Foreign Reserves and Hard Currencies of the World
- Foreign Reserves
- KEY: Network Effect - More Users, Exchangeability = More Power
- KEY: Control of Digital Transactions
- KEY: Military Power and Stability
- KEY: No competition from
- 2019 Status
- Role of Central Bank Swaps
- Stores of Wealth and Currency of Origin - 2019
- Derivatives - Dark Money
- Fall of Petro-Dollar
- US FED controls world's Money Supply - not good
- US Trade and Fiscal Deficits monetized
- Trade instability under Trump
- Strategic Arms Race using Reserve Status
- Electronic Settlements
- US "arbitrary" Sanctions and Insternational Payments Instability
- Dumping USD in Forex Reserves
- Rise of National Currency in Bilateral Trade
- Fluctuations in USD/National Currencies destabilize trade
- China - epicenter of Dedollarization
- Russia - US Sanctions, Putin drives non-dollar transactions
- Iran - Sanctions, Swift, Shipping/Insurance and Oil Trade
- Indian Rupee - hard enough to substitute for USD in some Indian-led trade
- EURO - European Foreign Exchange Trends
- German Mark with Kaiser Empire
- 1922-24: REICHSMARK re-introduced to fight hyper-inflation
- 1945-48: THE DEUTSCHE MARK introduced post Hitler
- 1957: EU initially formed TREATY OF ROME
- 1979: European Monetary System Adopted - Pegging Currency Trading - Early Start of Euro
- OCT 1979 UK Abolishes Forex Pegs/CONTROLS
- Oct, 1990 BRITAIN JOINS European Exchange Rate Mechanism
- Feb 1992: EU Formalizes with the MAASTRICHT TREATY
- JAN. 1, 1999: Euro becomes the common currency of 11 Nations
- EURO Unlikely to be a Reserve
- Yen - A manipulated Hard Currency
- China as a Super Power - YUAN Emerges as a Hard Currency due to Strong Trade Balance
- 1980-2000 Chinese Reforms, Miracle - Takes over from Japan as Factory of World
- MAY 1993: US labels Currency Manipulator in YUAN Devaluation
- DEC 1996-1999: CONVERTIBLE YUAN but PEGGED TO DOLLAR controlled by PBoC
- 2001: CHINA JOINS WTO - Most Favored Treaties benefit Globalization, MNC profits
- July, 2005 Yuan partial Float
- 2010+ shift away from USD via Trade balance
- 2015 Capital Flight, Yuan Falls rapidly
- Aug 2019 China labelled Currency MANIPULATOR
KEY: Network Effect - More Users, Exchangeability = More Power
In the financial sector, for example, stock exchanges grow in utility when they have more buyers, sellers, and volume. Likewise, in international finance, a currency can become increasingly entrenched when it’s accepted, used, and trusted all over the world.
KEY: Control of Digital Transactions
KEY: Military Power and Stability
KEY: No competition from
|USD||6750||62%||Slow Decline for 66% in 15 years|
|Euro||2200||20%||Slow Decline from 25% in 15 years|
|Yen||572||5%||Rose from 4.3% in 15 years|
|Pound||500||4.5%||Rose from 3.5% in 15 years|
- SRC IMF
Role of Central Bank Swaps
Stores of Wealth and Currency of Origin - 2019
|Category||Value $b||Principal Currency|
|Global Military Spending||1,782||USD exchange|
|U.S. Federal Deficit (FY 2020)||3,800||USD|
|Coins & Bank Notes||6,662||Fiat: 60% USD, 20% Euro-Yen-Yuan|
|Fed's Balance Sheet||7,037||USD|
|The World's Billionaires||8,000||USD,Euro,Yuan|
|The Fortune 500||22,600||USD|
|Stock Markets||89,475||USD,Euro,Yuan mainly|
|Narrow Money Supply||35,183||USD, Euro, Various|
|Broad Money Supply||95,698||USD, Euro, Various|
|Global Debt||252,600||USD, Euro, Various - Yuan emerging as Major|
|Global Real Estate||280,600||Physical Wealth|
|Global Wealth||360,603||Stored in tax havens, etc - mostly USD|
|Derivatives (Market Value)||11,600|
|Derivatives (Notional Value)||558,500 :|
|Derivatives (Notional Value - High end)||1,000,000|
- Src: CoinMarketCap, World Bank, BIS, CIA, Fed, World Gold Council, Forbes, Fortune
Derivatives - Dark Money
The value of financial derivatives are measured in very different ways. These manifests itself in a big way numerically.
Since derivatives are used to hedge risk and are "options" - the estimate of volatility and black/white swan events is key to valuing derivatives.
Notional value represents the position or obligation of the contract (i.e. a call to buy 100 shares at the price of $50 per share),
The gross market value measures the price of the derivative security itself (i.e. $1.00 per call option, multiplied by 100 shares).
