FMNN reported that Iran recently announced that it had ordered its central
bank to use euros for foreign exchange transactions and transform the state's
dollar-denominated assets by replacing the dollar with the euro.
The implication, by their government spokesman, Gholam Hossein Elham, was that
this move would also apply to oil revenues. He is reported as saying that,
"Foreign income sources and oil revenues will be calculated in euros and we will
receive them in order to put an end to our dependence on the dollar."
The bright side is that this move appears to have been a political action taken
to hurt the dollar, and thereby the U.S., and not because of any financial fear
of an imminent, massive dollar depreciation.
The dark side is that it will add to downward pressure on the dollar at a bad
time, adding to Federal Reserve Chairman Bernanke's problems. It may even help
to delay any planned move by the Fed to cut U.S. interest rates.
Story Continues Below
The same edition of FMNN reports an alleged rumor circulating on the Internet
that China is about to dump one trillion of its U.S. reserves.
While we think this remains a serious threat in the medium to long-term future,
we do not see it happening in the near future, provided America cooperates by
keeping its vast consumer market wide open to cheap (deflationary) imports from
China.
China could experience awkward, even "unpleasant" internal reactions to a rapid
increase in the value of the yuan. A "dirty" or "managed" float has kept the
yuan weak and grossly undervalued, ensuring very competitive Chinese pricing and
their rapid penetration of worldwide markets.
By accepting a weak dollar, the Chinese have lost some $210 billion in the last
year or so on the value of their dollar assets. Through their cheap exports,
they are also effectively subsidizing both U.S. interest rates and the
purchasing power of the American consumer.
The Chinese may not like helping America, or the cost of doing so, in the
short-term. But it most probably suits their long-term plans.
We feel that even the threat of dumping U.S. dollars is so powerful that it
yields the Chinese great rewards in their negotiations. By accepting a vast
paper loss on their dollar portfolio, China can keep the vast U.S. consumer
market wide open, destroying much of industrial America as they do so, while
building their own industries from the ground up on the backs of American
consumers.
[Editor's Note: Warren Buffett is betting billions the dollar will crash in
2007. Go
Here Now.]
In the meantime, China can push for other far more important concessions by the
U.S. government. Concessions that protect the dollar and the U.S. government
from severe economic/political embarrassment in the short term, but expose
America very seriously in the future, when other politicians will be left to
deal with the problems.
For example, from recent press reports, China appears to have negotiated an
important nuclear power deal, probably involving a major transfer of
sophisticated American nuclear technology to China. It may even include
technological knowledge and expertise that arguably could be used for military
purposes in future times.
We also feel that China has probably negotiated an "undisclosed" agreement with
the U.S. to "try" to maintain some stability in the dollar (by agreeing not to
lower U.S. interest rates as fast as the Fed might like), in return for China
not dumping dollars. If that is true, it could have a major impact on U.S.
financial markets, which expect a lowering of U.S. interest rates early in 2007.
We believe however, that the U.S. dollar will continue to slide as the official
"theft" of inflation is increasingly widely recognized, despite the official
U.S. statistics (CPI) showing a deceptively low level of U.S. inflation. They
will also be concerned when they see that the Fed has a decreasing number of
arrows in its quiver with which to deal with inflation.
[Editor's Note: Can Ben Bernanke avert the coming currency crisis?
Go here now.]
Although dressed-up in the diplomatic language, we suspect that the recent U.S.
- China negotiations represent, for America, some very major concessions, which
will cost us dearly in years to come.
While America sleeps, China can be expected to consolidate her increasingly
powerful position as America's next major strategic challenger.
It was long ago that Sun Tzu wrote, "The greatest skill in war is to defeat
one's enemy without firing a shot." We believe these words of wisdom are not
lost on his Chinese descendents.
It is becoming increasingly clear that, as we described in the Nov. 30 Financial
Intelligence, China is already influencing, even internal U.S. economic policy,
in a manner that should make our politicians thoroughly ashamed.
Editor's Notes:
