Reserve currency status

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Doug
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Reserve currency status

Until very recently I viewed the USD to be THE reserve currency.  Turns out I was badly mistaken despite a few years of nearly obsessive attention to economic matters.  I assume, perhaps wrongly, that others might share my misunderstanding.  So, I thought I'd share this:

http://www.marketwatch.com/story/aussie-canada-dollars-termed-reserve-currencies-2012-11-19?siteid=bnbh

Quote:

By David Marsh, MarketWatch

LONDON (MarketWatch) — The Australian and Canadian dollars, the world’s leading commodity-rich currencies, are being formally classified as official reserve assets by the International Monetary Fund, marking the onset of a multi-currency reserve system and a new era in world money.

In a seemingly innocuous yet highly portentous move, the IMF is asking member countries from next year to include the Australian /quotes/zigman/4867876/sampled AUDUSD +0.11% and Canadian dollars /quotes/zigman/4867882/sampled USDCAD -0.09% in statistics supplied by reserve-holding nations on the make-up of their central banks’ foreign exchange reserves. The technical-sounding measure, reflecting growing diversification of the world’s $10.5 trillion of reserves, is likely over time to exert wide-ranging impact on world bond and equity markets.


Reuters

A man walks past an advertisement depicting an altered Australian five dollar note.

Expanding by two the list of officially recognized reserve assets from the present five — the dollar, euro, sterling, yen and Swiss franc — signals a new phase in the development of reserve money. For most of the past 150 years, the world has had just two reserve currencies, with sterling in the lead until the First World War, and the dollar taking over as the prime asset during the past 100 years.

Sterling — although still the world’s third reserve currency on IMF figures, just ahead of the yen — has been in relative decline since the Second World War. The birth of the euro in 1999 has turned the European single currency into the world’s No. 2 reserve unit, but it is now officially accepted that the dollar and the euro share their role with smaller currencies.

Enshrining in official thinking a development already evident among reserve managers and on private markets, in a sense, does no more than catch up with reality. However, the IMF step has both practical and symbolic importance and will likely promote further asset diversification among official and private asset managers.

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The popularity among central banks of the Australian and Canadian dollars, which have been relatively strong even against the firm U.S. dollar during the past few years, reflect their stable economic growth and intact banking systems since the financial crisis, as well as the influence of Australian and Canadian commodity resources. On informal estimates, worldwide official foreign-exchange holdings in each of the two currencies probably are around $60 billion.

The Chinese renminbi, the Korean won and the Singapore dollar are being held by a relatively small number of central banks. There are no Asian currencies (apart from the yen) on the new IMF list, reflecting their still very low use as official assets.

The renminbi has attracted widespread attention as a possible future reverse currency. But it’s still some years away from attaining that status, primarily because it is not fully convertible. Although held in appreciable quantities by 10 to 15 central banks around the world, the Chinese money lags as a reserve currency behind not just the Australian and Canadian units but also some Scandinavian currencies.

People’s Bank of China Gov. Zhou Xiaochuan said at the weekend: “For the central bank, the next movement related to the yuan [renminbi] is going to be reform of convertibility … We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation.”

Zhou, who will have completed 10 years at the central bank next month, is widely expected to retire shortly. The focus will be on how much scope the Chinese Communist leadership gives his successor to pursue further financial liberalization.

The reserve data revamp forms part of a wide-ranging effort by the IMF, working closely with the Group of 20 leading economies and the Basel-based Financial Stability Board, to expand and deepen its overall statistical coverage of the world economy.

Recognizing that insufficient warning was given of the 2007-08 financial eruption, the IMF and its members say that statistics on different components of countries’ asset and liabilities and general cross-border financial linkages can provide valuable early indications of economic perturbation.

Extending the scope of the IMF’s so-called COFER data base — standing for “composition of foreign exchange reserves” — marks the culmination of 18 months of highly sensitive preparations, reflecting the secrecy with which some leading countries habitually cloak their foreign-exchange holdings. The IMF has pledged to continue to maintain total confidentiality on the composition of individual countries’ reserves, even though many previously publicity-shy countries including Switzerland, the U.K. and Russia are now giving details.

Since COFER was started in 1995, world foreign-exchange reserves have risen more than sevenfold, from $1.4 trillion to $10.5 trillion by the second quarter of 2012, mainly reflecting increased holdings by emerging market and other economies in Asia.

