Saturday, January 28, 2012

China And Japan Currency Swap: Nail In US Dollar’s Coffin – OpEd

By Horace Campbell
On 25 December 2011, the government of Peoples Republic of China and Japan unveiled plans to promote direct exchange of their currencies. This agreement will allow firms to convert the Chinese and Japanese currencies directly into each other, thus negating the need to buy dollars. This deal between China and Japan followed agreements between China and numerous countries to trade outside the sphere of the US dollar. A few weeks earlier, China also announced a 70 billion Yuan ($11 billion) currency swap agreement with Thailand.
After visiting China, the Prime Minister of Japan Yoshihiko Noda went on to India and signed another currency swap agreement with the government of India. These currency agreements in Asia came in a year when the countries of the Association of South East Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) were seeking to deepen ways to strengthen their firewall to protect their economies from the continued devaluation of the US dollar. In the year of the ‘Eurozone crisis’ when the future of the EURO as a viable currency was fraught with uncertainty, many states were reconsidering holding their reserves in the US dollar.
Moreover, in the face of the neo-liberal orthodoxy of the Bretton Woods institutions (especially the IMF) swap agreements were proliferating in all parts of the globe. The Latin Americans established the Bank of the South and are slowly laying the groundwork for a new currency, the SUCRE. As in Asia, the Bank of the South will be one of the fundamental institutions of the Union of South American Nations that has been launched in Latin America in order to guarantee the independence of the societies of Latin America. Not to be left as the only region holding dollars, the leaders of the oil rich states of the Gulf Cooperation Council have been buying gold while announcing as long ago as 2009 the intention to establish a monetary union with a common currency. In Africa there are plans for the strengthening of the financial basis of the African Union but so far there has not been the same kind coordinated regional plans for financial independence. During the period of the debate on the debt crisis in the USA, the Nigerian central bank governor Lamido Sanusi announced that Nigeria plans to invest 5 to 10 percent of its foreign exchange reserves in the Chinese currency – the Yuan also known as the renminbi (RMB).
These accelerated Swap agreements – (agreements between two or several countries (bilateral vs. multilateral) on exchanging currencies in times of crisis) – came a decade after the countries of ASEAN established the Chiang Mai Initiative (CMI). In the aftermath of the Asian economic crash and the currency attack by speculators of the financial services industry, the CMI had been established to promote financial cooperation among the ASEAN countries with regional collaboration on currency issues high on the agenda. Initially when the CMI was launched, the government of China had been lukewarm to the goals of the CMI but over decade, especially after the 2007-2008 Wall Street crash, the preliminary partnership that was called ASEAN plus three (Viz ASEAN countries plus China, Japan and Korea) matured to the point where the ASEAN Swap Agreements have now been expanded to the Chiang Mai Initiative Multilateralization (CMIM) agreement, and a set of rules with structured mechanisms for financial regionalism to work for the development of Asian bond markets. These three pillars of the new Asian economic cooperation – CMIM, Asian Bond Markets and bilateral swap agreements – mark a new stage in the international political order.
This week we will examine the implications of the Chinese/ Japan currency swap in the context of the internal discussions in China about the consolidation of socialism. In 2011, China overtook Japan as the second largest economy in the world, and every expansion increases internal and external pressures on the socialist goals of the People’s Republic of China. More importantly, it is crucial to recollect the competitive devaluations and currency wars of the last depression so that the decline of the dollar can be managed in a way that avoids the recourse to open confrontation of the last depression. It is worth remembering that one of the goals of the fascists in the last depression was to roll back socialism.
In our contribution this week we will examine the implications of the swap agreement between China and Japan and the pressures on other regions to delink from the dollar. The conclusion will argue that this swap is one more nail in the coffin of the dollar as the international reserve currency.


