FUTURE - SDRs, Multi-Polar Currencies

By pjain      Published June 23, 2020, 6:23 p.m. in blog Invest   

Fall of Euro-Dollar, Petro-Dollar as eCurrencies Thrive for Trade

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.

  1. 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),

  2. The gross market value measures the price of the derivative security itself (i.e. $1.00 per call option, multiplied by 100 shares).

  3. Transparency is lacking - that is why they are all Dark money - even central banks have little handle on what happens

  4. Also "trust" in ratings systems is critical

US FED controls world's Money Supply - not good

US Trade and Fiscal Deficits monetized

Electronic Settlements

US "arbitrary" Sanctions and International 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

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.

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

Dedollarization - Rise of National Currency in Bilateral Trade

China collaborates with Russia, Iran to avoid USD in trade

China - epicenter of Dedollarization

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.

Russia - Rest of globe too small or fragmented

  • Russia can't because it is not an advanced economic society and it too, like China, is corrupt.

Russia - US Sanctions, Putin drives non-dollar transactions

2019? 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

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.

Europe buckles under

Europe put forward proposals to increase the use of the euro in regional transactions.

Britain was just too small after WWII

  • Conservative Northern EU, Switzerland, Germany, etc. want to protect their economies from profligacy.

=== YUAN SDR - Dominating Superpower - Eurasia

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 Chinese Yuan recognized as a world currency - HUGE OUTFLOWS occurred

In November 2015 the Chinese Yuan was recognized as a world currency. On a PPP (Producer Price Parity) basis China is the largest economy in the world with the US in second place.

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.

2015+ China Forex Capital Controls - Prevent Jumping Ship

China clamped down forex and capital controls - restoring Internal stock and home markets

2016+ China gradually selling US T-bills

  1. China sold a large portion of its U.S. Treasury holdings last year

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.

2020 TPC/RCEP/CPEC, Belt-and-Road, String-of-Pearls

The Chinese love the Bretton Woods ,, (a) see the United States as the British of the 1940s - a declining imperial power facing economic and political problems that threaten its global position. And they see themselves (the Chinese) as being the Americans of the 1940s. - Benn Steil, author and director of international economics at the Council on Foreign Relations

2021 YUAN Floats - Forcing trading in it, Emerges as a Hard Currency due to Strong Trade Balance

--- China as a Super Power

Imperial China - dominating South China Sea

=== Europe Role as SDR - European Foreign Exchange Trends

EURO Unlikely to be a Reserve

Soros thinks it cannot become a Reserve currency. a system of two reserve currencies would be unstable

--- Euro IS a Reserve Currency

Euro has no central bank or policy.

The dollar isn’t strong—the Euro is weak

The Euro lacks the political coherence which is necessary to become THE major reserve currency.

TIMELINE of European Money

--- 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.

2005? Prior French colonies Unite to remove Franc/CFA - France stands to lose currency base

Countries such as Nigeria, Tunisia, Egypt and Angola were ready to change their currencies.

March 2011, French air force teeth in NATO-bombing

Hillary Clinton cheers Rabidly-thirsty for Gaddafi's blood! Why - Clintons 12+ years as Wall Street pawns or USD Reserve/Softpower?

  1. Hillary Clinton’s electronic mailbox. One of the 3000 emails showed NATO’s willingness to overthrow Gaddafi’s government. NATO mainly wanted to to neutralize the African gold currency supported by Libyan oil reserves.

2015? Libyan and East Mediterranean Power Vacuum

  1. In a world where American power is on the wane, Libya has emerged as the most promising playground for regional players.

  2. After getting their hand burnt after EU/NATO/Hillary Clinton bombing devasted Libya and triggered millions of refugees many reaching Italy, the EU is also staying out of the picture.

  3. Gold Dinar: the Real Reason Behind Gaddafi's Murder - Millenium State blog

Yen - A manipulated Hard Currency

Meiji Restoration

WWI, WWII Japan as a Super Power and its collapse

Japan wants to beggar its Yen to keep favorable trade as it suffers from persistent savings glut, low demand, aging and severe Deflation

Japanese Miracle 1960s-1989

Deflation 30+ years 1990-2020

India Long Road to Join Global Hard Currencies, RBI beggars it

1947 Independence - India followed along with Peg to Pound

1949 India continues Pound - Devalue wrt USD

The 1949 30% devaluation of UK Pound started an international realignment of exchange rates in which many other countries devalue their currencies against the U.S. dollar, including Australia and India.