The importance of the dollar has diminished, from a peak of 71.5% of declared reserves in 2001 to just under 62% by 2012. Outside the five standard reserve currencies, the importance of “other” currencies has risen, from a low of 1.3% in 2001 to 5.3% by end-June 2012, amounting to $310 billion.

Acknowledging that the COFER data base only inadequately captures currency diversification, the IMF contacted a total of 191 countries over the past year to try to refashion its statistical coverage, including important reserve-holders led by China, which do not report their currency breakdowns to the IMF. Of this total, 63 took part in a subsequent survey. Along with the five main reserve currencies, the survey revealed the identities of 10 other currencies among reserve holdings, of which the Australian and Canadian units are by far the most important.

The IMF’s attempts to persuade a significant number of COFER non-reporters such as China to open up on their currency composition have failed for the time being. So-called unallocated reserves held by more than 40 countries, where holders do not provide individual currency composition, amounted to $4.7 trillion, 44.5% of the total, as of June 2012. At present, the IMF does not reveal the names of countries that report under COFER, but this may change in future.

China believes that giving data to COFER would breach secrecy over the composition of its foreign-exchange holdings and, crucially, how its preferences change over time.

However, partly lifting the veil over Chinese holdings (which now total $3 trillion), the China Securities Journal, an official publication, reported in 2010 that 65% of China’s reserves were in dollars, 26% in euro, 5% in sterling and 3% in yen. Since then, observers have expected the Chinese may go further in increasing transparency — although this has yet to happen.

The Reserve Bank of Australia has already provided insights in holdings of the Australian dollar. It has published data based on a survey of central banks. which show 15 of them definitely holding Australian dollars, with another eight possibly doing so.

Some countries — such as Finland, Brazil and Switzerland — provide information on their own Australian dollar holdings. Based on the Reserve Bank of Australia data, definitive official holdings of Australian dollars are slightly less than $40 billion. Including other countries that hold Australian dollars (such as Malaysia and Hong Kong), but don’t give a breakdown, total central bank Australian dollar holdings may be around $60 billion. Reserve holdings of Canadian dollars may be of a similar order of magnitude.

Perhaps this loss of status is just another sign of the US decline in world status, but it strikes me as significant as we are likely to continue to lose reserve status gradually rather than falling off (another) cliff.

Doug

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Thanks Doug

For bringing this topic back in to view.. this is one of the very important concepts that I believe everyone should get a grasp of in order to comprehend the bigger picture of what's upon us.  I think to some degree you may be conflating the ideas of reserve currency vs. what are acceptable as reserves for CB holdings. Indeed.. along with the other currencies mentioned in your article, Gold is getting more recognition as an acceptable reserve asst;

The most significant change is moving gold from its tier 3 status to tier 1 capital as 100% loan-backing reserves, the same as cash and bonds. For the first time in 42 years, gold is being brought back into our financial system as money. All the world's banks are now storing this metal, not as some 3rd rate "asset," but as all the world's working capital - its money.

source:  http://seekingalpha.com/article/1016161-basel-iii-and-gold

With regard to the US "petro" dollar and it's continuing role as the world's reserve currency, the cracks we have all been monitoring are in fact growing bigger.  John Rubino did an excellent job of quantifying this loss of status in a recent article where he quoted the degree to which other reserves have supplanted US dollars as a fraction of overall CB reserve assets (to your point, and in agreement with your interpretation);

The importance of the dollar has diminished, from a peak of 71.5% of declared reserves in 2001 to just under 62% by 2012. Outside the five standard reserve currencies, the importance of “other” currencies has risen, from a low of 1.3% in 2001 to 5.3% by end-June 2012, amounting to $310 billion.

http://dollarcollapse.com/currency-war-2/welcome-to-the-currency-war-par...

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Jim

I know that gold is held by CBs as a reserve asset, but given the secrecy of such holdings it is difficult to get a handle on the proportion of the metal to currencies.  The one CB that most occupies my mind lately is China.  Although I haven't seen any authoritative numbers, it seems that China is buying gold at all levels as fast as they can, while at the same time have stopped buying US debt.

If that appearance is accurate I would think the degradation of the USD as a reserve currency might become more of a plummet than a glide.  Or, does the sheer size of the US economy keep the USD elevated as a reserve asset beyond when it would otherwise fail?  And, of course, this all plays into the status of the USD as a safe haven asset, where it still seems to have considerable strength.

This article seems particularly relevant to the above questions:

http://www.zerohedge.com/news/2012-11-28/how-do-chinese-view-gold-market

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Trends, with tipping point ahead...