This was the headline in the financial press as Bloomberg News and other news sheets of the financial world reported the agreement on settling trade between the two countries in Yen and RMB instead of dollar. With US $340 Billion of transactions in 2010 between the two countries, both being each other’s biggest trading partner, the deal is a clear break away from US financial domination. This Bloomberg Report stated,
‘Japan and China will promote direct trading of the Yen and Yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said. Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct Yen- Yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said. China is Japan’s biggest trading partner with 26.5 trillion Yen ($340 billion) in two-way transactions last year, from 9.2 trillion Yen a decade earlier. The pacts between the world’s second- and third-largest economies mirror attempts by fund managers to diversify as the two-year-old European debt crisis keeps global financial markets volatile.
‘Given the huge size of the trade volume between Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations.’
Less than two weeks later, in the first week of January 2012, the President of South Korea Lee Myung-bak travelled to China to discuss a ‘bilateral strategic partnership.’ This discussion on bilateral partnership between South Korea and China took place in a context where the Republic of South Korea did not want to be left behind. Ostensibly the visit to China was to discuss the recent passing of Kim Jung IL of North Korea but Chinese media reported that China, Japan and South Korea were hammering out the basic framework for a free trade agreement between the three biggest economies in East Asia.
These agreements will have implications for the dollar as the global reserve currency and there will be increased pressures for the Chinese currency to be internationalized as other societies follow the lead of Japan and seek swap agreements outside of the dollar.


Japan is one of closest allies of the United States. There are thousands of US troops stationed in Japan, but the Japanese, like all peoples of the world, have been losing money as the US dollar was devalued over the past three years. This devaluation has taken the form of what the US authorities called quantitative easing. There has been two such quantitative easings since the 2009 as the United States unloaded more fiat currency on the world. Whatever the name (devaluations or quantitative easing) all countries in the world were thinking of finding ways to escape being hostages to the US dollar and Central Bank governors from Brazil to India and beyond are working to protect their societies from these devaluations. Asian central banks together hold some $3,3 Trillion in reserves, amounting to an impressive 46 percent of the world’s total national reserves. The government of China has vowed to reduce its holding of US dollars and in 2011. The China Daily newspaper reported that,
‘According to data from the US Treasury Department, China’s holdings of US Treasury bonds stood at $1.1326 trillion by the end of November 2011, $1.5 billion down from the previous month. It was the second successive month that the amount had declined, and the lowest reserve level seen since July 2010. China made six monthly cuts of US debt in 2011, the department’s data showed, trimming its holdings by $27.5 billion from the end of 2010. Yet despite the reductions, China remains the top buyer of US Treasury securities.”
What was left unsaid was the plan of the political leadership of China for a deft management of the reductions so that the international political economy is not drastically affected leading to unforeseen circumstances. Over the past decade numerous officials from the National People’s Congress, the Central Bank and the commercial sectors have been stating that China has to reduce its holdings of US bonds and diversify into other currencies. When, over five years ago, Parliamentary vice-chairman Cheng Siwei, called for the diversification of Chinese reserves away from US bonds, the implicit assumption was that China would diversify and buy European bonds. This was before the full hollowness of the European project became manifest to the world.


