1% "stripmine" the public and we make our preparations for survival.  I keep hoping the 1% keep 90% of their wealth in stocks and bonds.  

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thc0655

I love your posts BTW, and the fact that we have a LEO amongst us here (as you made clear in a recent PP post - I hope you don't mind my repeating it).  Anyway, your comment above about the 1% made me recall a recent post by Mike Krieger that I found insightful, entitled, "The Stock Market:  Food Stamps for the 1%";

http://libertyblitzkrieg.com/2013/01/31/the-stock-market-food-stamps-for...

"More than any other group, the 1% has been convinced that the stock market represents some sort of leading indicator of wealth and prosperity.  Nothing could be further from the truth.  Sure, the stock market can function as such an indicator.  It is such an indicator when the rising stock market reflects a dynamic, capitalist economy where new industries and companies are rising to the top and improving standards of living for the populace.  It represents the opposite indicator when it merely reflects the ownership interests of the oligarchs in a crony-capitalist, fascist economy that is picking away at the dying carcass of what little economic freedom still remains.  This is what a rising stock market actually represents today.  When people look at it they should understand it is merely a measure of the oligarchs getting wealthier and more powerful and you becoming more of a debt slave.  It represents their interests in multinational corporations with record profit margins because they refuse to pay their employees a living wage.  A rising stock market today is actually a leading indicator of the destruction of the middle class, cultural destitution and a society in collapse."

Amen. 

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karma will not be denied

thc0655 wrote:

I keep hoping the 1% keep 90% of their wealth in stocks and bonds.  

LOL.  I've often thought the same.  Problem is, even if they lost 90% of their wealth, most of them would still be pretty well off. 

The CEOs of United Healthcare are particularly egregious examples of these types of sociopaths.  Stephen Hemsley is the present one.  He has something like three-quarters of a billion in unexercised stock options and makes a 7 to 8 figure annual salary but that's not enough.  He still presides over a company that does things like delaying and denying payment on terminally ill people until the people expire.  They extract every penny possible out of patients and providers while advertising in the media how much they care about the people they insure.  What a load of bunk and what sorry excuses for human beings! 

But they do have to live someplace. Protests were held on the roadside outside of his house but he got the local government to chase the protestors away on the basis of trespassing.  Now though, they're protesting on the ice on the lake that his house is on, lol.

Quite frankly, it warms my heart to know that his picturesque view is sullied by the presence of justifiably outraged off people and their signs.  

If we would universally deny any kinds of service to these people, things would change fast.  No housekeeping or maid service, no cook, no chaffeur, no lawn care, no home repairs, no plumbing repairs, no care repairs, no health care, no meals served in restaurants, nothing.  Then let them see how much their greed benefits them.  But as Jim Sinclair has talked about recently and as history has shown time and time again, their day of reckoning will come.  As ye sow, so shall ye reap ... otherwise known as being bit in the butt by karma. 

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Russia...again

Funny how Russia keeps coming up in these conversations.  Perhaps we should pay attention.

http://www.zerohedge.com/news/2013-02-10/russia-flips-petrodollar-its-head-exporting-crude-buying-record-gold

Quote:

Putin Turns Black Gold Into Bullion as Russia Out-Buys World

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

Although Russia may be first in adding gold to their reserves, I believe China is importing quite a bit more gold and holding on to the gold they produce as the world's largest producer.

Quote:

Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world, said Marcus Grubb, head of investment research at the World Gold Council. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons,

The article also mentions that developed world nations are selling their gold, but I don't think that is any longer true.  Many were selling when gold was at its low point around 2000, but I believe I read they have been holding onto it in more recent years.  Although, I don't think they're buying.  That would be contrary to their price suppression schemes.

Doug

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Wealthcare.

Ao wrote: As ye sow, so shall ye reap ... otherwise known as being bit in the butt by karma.

LOL! Nice picture!

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Doug, you may want to look at Russia in a different way....

I know you look at them as our enemy.  But maybe, they're really our only hope.

Russia and China are the only Strong Powers that are left to fight the Western Banking Cartel.  Putin himself has talked about how the Western Banking Families are his enemies, and he will not allow them to persue their power in his country.  China is trying to do the same!

The Cartel cannot be defeated without the help of these two countries.  Keep that in mind.

Doug wrote:

Funny how Russia keeps coming up in these conversations.  Perhaps we should pay attention.

http://www.zerohedge.com/news/2013-02-10/russia-flips-petrodollar-its-head-exporting-crude-buying-record-gold

Quote:

Putin Turns Black Gold Into Bullion as Russia Out-Buys World

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

Although Russia may be first in adding gold to their reserves, I believe China is importing quite a bit more gold and holding on to the gold they produce as the world's largest producer.

Quote:

Quantitative easing by major economies to support financial asset prices is driving demand for gold in the emerging world, said Marcus Grubb, head of investment research at the World Gold Council. Before the crisis, central banks were net sellers of 400 to 500 tons a year. Now, led by Russia and China, they’re net buyers by about 450 tons,

The article also mentions that developed world nations are selling their gold, but I don't think that is any longer true.  Many were selling when gold was at its low point around 2000, but I believe I read they have been holding onto it in more recent years.  Although, I don't think they're buying.  That would be contrary to their price suppression schemes.