I agree that you are pointing out the important and relevant trends, especially regarding China.  And your point is very well taken regarding Gold.. and you may have seen that none other than Eric Sprott is starting to make more noise about the idea that Western central banks must have been, and may continue to dishorde Gold, probably via leasing, in order to keep the price down.  The USD may very well still be a safe haven asset in the eyes of some.. but I believe this will change in the years ahead, and that this wave of repatriating paper and credit dollars will be the final straw that ignites very strong inflation. I am notoriously poor at timing....

Another very recent piece on this topic;

http://www.financialsense.com/contributors/john-butler/curse-reserve-cur...

Also, if you did not see this... it's a fascinating view of our dimished and dimishing role in the context of Global GDP;

http://www.zerohedge.com/news/2012-11-28/cost-kidding-yourself

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Doug and Jim I hope you don't mind if I jump in...

Most here should know that I just do what Chris and Adam suggests, and this was done only after really looking at the other point of view. We all have done this I suppose and is why we are so supportive of the Crash Course and Chris's and Adam's essays as they appear. So from here to there and this is to imply Oil Petro Dollars to Gold Dollars or a basket will include Gold and Oil as well for they will be the dominant Money commodity within the fiat system. Oil moves markets and drains cash from circulating.  

I like very much Charles H. Smith because I feel I see a serious contraction as I believe this must occur before High Inflation/Hyperinflation (Chris said when asked:"Deflation/Inflation, Yes"), and a new basket of currency is developed, and this implies to me that the Dollar will get stronger first, Debt will be destroyed by default, and then a new currency is established (a big maybe in the next 10 years?). The United States will still be at the head of the table no matter what happens, and I am comfortable saying this. We are still and most likely will be the single greatest economy in the world. China today doesn't make me all that concerned that they will be the economy that the world turns too as they have their own problems. Japan (yen), Euro, I don't think so. As I understand the Triffin Parodox, who the hell wants it? 

Psychologically it is hard for the human race as a whole to be adoptive to a new system that is understood, and move to one they are unfamiliar with. Europe tried to be a great currency, and what a mess that is and will still become. That is fresh to all mind sets now, and will absolutely be a serious reason to keep the U.S. as reserve currency by default, and at the very least a flight to safety for a good while yet are my conclusions. 

In saying this, I believe Chris and Adam (partners and why I use both now where appropriate) represent a seriously sound pathway to a future yet unknown, and is why I hold physical Gold as my savings account/insurance, and add to it quarterly as a percentage of savings accumulated. I play Oil because it is the base commodity for all things made. Oil is the most important energy source, it is the world economy ($100 dollar Oil and a Recession will follow...$70 dollar Oil and we have a nice rebound), and so I own or short it as the world economy is dependent on it for everything.

Here is an older article I have as part of my Chris Martenson file that I keep on my desk top file. It is not written by Chris but it was a nice read and only added to my simple strategy and knowledge base.The whole series I thought is easily understood by everyone.

The only questions I have with regards to high Inflation or Hyperinflation, and it gnaws at me, is how are we going to pay down Debt with lower wages and shorter hours. How are we going to pay down Debt if welfare is on the rise, and more and more Folks get Disability payments for a headache (how do you treat a head problem and is a reason Disability is awarded). How are we going to pay down Debt by taxing the middle class to pay the non-working classes benefits, and the middle class has less and less discretionary spending as they take care of those who do not work because of job loss or some play the system as they can do better sitting home than work? It is quite profitable to not work at all and free load is the rational. 

The stress on the system must mean destruction of Debt through Bankruptcy and Default are just a natural progression as the strains become to much to manage, and the public finally give in to a very easy solution and that is to legally get rid of all Debt for no pain at all, and it's cheap to bankrupt. Rationalizing that the Banks would never lend to them anyways because banks aren't lending to them. Isn't that the only reason the consumer pays their Debt anyways for credit to buy homes and big ticket items? We have to have high scores on the 3 credit bureaus, right? This economy is headed for years of bad times, and it would be easier to re-establish credit with no debt, you bankrupted it. I just imagine this to be a ticking time bomb, and if they allow school loan bankruptcy then Kaboom!, as student loans have recently hit there high of 90 days past due just recently as a percentage of those delinquent. That's a potential Trillion dollar Kaboom Folks! 

So many questions that it is hard to truly get a grip.