The Chinese economy has registered an average of over 10 per cent growth in the past thirty years. This has been the most successful transformation of an economy in the recorded history of political economy, but the pundits do not like to point to the socialist foundations of China and the sacrifices made by the Chinese people to transform their society. Mao Zedong called the currency of China, the Renminbi, and the people’s currency. Renminbi is the official name of the currency introduced by the Communist People’s Republic of China at the time of its foundation in 1949. The other name for the currency is the Yuan. Hence the Chinese currency is known by a number of names (including the Kuai).
As a low wage economy, the hard work of the Chinese producers has made the society a force to be reckoned with and the currency attractive to other countries seeking a refuge from the dollar. The political leaders in China have been careful about the pace and nature of the internationalization of the currency. The leaders have slowly allowed Hong Kong to become an offshore renminbi financial centre by allowing authorized institutions in Hong Kong to offer renminbi services such as deposit taking, currency exchange, remittance and trading in RMB denominated bonds. Since 2009 when the Chinese government opened this slight door to the internationalization of its currency, other financial centres such as Macau and Singapore have been hoping to get into the offshore RMB business.
These regional pressures for the internationalization of the RMB came up against the hard reality that for the full internationalization of the currency, for the RMB to become a global currency, the government of China would have to establish capital markets and ensure the full convertibility of capital account. The balance of forces within China would then shift in favour of the one per cent who would then privatise state assets at a faster rate. In the present international system, opening such capital markets beyond the tightly controlled stock exchanges would open up the Chinese currency to the kind of full scale attack and speculation that was witnessed in the Asian financial crisis in 1997. Thus far the Chinese state has held the line against the expansion of capital markets in ways that would undermine the stability of the society.
The economy of China is a mixed economy with the state-owned enterprises dominating the economy. Of the ten largest companies on the Shanghai Stock Exchange, eight are state owned. With the growth and power of the Chinese economy, the Chinese capitalists have expanded with a large number of billionaires. These billionaires do not control political power and the Chinese state continues to subsidise food, education and transportation services. There are many limitations to the nature of the Chinese political system, especially the hothouse of growth and accumulation that is creating a fundamental environmental hazard for the majority of the citizens. The growing inequalities and the massive push for the reversal of socialist gains since 1949 are now compounded by an alliance between capitalists in Singapore and the US who are calling for speeding the internationalisation of the RMB.
It is in this context where the December 25 agreement to allow Japan to ‘apply to buy Chinese bonds next year’ becomes significant. It is again worth quoting the press reports of the December 25 agreement. According to the British Broadcasting Corporation,
‘The two leaders also agreed to allow the Japan Bank for International Cooperation to issue Yuan-denominated bonds in China, the first time a foreign government body has been allowed to do so. At the same time Japan said it was also looking to buy Chinese government bonds, a move that analysts believe may prove to be mutually beneficial to both nations. ‘By adopting Chinese bonds as a part of official foreign exchange reserves, Japan is labelling Chinese bonds as an investable asset,’ according to Takuji Okubo of Societe Generale Tokyo.
‘This should encourage Japanese private investment into Chinese bonds, as well as into other Asian emerging currencies. Such a development in turn should help develop offshore currency trading in Japan.’
This new collaboration between China and Japan has been underlined by the Japanese Foreign Minister Koichiro Gemba who on Tuesday said that ‘Japan will seek to take a less inward-looking stance when it comes to diplomacy in the Asia-Pacific region.’ In the words of the China daily newspaper the Foreign Minister said that, ‘Japan will look to enhance diplomatic ties with China based on mutually beneficial goals. With China, this year marks the 40th anniversary of normalizing diplomatic ties, we will aim to deepen the mutually beneficial relationship based on common strategic interests,’ Gemba said in his first foreign policy speech in parliament.
He went on to say that Japan plans to proactively make ‘concrete efforts’ to strengthen its ties with China and establish more ‘open and multilayered networks’ in the best interests of both countries
Ever alert to these shifts in the global currency and financial markets, the British Chancellor of the Exchequer, George Osborne, travelled to Hong Kong in January and offered London as the western base for the coming internationalization of the RMB. Osborne was vociferously making a plea to make London the leading centre for trading the Chinese currency. This conservative Chancellor was exposing the opportunism of the British and demonstrating the short memory of the British hoping that the Chinese have forgotten the Opium Wars.


While the British were declaring their willingness to embrace the RMB, the US Senate has gone about increasing the war of words against China. In the failure to compete in the so-called ‘marketplace,’ sections of the US political leadership have for years been complaining that China should allow open markets for its currency and for its currency to appreciate more rapidly. There are two sections of the US political establishment pushing against the Chinese currency. The first are those allied to Wall Street and the currency speculators who want to be able to trade in the Chinese currency and to do to China what was done to Malaysia, Taiwan, Thailand and other Asian economies in 1997. The second pressure is coming from those sections of capital who complain that China is flooding US markets. While these two sections do not agree they support the information war against China, this information war carries the refrain that the renminbi is undervalued by 25-30 percent against the dollar, which means Chinese exports to the US become 25-30 percent cheaper, while US goods exported to China are more expensive.
Even though China has allowed its currency to appreciate a little in the last two years, the two sections of capital in the US hostile to China have said that this is not enough. In October 2011 the US Senate passed S.1619, the Currency Exchange Rate Oversight Act of 2011, and a bill to address China’s ongoing currency manipulation, by a vote of 63-35.
One year earlier one commentator for Time Magazine had noted correctly that the real challenge for the United States was to change its consumption patterns.
‘We’ve seen this movie before. From July 2005 to July 2008, under pressure from the US government, Beijing allowed its currency to rise against the dollar by 21 percent. Despite that hefty increase, China’s exports to the US continued to grow mightily. Of course, once the recession hit, China’s exports slowed, but not as much as those of countries that had not let their currencies rise. So even with relatively pricier goods, China did better than other exporting nations.
Look elsewhere in the past and you come to the same conclusion. In 1985 the US browbeat Japan at the Plaza Accord meetings into letting the yen rise. But the subsequent 50 percent increase did little to make American goods more competitive. Yale University’s Stephen Roach points out that since 2002, the US dollar has fallen in value by 23 percent against all our trading partners, and yet American exports are not booming. The US imports more than it exports from 90 countries around the world. Is this because of currency manipulation by those countries, or is it more likely a result of fundamental choices we have made as a country to favor consumption over investment and manufacturing?’