Transparency is lacking - that is why they are all Dark money - even central banks have little handle on what happens
Also "trust" in ratings systems is critical
Fall of Petro-Dollar
US FED controls world's Money Supply - not good
US Trade and Fiscal Deficits monetized
Trade instability under Trump
Trade between China and the US mainly relies on small and medium-sized enterprises,
However, many Chinese export-oriented small and medium-sized enterprises are now facing difficulties. The US has already raised its duties on Chinese goods from 10 percent to 25 percent, which is tantamount to closing its doors. In case American consumers agree to pay more out of their pockets, these companies will be able to raise prices on products by 25 percent, which is hardly probable
Strategic Arms Race using Reserve Status
China and Russia have expressed their alarm at the extremely dangerous actions of certain states that, out of their own geopolitical and even commercial benefits, destroy or adapt the existing system of arms control and non-proliferation of weapons of mass destruction to their needs
The rest of the world's strong military states like Russia, China, obviously want to promote multilateralism and expressed commitment to working together to preserve the system of international mechanisms on non-proliferation and arms control.
Arms Trade still in USD
Belt and Road Initiative (BRI)
Eurasian Economic Union (EEU) to promote regional economic integration.
US "arbitrary" Sanctions and Insternational Payments Instability
“The instability of dollar payments is creating a desire for many global economies to find alternative reserve currencies and create settlement systems independent of the dollar. We’re not the only ones doing it, believe me.” -- Russian President Vladimir Putin
Dumping USD in Forex Reserves
Russia buys quarter of World Yuan reserves in shift from Dollar - dumping $101 billion in U.S. holdings from its huge reserves, shifting into Euros and Yuan last spring amid a new round of U.S. sanctions. The data reveal a dramatic acceleration in a policy Russia has been pursuing for several years of reducing exposure to assets that could be affected by U.S. restrictions. Russia’s reserves are among the 10 largest in the world, totaling $458 billion at the end of June 2018. The data suggest Russia accounted for 90 percent of the inflows into the Chinese bond market in the first half of 2018
China sold a large portion of its U.S. Treasury holdings last year
Europe put forward proposals to increase the use of the euro in regional transactions.
Rise of National Currency in Bilateral Trade
Fluctuations in USD/National Currencies destabilize trade
Random movements in national exchange rates particularly against major global invoicing currencies such as US dollar, euro, pound sterling, etc. cause uncertainty in export proceeds and import payments. Along with other hedging instruments, trade in local currency instead of global invoicing currencies could mitigate the adverse impacts of exchange rate volatility in the developing countries. Countries have explored the use of national currencies through various arrangements including currency swap arrangements and bilateral trade arrangements. India’s rupee trade with Russia, East European countries, Nepal, Iran and other countries in the past is one such example. This scheme, which was actually conceived as a trade policy instrument in the 1950s through 1980s during the times when India faced severe foreign exchange constraint, is now being considered as a generalized policy option for mitigating exchange rate-related risks in trade. Against this backdrop, this paper examines the features of rupee trade arrangements with Nepal, Russia and Iran and its possible extension for a number of identified oil-exporting countries.
China - epicenter of Dedollarization
Russia - US Sanctions, Putin drives non-dollar transactions
2018 Trade between Russia and China saw growth last year of around 25 percent to US$108 b
2019 June - Russia and China took another step away from the U.S. Dollar after the two countries agreed to develop bilateral trade using the Ruble and the Yuan and cooperate on development of national payment systems, and facilitate cross-border payments in national and other currencies. Putin said Russia is ready to provide China with sufficient oil and gas, and export more soybeans and other farm produce to China
Trade between China and the US mainly relies on small and medium-sized enterprises, while China’s bilateral trade with Russia accounts for large state-owned enterprises
Iran - Sanctions, Swift, Shipping/Insurance and Oil Trade
Joint Comprehensive Plan of Action on the Iran nuclear issue was a major advance under Obama. But Trump shredded it. Russia, China declared their rejection of unilateral sanctions by the United States against Iran. Even Europe has less publicly moaned the scrapping of JCPOA.
Indian Rupee - hard enough to substitute for USD in some Indian-led trade
1960s Interestingly after Indian mind 1960s famines, the US AID PL480 program was supposed to be repaid in mainly "rupee" trade, imports from India, etc. - not in hard currency.
UAE deal - June 2019 - India and UAE agree to trade in local currencies in a currency swap agreement of $500m to boost trade and investment without involvement of a third currency like the US dollar. With more than $50 billion in bilateral trade, the two countries are each other’s largest trade partners. India’s foreign direct investment into the UAE was $6.6 billion in 2017 while the UAE’s investment in India stood at $5.8 billion. UAE is the sixth-largest oil exporter for India, with non-oil trade between them accounting for $34 billion.
t is also expected to give a push for the local currencies of the two nations and may reduce the impact of volatility in exchange rate arising from the dependency on a third currency. It is also expected to reduce the transmission costs arising from exchange rate risk - Indian Embassy in Abu Dhabi
EURO - European Foreign Exchange Trends
German Mark with Kaiser Empire
1922-24: REICHSMARK re-introduced to fight hyper-inflation
After Germany’s post WWI economic struggles lead to out-of-control inflation. The new currency, the Rentenmark, is introduced in 1923 to restore stability. It is replaced the following year by the Reichsmark, with a value equal to the prewar gold-based mark.
