Friday, November 18, 2016

Strong dollar about to trigger a massive dumping of treasuries and dollar reserves by foreign holders of U.S. debt

Few people actually connected the dots six years ago as to the real reasons behind the Arab Spring uprisings in places like Yemen, Egypt, and elsewhere in the Middle East.  Politicians and a lazy mainstream media wanted us to focus on how it was due to people wanting to rise up against tyrannical dictators, but the truth of the matter was that the civil unrest was intrinsically tied to the dollar, and in nations being unable to afford to purchase commodities such as wheat because of how strong the reserve currency was in relation to their own.


Image result for arab spring bread helmet
(Egytian protester wearing a bread helmet)

When grain prices spiked in 2007-2008, Egypt's bread prices rose 37%. With unemployment rising as well, more people depended on subsidised bread – but the government did not make any more available. Egypt's annual food price inflation continued and had hit 18.9% before the fall of President Mubarak. 
Fifty per cent of the calories consumed by Egyptians originate outside its borders. Egypt is the world's largest wheat importer, and no country in the region (except for Syria) produces more than a small fraction of the wheat it consumes. Should the global markets be unable to provide a country's need, or if there are not enough funds available to finance purchases and to offer price support, then the food of the poor will become inaccessible to them. - Guardian
Despite the fact that the entire world was involved in the Great Recession, and most of their economies did not have access to strong central banks able to implement ZIRP and QE programs, it did not take the dollar exploding over 100 on the dollar index to cause financial havoc to one or more countries, but only a move from 72 to 84 to be just enough for countries deep in recession to be unable to buy dollars so they could purchase over-inflated commodities to feed their peoples.


In the past 30 years there have been three times when the dollar was over 100 on the index, and on every occasion a financial or monetary crisis emerged someone in the world.  In the 1980's it was the Mexican Peso crisis, and in the late 1990's it was both the Argentinian and Asian financial crises.

And now in November of 2016, and immediately following the election of Donald Trump as President, the dollar has skyrockted upwards and has crossed 100 on the index for the first time in 13 years.  And in that short amount of time since Nov. 8 we have seen India experience a monetary meltdown, and China see its currency strengthen to its highest levels in a decade.

However, both India and China are not Argentina, Egypt, Mexico, and Thailand.  And unlike these second world economies who were unable to withstand the reserve currency's pressure on their own money back 20 and 30 years ago, the world's second and seventh largest economies do have a form of ammunition to respond to the dollar's move and counter the dollar with its own medicine...

That of their dollar reserves.  And China appears ready now to bring heavy pain to the U.S. bond market by dumping hundreds of billions, if not trillions of dollars worth to protect their own economy.
Asked about when the Yuan may cross the psychological barrier, a PBOC advisor told Reuters that "I don't think the breaking of 7 is imminent. We may have to wait until next year." Actually, at this rate, "breaking" of 7 may happen as soon as next week, to which he adds :"If the pace of depreciation is too fast, if it hit 7 before the end of this year, the central bank will control it." 
And that's when the liquidation of Chinese USD-denominated reserves begins in earnest, among all those other measures the PBOC implemented a year ago when the market was far less sanguine about the Chinese devaluation: 
The policy insiders said the central bank was likely to intervene in currency markets and enforce capital controls to slow the rate of decline in the yuan. 
As we expected, the intervention has already started:
traders said large Chinese state banks had offered dollars in the domestic currency market on Thursday in an apparent effort to slow down the depreciation of the yuan. 
They said there had been no sign of state dollar selling in previous sessions. 
Another way of saying "offering dollars" is selling US assets. - Zerohedge
Once China begins dumping more of their dollars in earnest, and the bond rates for Treasuries start to spike arithmetically or even exponentially, it will open the floodgates for everyone else to dump their $14 trillion in foreign held dollars where the ramifications of them returning to the U.S. will be catastrophic.  And all that inflation that has been exported for decades to the rest of the world will come back in one sudden wave to prices and consumers, and might very easily spell the end of the American century, as well as dollar hegemony as the global reserve currency.

0 comments:

Post a Comment