This commentary on the need for the US to transform its economy and live within its means fell short of outlining a more fundamental problem, that of the military management of the international system and the outmoded imperial impulses that stem from the kind of militarism that now reflect US society. While the Japanese and the Chinese were deepening economic relations, the US political leaders were intensifying its bellicose rhetoric about Chinese military buildup in the South China Sea and pushing forward the idea of a Trans-Pacific Partnership (TPP) Agreement. Japan was being wooed to become a key anchor of the US dominated TPP.
The China/Japan currency swap was a bold move on the part of these two economic giants in Asia. There are historic difference between the Chinese and Japanese, especially the experiences of the 1930’s Japanese occupation of China and the Rape of Nanking. Notwithstanding these historic differences the US debt of over US $ 14 trillion along with the inability of the US political leaders to effectively tackle the growing debt has awoken many that the US dollar as the international reserve currency is on its last legs.
In May 2009, Nouriel Roubini in a contribution to the New York Times on the Almighty Renmimbi summed up the decline of the dollar in this way,
‘This decline of the dollar might take more than a decade, but it could happen even sooner if the US did not get its financial house in order. If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. It would take a long time for the renminbi to become a reserve currency, but it could happen. The resulting downfall of the dollar may be only a matter of time.’
Nouriel Roubini was writing this warning to alert the US rulers to shift gears because of the rise of China. He called for a strategy of investments to recover the US economy declaring, ‘Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.’
China and Japan have taken a decisive step to diversify their reserve holdings away from the dollar. What is more fundamental is the new rush by other states to join in this new regional currency arrangement. Republic of South Korea is knocking to become central to this swap arrangement while other members of ASEAN are watching these developments carefully. The Eurozone crisis has narrowed the ability of the US to respond negatively to the China/Japan currency swap. Importantly, the capitalist crisis in Europe has stiffened the spine of those elements of the Chinese society who proclaim that the principal task of China is to bail out its own people and transform the economy to benefit the 1.3 billion citizens. These left forces in China are calling for the consolidation of socialism and for vigilance to halt the power of those who are calling for a speedy internationalization of the RMB. These social elements understand the realities behind the call for opening capital markets in China.
It is the left and the progressive forces in China who agree with Mao that the RMB is the people’s currency and that the most important currency is the Chinese people. It is not usual for this writer to quote from Time magazine, but in the arguments of [url=,9171,2024220,00.html#ixzz1kXFiPwKO]
Fareed Zakaria[/url] on the question of overvalued currency, this author would concur, ‘The Real Challenge from China: Its People, Not Its Currency.’
‘China is beginning a move up the value chain into industries and jobs that were until recently considered the prerogative of the Western world. This is the real China challenge. It is not being produced by Beijing’s currency manipulation or hidden subsidies but by strategic investment and hard work. The best and most effective response to it is not threats and tariffs but deep, structural reforms and major new investments to make the U.S. economy dynamic and its workers competitive.’
And Zakaria might have added that the US cannot be competitive as long as it imprisons the best of the young people of colour in the prison industrial complex.
The lessons learnt from the last capitalist depression are that competitive devaluations, trade wars, currency disputes and new alliances sow the seeds of hostilities and provide the climate for incidents. Incidents then spin out of control beyond diplomacy. The contagion from the capitalist crisis will spread and the forces of socialist transformation will have to be even more alert and vigilant to balance the formation of a regional currency block while supporting the creation of the multipolar world to end the era of dollar and pound/sterling hegemony. Those regions of the world that have not awoken to the slow demise of the dollar need to pay closer attention. Planned diversification away from the dollar is preferable to rushed monetary unions. The African peoples have a lot of lessons to learn from both the capitalist crisis in Europe and the new financial arrangements between China and Japan.
Horace Campbell is professor of African American Studies and Political Science at Syracuse University.

EU sent 50 MEPs to Congo for eight days at cost of £850,000

The European Parliament spent over £850,000 sending 50 MEPs for an eight-day trip to the Congo in 2010, according to a list of its most expensive foreign delegations.