We need jobs, and I see the Walmart model as how we'll get them too. The jobs numbers will look better (Politicians will love this, so will the Fed) but wages and benefits will go lower so how will that help our economy?  Oil will just stay so much higher as Supply-Demand has to get tighter as more people go to work but pay higher oil prices to get there as more drive to work. That's a terrific way to preserve our greatest resource! Sheesh.

We need a reset and everything crash so the narrative can get seriously focussed. So that the politicians and public starts to understand the seriousness of where we are at, and then negotiate for something rather than nothing. Only then can we build out our Transportation and Electrical system with cheaper labor that can afford cheaper housing, and everything else. Then we need to manage Oil before Oil manages us, as it is doing as we speak. Entitlements take a huge hit but with the reset everything takes a hit. It's the only way to change the narrative are my thoughts, and keep the social fabric together by making it a National objective, a mandate for us to provide for a future that will get better as we turn to the next best BTU, and hopefully we use everything so that we are not so dependent on just one. OIL! Gregor does a terrific job with all his essays expressing our future energy needs, and how we should approach it. He is actually uplifting for me because I see a future, and not a Mad Max future. that depresses me. So I hang onto all of his essays as they represent hope.

Enjoy

http://www.financialsense.com/contributors/jerry-robinson/the-rise-of-the-petrodollar-system-dollars-for-oil

Merry Christmas

BOB

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Bob...

First off, how dare you insert yourself into the private reserve currency funfest that Doug and I were having... boy... the nerve of some people   : )

You said,

China today doesn't make me all that concerned that they will be the economy that the world turns too as they have their own problems

and I would point you back to the second article I linked to above, which shows very clearly that the US proportion of the world economy has been diminishing for some time, and that extrapolation of this trend puts us at a distant #2 to China by 2021.  The strength of the dollar relative to most other currencies is a signal that has little value to me... I am interested in the dollar:Gold cross only, and this is getting ready to blow out sometime in the next six months I think.  The manipulations of the Gold cartel are getting more desperate, and more naked by the week;

http://truthingold.blogspot.com/2012/11/the-unmistakable-sign-of-illegal...

Forget the dollar... what I see lining up as the greatest investment opportunity of all time will be the short market (SDS?) long Bullion and Miners play.  I agree completely with Rosen on this;

source: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/11/28_R...

Coming back to global stock markets, they are due for a final leg down and it is going to be an enormous collapse.  The public has been conditioned to believe that gold shares will go down with the general stock markets and nothing could be further from the truth.

The rise in the gold and silver shares will be sensational.  As stocks weaken and the price of gold moves into a steeper ascent, the profits to the gold miners will be massive.  Profits will be absolutely enormous.  Up to now, they have been relatively tame because the price of gold is at a level where they are not making that much money.  But if you just look at the long-term gold and silver charts you will see how high they are headed.

From here on out, every single dollar that the price of gold or silver goes up, the vast majority of those gains will go straight to the profit side of the ledger.  That’s going to be monstrous.  Can you imagine gold at $3,000, $4,000, $5,000, $6,000 an ounce with the costs of mining only increasing modestly from current levels?

As I said, the gold and silver shares will see monstrous profits and the mining shares will soar just like they did in the 1970s bull market.  It won’t matter what general stocks are doing, just like it didn’t matter that stocks were in a bear market from 1966 to 1982.  We saw mining shares in a full blown mania when the gold and silver bull markets ended in 1980, and that was in the midst of the ’66 to ’82 bear market.

So KWN readers need to understand that the mining shares will divorce themselves from the action of the general stock market as the price of gold and silver soar, and money moves out of general stocks and bonds and into gold, silver and the shares.

Investors cannot get off of the main trend and make money, and the main trend is up for gold, up for silver, and the mining shares, and down for the general stock markets.”

Rosen also added:  “There is no painless way out of the mess the world is in today.  We are in the final death throes of a mess that started 100 years ago with the creation of the Federal Reserve and there is no painless way out.

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I love it Jim, conviction and in particular...

"The strength of the dollar relative to most other currencies is a signal that has little value to me... I am interested in the dollar:Gold cross only, and this is getting ready to blow out sometime in the next six months I think.  The manipulations of the Gold cartel are getting more desperate, and more naked by the week".

...and this from Rosen (?):

"Coming back to global stock markets, they are due for a final leg down and it is going to be an enormous collapse."