1945-48: THE DEUTSCHE MARK introduced post Hitler
With its economy in ruins and experiencing hyperinflation again, Germany replaces the Reichsmark with the Deutschemark. However, this was done with the support of US, and understanding that reparations will be very few.
1957: EU initially formed TREATY OF ROME
Belgium, Holland, Luxembourg, France, Germany and Italy sign a treaty to form the European Economic Community, which eventually evolves into the trading bloc known today as the European Union.
1979: European Monetary System Adopted - Pegging Currency Trading - Early Start of Euro
One of many steps that eventually lead to the creation of the euro, the adoption of the EMS is accompanied by an exchange-rate mechanism in which central banks of the member states agree to keep their currencies within a narrow trading band.
OCT 1979 UK Abolishes Forex Pegs/CONTROLS
Britain abolishes all foreign-exchange controls, strengthening the role of London in the world’s financial markets.
Oct, 1990 BRITAIN JOINS European Exchange Rate Mechanism
Britain joins the European Exchange Rate Mechanism, motivated, at least in part, by the country’s repeated failure to meet its money-supply targets.
Feb 1992: EU Formalizes with the MAASTRICHT TREATY
Leaders of the 12 European Community nations agree to move ahead with plans to form the EU, authorizing elections, a central banking system and a single currency.
JAN. 1, 1999: Euro becomes the common currency of 11 Nations
- Euro becomes the currency of 11 member states of the European Union, not including the U.K.
EURO Unlikely to be a Reserve
Soros thinks it cannot become a Reserve currency. a system of two reserve currencies would be unstable
Yen - A manipulated Hard Currency
WWI, WWII Japan as a Super Power and its collapse
Japanese Miracle 1960s-1989
Deflation 30+ years 1990-2020
China as a Super Power - YUAN Emerges as a Hard Currency due to Strong Trade Balance
1980-2000 Chinese Reforms, Miracle - Takes over from Japan as Factory of World
MAY 1993: US labels Currency Manipulator in YUAN Devaluation
The U.S. Treasury labels China a currency manipulator in a report to Congress. China is kept on the list in Treasury reports for September 1993 and July 1994.
- In Jan 1994: YUAN DEVALUES. China moves the official exchange rate for the yuan from 5.8 to the U.S. dollar to the prevailing market-determined rate of 8.7, devaluing the yuan by 33% overnight as part of reforms to establish a socialist market economy. The new “controlled floating-rate system” lets the yuan move on the market within a narrow government-determined range.
DEC 1996-1999: CONVERTIBLE YUAN but PEGGED TO DOLLAR controlled by PBoC
China allows the yuan to be fully convertible into foreign currencies for trade purposes but maintains rules and limits on buying and selling foreign currencies to make loans and investments.
China pegs the yuan at 8.28 to the U.S. dollar through frequent central-bank interventions.
2001: CHINA JOINS WTO - Most Favored Treaties benefit Globalization, MNC profits
China begins to relax capital controls gradually after joining the World Trade Organization, but international pressure grows for China to let the yuan appreciate faster to help balance global trade.
July, 2005 Yuan partial Float
China shifts from a decade-old peg against the dollar to a managed float, based on a basket of currencies. It lowers the value of the yuan 2.1% overnight to 8.11 against the dollar.
2010+ shift away from USD via Trade balance
JULY 2008-JUNE 2010: LOWER YUAN. China effectively pegs the yuan against the dollar at 6.83 as an emergency measure to help stabilize China’s economy amid the worsening global financial and economic crisis.
JULY 19, 2010: YUAN EXPANSION. China’s central bank and the Hong Kong Monetary Authority agree to expand the scope of yuan clearing in Hong Kong, and offshore yuan trading begins to take off.
JAN. 12, 2011: YUAN TRADING. Bank of China opens yuan trading for U.S. customers.
2015 Capital Flight, Yuan Falls rapidly
There was a massive capital flight throughout 2015 out of China**, that was cut very sharply early 2016 by CCP policies. Soros, in January 2016 predicted a financial crisis akin to 2008 based on the state of the global currency, stock and commodity markets as well as the sinking Chinese yuan. China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.
Aug 2019 China labelled Currency MANIPULATOR
The U.S. Treasury again labels China a currency manipulator after the Chinese central bank let the yuan depreciate to a low of 7.1087 to the dollar in Hong Kong. The move comes amid a trade war between the U.S. and China that has spooked financial markets and fueled fears of a stall in the U.S.’s economic expansion.