EU sent 50 MEPs to Congo for eight days at cost of £850,000 In July, 13 of the ACP-EU MEPs travelled to the Seychelles for a five-day trip that cost the taxpayer an £4,374 per head in travel, hotel and 'logistics' bills

MEPs were attending a meeting of the African-Caribbean Pacific and EU (ACP-EU) joint parliamentary assembly to discuss with MPs from the developing countries how to tackle poverty in the world's poorest regions.
At the November 2010 gathering in Kinshasa, MEPs racked up a bill of £17,067 per head – a sum that is 141 times the £121 that is the average annual income in Congo. The figures, revealed by The Daily Telegraph, were described by a Ukip MEP as “an affront to taxpayers”.
The same ACP-EU delegation of MEPs, a group of 64 this time, had previously gathered in Tenerife in January 2010. They ran up travel and hotel bills of £588,404, or £9,193 each, over the course of a week in the Spanish sunshine, according to the list revealed by The Daily Telegraph. A one week stay in a junior suite in London’s elite Ritz Hotel costs £3,928.
In July, 13 of the ACP-EU MEPs travelled to the Seychelles for a five-day trip that cost the taxpayer £4,374 per head in travel, hotel and “logistics” bills.
The costs of the first class flights and five star luxury hotels for the trips, totalling £230 million in 2010, have traditionally been shrouded in secrecy by an EU assembly that is wary of fuelling its “gravy train” image.

But following an investigation into spiralling costs by MEPs on the parliament’s budget committee, the EU assembly’s administration has compiled a list of the most expensive trips, breaking down costs for the first time.
The figures, seen by this newspaper, show the huge bills presented to taxpayers for keeping MEPs in the lifestyle to which they are accustomed.
A delegation of four MEPs to Argentina in March 2010 cost £21,878 in daily bills for each MEP. Seven MEPs on the parliament’s trade committee managed to rack up travel, hotel and other bills of £5,384 each over four days in springtime Rome.
Marta Andreasen, a Ukip MEP and the European Commission’s former chief accountant before she was sacked by Lord Kinnock for whistle-blowing in 2004, described the costs as “astonishing” at a time when the EU was imposing austerity programmes on the eurozone.
”Even as the eurozone crisis was starting to bite hard in 2010, MEPs were rewarding themselves with self-serving and largely pointless delegation visits,” she said.
”These figures are an appalling abuse of public money. They should hang their heads in shame.”
A parliament spokesman insisted that the figures include “global costs” such as accompanying staff and the cost of hiring rooms for meetings.
”The why of these meetings is that relations between the EU and third countries by necessity have a parliamentary dimension,” she said.
”These meetings provide the only way in which elected representatives of, for example, the ACP former colonies can make their wishes heard as regards EU policies.”
Other Brussels institutions and officials are increasingly concerned that spending by MEPs is in danger of damaging the EU during a period when national public budgets are being cut and living standards have been hit by a recession generated by the eurozone.
Earlier this week, Janusz Lewandowski, the European budget commissioner, wrote a letter to the parliament asking MEPs to show the public that the EU was tightening its belt and reducing the costs of administration.
”It is of utmost importance to continue to demonstrate that the European institutions are acting responsibly in the light of the difficult economic and budgetary conditions and to send a corresponding signal to European public opinion,” he wrote.

Spain's unemployment total passes five million

Spain's unemployment figure passed the five million mark in the last quarter of 2011, official figures show.
Spain's unemployment figure passed the five million mark in the last quarter of 2011, official figures show.
The National Statistics Institute said 5.3 million people were out of work at the end of December, up from 4.9 million in the third quarter.
The rate rose from 21.5% in the third quarter to 22.8% - the highest rate in nearly 17 years.
Spain already has the highest jobless rate in the 17-nation eurozone and is expected to slide back into recession.

The 22.8% rate is more than twice the average unemployment rate of the eurozone, which stood at 10.3% in November, according to data released earlier this month.
The Spanish figures show almost half of all 16-24 year-olds in the country are jobless - 48.6% compared with 45.8% before.
Spain's new ruling Popular Party conservative government has pledged labour reforms to try to improve the jobs market.
On Thursday, public service employees staged a series of demonstrations across Spain to protest against unemployment and increasing austerity measures.
Budget cuts Spain has struggled since the property bubble burst in 2008.
In the years between 2004 and 2008, the average house price in Spain rose 44%, Construction represented about 16% of GDP by the end of the boom, and the unemployment rate was down to 7.95%.
However, rising house prices fuelled the sub-prime mortgage market, leading the Spanish to borrow more as they struggled to get on the housing ladder.