Doug

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Thanks Logansrun

I don't view Russia as our enemy, just another power bloc in the ongoing currency wars.  They play their role skillfully, along with China, as cultures that are long acquainted with Machiavellian manipulation.  I agree with you that they are probably our best hope of destroying the western banking cartel, unless we as supposed democracies are able to do it ourselves.  I am not optimistic on that score, but it seems to me we are confronted with two distinct possibilities.  One, we are able to bring about enough political pressure to meaningful reform and break up the big banks as well as monetary system, or two, the east will do it by destroying western currencies.  IMHO, the former is preferable.

Doug

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What currency war?

Just as we are wrapping our heads around the idea of an ongoing currency war, this analysis comes along that agrees with much of what we agree to on this site, but finds that these currency devaluations are controlled and agreed upon by tptb:

http://www.ritholtz.com/blog/2013/02/locked-and-loaded/

Quote:

Currency War – Theory & Practice

All seem to agree now that global monetary authorities are fully engaged in trying to protect their currencies from relative appreciation. The fundamental question remains: is there a growing likelihood of a messy sovereign “currency war” in which monetary authorities compete to beggar their neighbors or are treasury ministries (in fact, central banks) collaborating with one another to devalue their respective currencies in a sequentially, but orderly fashion? By identifying the answer we should gain insight into the nature and timing of significant changes in economic output and market valuations.

We do not think current whack-a-mole currency devaluations imply a belligerent currency war, now or in the future. Let’s follow incentives. Who does a cheap currency ultimately benefit? It theoretically helps indebted governments fund themselves with foreign investment from entities with stronger currencies, and it benefits cheap currency-based exporters deliver cheaper goods and services than exporters that report earnings in domiciles with stronger currencies. On the first score, most indebted sovereigns have come to rely predominantly on their central banks for funding (i.e., QE), rather than foreign funding.

Regarding global exporters, most have set up foreign manufacturing capabilities where their products are consumed, better matching costs with revenues. Further, swap markets and trade receivables allow exporters to adequately manage their currency exposures. Everyone knows the enormity of the swaps market and it has recently come to light that trade receivables have become the largest credit market in the world (see graphic on following page). At $17 trillion, it is larger than the mortgage and corporate markets. That exporters must report earnings in their native currency by converting all margins back is a direct problem for corporate treasurers and their shareholders, not domestic employees (at least directly), which means strong currencies are not directly a problem for politicians.

For these markets to break down, the banking system would have to break down, which leads us to our final point about the potential for a global currency war. Modern currencies are created by banks and their central banks – not by governments or by domestic exporters that would benefit from cheaper currencies. This suggests a trade war is not a decision for politicians or exporters to make. Ultimately, SIFI banks control the game.

When push comes to shove, the primary mission of central banks is to keep their banking systems solvent in times of stress. (Should this effort be claimed to support economic objectives like price stability or full employment, all the better.)
A monetary food fight would risk the demise of a major currency, which, with today’s cross-levered, cross-funded bank balance sheets, would further suggest mutually-assured global bank system destruction. As bank deposits are now highly concentrated within very large SIFI banks, one major global bank failure anywhere in the world arising from one economy “winning” a currency race to the bottom would impact all global banks and, by extension, the broad perception of bank failures.When push comes to shove, the primary mission of central banks is to keep their banking systems solvent in times of stress. (Should this effort be claimed to support economic objectives like price stability or full employment, all the better.)

SIFI banks are the controlling shareholders of the most influential central banks. Central bankers controlling over 75% of global GDP, in turn, gather every two months at the BIS in Basel, Switzerland to discuss and coordinate policies. We think this implies a continuation of managed, discrete currency takedowns. Beggar-thy-neighbor attitudes and rhetoric among sovereign politicos may spring up from time to time but we do not expect such attitudes in the global banking system, where it counts.

Share prices of the world’s largest banks are lagging the general market even though their revenues and earnings are soaring. Some argue the market fears that one day central banks will reverse their loose monetary conditions, in turn decreasing bank net interest margins. We do not think narrowing loan margins is a valid reason to be concerned. The cash flows of most large banks are almost certainly hedged against higher market rates, if not with each other than with their central banks. The real problem, as we see it, would be the value of their loan books, which would decline materially were rates to rise coincident with a decreasing appetite for new bank assets (loans). This fear, in itself, provides the fundamental reason not to be concerned that central banks will withdraw from the markets, letting interest rates rise, before adequately reserving SIFI banks. We expect no interest rate surprises.

So by our way of thinking there is very little risk of a belligerent global currency war. This is not to say we think central banks will stop methodically cheapening their currencies. They must continue to satisfy their principal aim of de-levering bank balance sheets to maintain bank loan book valuations. Consistent with domestic optics central banks will continue to destroy their currencies in a coordinated fashion that avoids “a global currency event.”

From a trading perspective, we speculate it is wise to play reversals at extremes of cross-rate FX ranges. The risk of major currencies breaching well-established ranges seems remote as long as major central banks work together to preserve their currency oligopoly. In light of this theory, consider the significant bounce of the EURUSD since July 2012, from 1.21 to 1.35, against almost universal sentiment believing it would see parity to the USD. Should FX traders now apply this theory to the universally accepted demise of JPYUSD?

I guess the question remains whether these "controlled" devaluations can stay controlled.

Doug

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