I am prepared for Gold to go higher and am very secure with my position, so I am covered there. I have shorted Oil in anticipation of the collapse as Oil should follow the world economy with the collapse, and then a short would be beneficial. Same logic as you apply for the monster move in Gold so soon (?) that it took me off guard and why I loved your conviction, Confirmed by the Golden Cross. I seen those in Oil and I seen false ones too. Ouch!

I am a huge fan of your researc on Gold Jim, and I think my logic for Oil stands the same test. What is so great is one or the other or both should confirm our hard work and due dilligence. Yes$?!

I may have different thoughts on China than you perhaps but I could care less. I don't  for a second think their "Different", and I favor more Pettis views more than anyones but I am open to what transpires. No biases formed. Like I said, don't care, and will deal with them when necessary. Right now I wait, and watch as this is just to much fun.

OK, off to read what you have left to read. I love it when good Folks support their opinions with more research for me.

Be good Jim

BOB

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Thanks Bob

I agree that oil would go down with almost all ships if we get a market dump... though I don't watch it closely enough and therefore don't have your level of conviction on that trade.  I certainly don't think we will ever see $30/barrel oil again... but I could see $65 in a broad recessionary dump, at least momentarily.  The next signpost in the Gold story will of course be the fiscal cliff debate...  the worst thing for Gold would be to have us go over the cliff as it presently stands.. since this is exactly the kind of painful tax increases and spending cuts we actually need to make happen in order to get back to balance... and to think that this "cliff" only would get us about 1/2 way, not withstanding the negative feedback loops it would instill (i.e. if you cut 50% of deficit spending, you will also cut some of the tax revenue generated by all that spending.. hence your 50% cut does not really get you 1/2 to the balanced budget goal line ... get it?).  The best thing for Gold will be the can kick that the mass media is currently touting as success!  That coupled with a commercial signal failure of some sort (failure to deliver on Comex, realization that allocated Gold has been broadly rehypothecated, etc) would be the final straw..and Gold (and Silver) would go parabolic.         

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Yeah Jim...

I see this exactly as you have spoken. I just do. Jim this Cliff may just happen, it might. I don't care either because we are toast, no doubt about that. IMHO

Merry Christmas

BOB

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China's forex reserves

This is an interesting article on China's slowing forex reserves, including US debt.  Apparently their reserves of US debt are slightly lower in the last couple years, but the percentage of US debt they hold is down from 12% to 10%.  That seems significant to me and the article suggests this trend will continue.

http://www.financialsense.com/contributors/james-gruber/slowing-china-forex-reserves-may-spell-trouble

Quote:
Given China is the second largest holder of U.S. Treasuries, and it'll likely be a net seller going forward, this means the U.S. will need to find other ways to fund its debt. The most likely option is that domestic savers in the U.S. will fill the gap. Such an outcome would reduce private sector credit to finance government needs. This would be profoundly deflationary.

The other broader point, as noted by CLSA Strategist Russell Napier, is that the world's money supply growth has primarily relied on China in recent years. Since 2007, the U.S. has only accounted for 15% of total money supply growth, while China has accounted for 45% of the total!

Without China fuelling the world's money supply via printed Yuan, the big question is who can pick up the slack. Europe appears highly unlikely given its austerity measures. The U.S. and Japan maybe, but remember the latter has tried massive quantitative easing to increase money supply before (2001-2006) and failed miserably. Any way that you cut the numbers, global money supply is in trouble without China's continued contribution. This means another global deflationary shock in the not-too-distant future shouldn't be ruled out.

What to Own

For some time, I've argued that the western world is entering the same traps of zero-bound interest rates that Japan fell into. Like Japan, it's finding out that it isn't easy inflating out a major credit bust.

The endgame is likely to be a deflationary bust or serious inflation/hyperinflation. In many respects, these scenarios are two sides of the same coin and one could well follow the other.

China's forex reserve slowdown may hasten this endgame.

Under these circumstances, where do you invest? Well, your goal should be preserving your hard-earned money. I've argued previously that cash, principally the Singapore dollar, and gold should be core holdings. Under the two scenarios presented above, these two assets are likely to hold you in good stead. Equities would be big losers in either scenario. And bonds would potentially prove profitable under deflation, but with rates so low and the debt loads of many countries so high, they're much less attractive.

(bold mine)

I don't understand the Singapore dollar recommendation because I don't know much about forex trading, but gold is obvious.  Under this China scenario, it seems that the USD will depreciate, and with interest rates at near zero who's going to buy US debt?  And what are the implications for reserve currency status?  My head hurts.

Doug

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Someone shared this in

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Triffin Dilemma

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