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There are millions without hope - some people I know have been without work for two years”
Marisol, Malaga
The downturn has seen repossessions of Spanish properties rise 32% in the past year.
The range of austerity measures proposed by new Prime Minister Mariano Rajoy's government angered many ahead of this week's protests.
His measures include 8.9bn euros in new budget cuts, and tax increases designed to boost government coffers by 6.3bn euros.
However, there are concerns that Mr Rajoy will be unable to meet his pre-election pledge to cut the country's deficit to 4.4% of GDP in 2012.
The Bank of Spain predicts the country's economy will shrink by 1.5% this year, saying the eurozone debt crisis has destroyed business confidence and closed off bank credit, causing a large drop in domestic demand.

If The Economy Is Improving….

Everywhere you turn these days, someone is proclaiming that the economy is improving.  Barack Obama is endlessly touting the “improvement” in the economy, the mainstream media is constantly talking about “the economic recovery” and an increasing number of Americans seem to be buying into this line of thinking.  A new NBC/Wall Street Journal poll found that 37 percent of Americans believe that the economy will improve over the next year, while only 17 percent of Americans believe that it will get worse.  But is the economy actually improving?  Not really.  At the moment things are relatively stable.  Some economic statistics are improving slightly and some continue to get even worse.  However, it is very important to keep in mind that one of the biggest reasons why things have stabilized is because the federal government is pumping more than a trillion dollars a year into the economy that it does not have.  The Obama administration is engaging in a debt binge unlike anything America has ever seen before, and yet many economic indicators are still in decline.  So what is going to happen when the federal government stops injecting gigantic waves of borrowed money into the economy?  That is a frightening thing to think about.  The best efforts of our “leaders” in Washington D.C. are not accomplishing a whole lot.  The Federal Reserve has pushed interest rates as low as they can go and the federal government is spending unprecedented amounts of money.  But even with the federal government and the Federal Reserve pushing the accelerator all the way to the floor, the economy is still not improving much at all.  Millions upon millions of Americans out there are anticipating some sort of a “great economic recovery”, and they are going to be bitterly disappointed.
But right now there are some “bright spots” in the economy, and you are bound to run into family and friends that will repeat to you the nonsense that they are hearing on the television about how the economy is recovering.
When they try to convince you that the economy is getting better, ask them these questions….
If the economy is getting better, then why did new home sales in the United States hit a brand new all-time record low during 2011?
If the economy is getting better, then why are there 6 million less jobs in America today than there were before the recession started?
If the economy is getting better, then why is the average duration of unemployment in this country close to an all-time record high?
If the economy is getting better, then why has the number of homeless female veterans more than doubled?
If the economy is getting better, then why has the number of Americans on food stamps increased by 3 million since this time last year and by more than 14 million since Barack Obama entered the White House?
If the economy is getting better, then why has the number of children living in poverty in America risen for four years in a row?
If the economy is getting better, then why is the percentage of Americans living in “extreme poverty” at an all-time high?
If the economy is getting better, then why is the Federal Housing Administration on the verge of a financial collapse?
If the economy is getting better, then why do only 23 percent of American companies plan to hire more employees in 2012?
If the economy is getting better, then why has the number of self-employed Americans fallen by more than 2 million since 2006?
If the economy is getting better, then why did an all-time record lowpercentage of U.S. teens have a job last summer?
If the economy is getting better, then why does median household income keep declining?  Overall, median household income in the United States has declined by a total of 6.8% since December 2007 once you account for inflation.
If the economy is getting better, then why has the number of Americans living below the poverty line increased by 10 million since 2006?
If the economy is getting better, then why is the average age of a vehicle in America now sitting at an all-time high?
If the economy is getting better, then why are 18 percent of all homes in the state of Florida currently sitting vacant?
If the economy is getting better, then why are 19 percent of all American men between the ages of 25 and 34 living with their parents?
If the economy is getting better, then why does the number of “long-term unemployed workers” stay so high?  When Barack Obama first took office, the number of “long-term unemployed workers” in the United States was approximately 2.6 million.  Today, that number is sitting at 5.6 million.
But there is some good news.
When Barack Obama first took office, an ounce of gold was going for about $850.  Today, the price of an ounce of gold is over $1700.
The era of great prosperity that America has enjoyed for so long is coming to an end.
In fact, our long-term economic decline is about to accelerate.
So enjoy this “bubble of hope” while you can, because it won’t last long.
As I have written about previously, many are warning that Europe is on the verge of a nightmarish financial crisis that could potentially plunge us into aglobal recession even worse than 2008.
So let us hope for the best, but let us also prepare for the worst.
Just because the economy is about to go through hard times does not mean that you have to go through hard times personally.
Right now, you can decide to make an investment or start a business that will thrive in a tough economic environment.
Victory often goes to the most prepared.  So don’t just sit there while the storm clouds gather.  Instead, this should be a time when you are gathering resources and developing a gameplan for the coming economic chaos.
Those that choose to have blind faith in “the system” are going to be tremendously disappointed in the years ahead.  Just because you have a job right now does not mean that it is always going to be there.  Just because your stock portfolio is doing well right now does not mean that will always be the case.
Hopefully we all learned some important lessons from 2008.  The global financial situation can turn on a dime.  When markets fall apart, they tend to do so very rapidly.
Ultimately, the debate about whether the economy is improving or not is going to be ended very emphatically.  When the next wave of the financial crisis hits, there will be no doubt about what direction things are going.
Don’t let the next wave catch you by surprise.
Now is the time to prepare.