1966 Famine - hurt India - further devaluation

1992 Forex Crisis

2015+ RBI Controls INR and continues to Beggar the Rupee

Still RBI has massive currency flow controls. Indian Rupee is not a freely or fully convertible currency.

A fully convertible currency is one which has the least capital and current account controls. This is only possible if your banking system, treasury markets, bond markets should have depth (volume) and breadth ( Variety of instruments) to withstand capital inflows and outflows .

INR as a fragile currency, Low Share of Global Trade, Even though Indians everywhere

Rupee’s share in global trade settlement is negligible.

Even though Indians are one of top overseas populations, sadly it is far from a hard currency.

Why is Indian rupee so weak? - “When you have decent inflows, there is no reason for the rupee to depreciate and the RBI's sharp dollar purchases are the predominant reason behind the weakness,” said Anindya Banerjee, a currency analyst at Kotak in Mumbai.Nov 28, 2019

Oil and Gold Imports Waste Forex - mess up balance

Do Liberal Educational Loans Waste Forex

Indian Rupee - hard enough to substitute for USD in some Indian-led trade

  1. 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.

  2. 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

Outbound Travel Waste Forex = Total FDI

A WTO study says Outbound forex spent was $20b in 2015 growing 12% per year. WTO estimates 50m per year will travel abroad, spending $60 billion by 2020, or about the same as the total FDI inflow into India in 2017.

Sadly FDI inflows are NOT rising by even 10% per year - no wonder that between lack of FDI and the massive Public sector banks, there is a massive capital starvation in India.

  • Encouraged by its pace-setting 7% GDP global growth rate, rising personal income levels and changing lifestyles, huge middle class as well as the availability of low-cost air fares and diverse travel packages, India is rapidly becoming one of the fastest growing outbound travel markets in the world, second only to China.

India’s population currently 1.35 billion overtakes China’s

Its young, tech-savvy, educated workforce are GLOBALS ie well connected and traveling abroad often. A sizable number of Indians have a net worth of more than $1 million and 180 million Indians - three times the population of the UK - speaks English, and many of these folks own cars, cell phones and carry credit cards.

India's middle class is already bigger than entire US population and will double in size to 547 million .

Every year, more than 5.4 million Indians go abroad to conduct business, attend meetings, study, sight-see, shop, honeymoon and especially to visit friends and relatives (VFR). With more than 20 million Indian nationals now living throughout the world (3.4 million in the US), the volume of outbound travel is increasing about 25% a year.

Indian Tourists spend the most!

There was a time when Americans spent big, tipped generously and lived life king-size while travelling the globe. Now when traveling abroad, Indian tourists are among the world’s highest-spending globetrotters.
In fact they spend this money in an average 2 weeks alone!

Nationality Spend/Trip
India $1200
Americans $700
British $500
Chinese $300
Japanese $300

Most Indian business and VFR trips include leisure and shopping components, and nearly half of all Indians who venture abroad do so to shop with almost 75% buying branded duty-free goods.

If expectations are realized, the UNWTO predicts today’s 20 million outbound Indian travelers will more than double to 50 million over the next three years.

Kinds of trips abroad - Business - really important including IT/outsourcing travel - last 3+ weeks - Holiday trips last 2 weeks and usually setup as booked discount tours - VFR remains the staples of Indian outbound tourism and last 4-6 weeks - Sports vacations - luxury travel - MICE trips - Honeymoons - people are spending $10,000+ for fancy Aussie and Swiss honeymoons paid for bride's Dear-old-Dad - Cruises

Most Popular Destinations

Nearby and Southeast Asian countries remain preferred destinations as they are "Cheap" and bring back "Goods" - Thailand - the top destination esp. Bankok - Dubai is probably the No. 2 destination for Indians - Singapore - Malaysia - Sri Lanka - Nepal - Australia

Canada and U.S. dominates for business/careers - US in 2000 over 250k Indians came, growing to in 2015 1.1m+, by 2018 1.4m+ and by 2025 2-3m - Indians were the 7th largest market for US - spending $12b in 2015 alone - Air India and United offer the only nonstop flights to New York and San Francisco from India

European countries are popular in the luxury segment. - 2.5m Indians visited Europe in 2016, adding almost $3 billion to the local economies of individual countries. - London, Scotland, Paris, Switzerland and Germany remain age-old favourites esp. as many Bollywood movies were shot on location there - East European countries such as Hungary, Slovakia, Poland are loved by Indians being picturesque and high value for money - The Mediterranean weather countries of Greece, Spain and Portugal have also gained popularity esp. by the "been-there" Europe travellers

In Asia emerging destinations drawing attention include - China - Japan



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