Will Iran Kill the PetroDollar?

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran's oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.

But that line doesn't make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.
The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.
We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. That is not the picture of a world superpower worthy of the privileges gained from having its currency back global trade. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.
If the US dollar loses its position as the global reserve currency, the consequences for America are dire. A major portion of the dollar's valuation stems from its lock on the oil industry – if that monopoly fades, so too will the value of the dollar. Such a major transition in global fiat currency relationships will bode well for some currencies and not so well for others, and the outcomes will be challenging to predict. But there is one outcome that we foresee with certainty: Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

The Petrodollar System

To explain this situation properly, we have to start in 1973. That's when President Nixon asked King Faisal of Saudi Arabia to accept only US dollars as payment for oil and to invest any excess profits in US Treasury bonds, notes, and bills. In exchange, Nixon pledged to protect Saudi Arabian oil fields from the Soviet Union and other interested nations, such as Iran and Iraq. It was the start of something great for the US, even if the outcome was as artificial as the US real-estate bubble and yet constitutes the foundation for the valuation of the US dollar.
By 1975, all of the members of OPEC agreed to sell their oil only in US dollars. Every oil-importing nation in the world started saving its surplus in US dollars so as to be able to buy oil; with such high demand for dollars the currency strengthened. On top of that, many oil-exporting nations like Saudi Arabia spent their US dollar surpluses on Treasury securities, providing a new, deep pool of lenders to support US government spending.
The "petrodollar" system was a brilliant political and economic move. It forced the world's oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world's oil for free, since oil's value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.
The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.
There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.
So here's an interesting thought experiment. Everybody says the US goes to war to protect its oil supplies, but doesn't it really go to war to ensure the continuation of the petrodollar system?
The Iraq war provides a good example. Until November 2000, no OPEC country had dared to violate the US dollar-pricing rule, and while the US dollar remained the strongest currency in the world there was also little reason to challenge the system. But in late 2000, France and a few other EU members convinced Saddam Hussein to defy the petrodollar process and sell Iraq's oil for food in euros, not dollars. In the time between then and the March 2003 American invasion of Iraq, several other nations hinted at their interest in non-US dollar oil trading, including Russia, Iran, Indonesia, and even Venezuela. In April 2002, Iranian OPEC representative Javad Yarjani was invited to Spain by the EU to deliver a detailed analysis of how OPEC might at some point sell its oil to the EU for euros, not dollars.
This movement, founded in Iraq, was starting to threaten the dominance of the US dollar as the global reserve currency and petro currency. In March 2003, the US invaded Iraq, ending the oil-for-food program and its euro payment program.
There are many other historic examples of the US stepping in to halt a movement away from the petrodollar system, often in covert ways. In February 2011, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), called for a new world currency to challenge the dominance of the US dollar. Three months later a maid at the Sofitel New York Hotel alleged that Strauss-Kahn sexually assaulted her. Strauss-Kahn was forced out of his role at the IMF within weeks; he has since been cleared of any wrongdoing.
War and insidious interventions of this sort may be costly, but the costs of not protecting the petrodollar system would be far higher. If euros, yen, renminbi, rubles, or for that matter straight gold, were generally accepted for oil, the US dollar would quickly become irrelevant, rendering the currency almost worthless. As the rest of the world realizes that there are other options besides the US dollar for global transactions, the US is facing a very significant – and very messy – transition in the global oil machine.
The Iranian Dilemma
Iran may be isolated from the United States and Western Europe, but Tehran still has some pretty staunch allies. Iran and Venezuela are advancing $4 billion worth of joint projects, including a bank. India has pledged to continue buying Iranian oil because Tehran has been a great business partner for New Delhi, which struggles to make its payments. Greece opposed the EU sanctions because Iran was one of very few suppliers that had been letting the bankrupt Greeks buy oil on credit. South Korea and Japan are pleading for exemptions from the coming embargoes because they rely on Iranian oil. Economic ties between Russia and Iran are getting stronger every year.
Then there's China. Iran's energy resources are a matter of national security for China, as Iran already supplies no less than 15% of China's oil and natural gas. That makes Iran more important to China than Saudi Arabia is to the United States. Don't expect China to heed the US and EU sanctions much – China will find a way around the sanctions in order to protect two-way trade between the nations, which currently stands at $30 billion and is expected to hit $50 billion in 2015. In fact, China will probably gain from the US and EU sanctions on Iran, as it will be able to buy oil and gas from Iran at depressed prices.
So Iran will continue to have friends, and those friends will continue to buy its oil. More importantly, you can bet they won't be paying for that oil with US dollars. Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold, supported by a few rupees and some yen. Iran is already dumping the dollar in its trade with Russia in favor of rials and rubles. India is already using the yuan with China; China and Russia have been trading in rubles and yuan for more than a year; Japan and China are moving towards transactions in yen and yuan.
And all those energy trades between Iran and China? That will be settled in gold, yuan, and rial. With the Europeans out of the mix, in short order none of Iran's 2.4 million barrels of oil a day will be traded in petrodollars.
With all this knowledge in hand, it starts to seem pretty reasonable that the real reason tensions are mounting in the Persian Gulf is because the United States is desperate to torpedo this movement away from petrodollars. The shift is being spearheaded by Iran and backed by India, China, and Russia. That is undoubtedly enough to make Washington anxious enough to seek out an excuse to topple the regime in Iran.
Speaking of that search for an excuse, this is interesting. A team of International Atomic Energy Agency (IAEA) inspectors just visited Iran. The IAEA is supervising all things nuclear in Iran, and it was an IAEA report in November warning that the country was progressing in its ability to make weapons that sparked this latest round of international condemnation against the supposedly near-nuclear state. But after their latest visit, the IAEA's inspectors reported no signs of bomb making. Oh, and if keeping the world safe from rogue states with nuclear capabilities were the sole motive, why have North Korea and Pakistan been given a pass?
There is another consideration to keep in mind, one that is very important when it comes to making some investment decisions based on this situation: Russia, India, and China – three members of the rising economic powerhouse group known as the BRICs (which also includes Brazil) – are allied with Iran and are major gold producers. If petrodollars go out of vogue and trading in other currencies gets too complicated, they will tap their gold storehouses to keep the crude flowing. Gold always has and always will be the fallback currency and, as mentioned before, when currency relationships start to change and valuations become hard to predict, trading in gold is a tried and true failsafe.
2012 might end up being most famous as the year in which the world defected from the US dollar as the global currency of choice. Imagine the rest of the world doing the math and, little by little, beginning to do business in their own currencies and investing ever less of their surpluses in US Treasuries. It constitutes nothing less than a slow but sure decimation of the dollar.
That may not be a bad thing for the United States. The country's gargantuan debts can never be repaid as long as the dollar maintains anything close to its current valuation. Given the state of the country, all that's really left supporting the value in the dollar is its global reserve currency status. If that goes and the dollar slides, maybe the US will be able to repay its debts and start fresh. That new start would come without the privileges and ingrained subsidies to which Americans are so accustomed, but it's amazing that the petrodollar system has lasted this long. It was only a matter of time before something would break it down.
Finally, the big question: How can one profit from this evolving situation? Playing with currencies is always very risky and, with the global game set to shift to significantly, it would require a lot of analysis and a fair bit of luck. The much more reliable way to play the game is through gold. Gold is the only currency backed by a physical commodity; and it is always where investors hide from a currency storm. The basic conclusion is that a slow demise of the petrodollar system is bullish for gold and very bearish for the US dollar.


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