Putin and Wen announces quiting the USD
Russian President Vladimir Putin and Chinese Premier Wen Jiabao has just jointly announced in St. Petersburg to no longer use the U.S. dollar in their two country’s bilateral trade. China Daily reported the news, headlining, “China, Russia quit dollar.” This is a reaction to the yet another round of printing by the Fed ($600 billion in fact).
“Quantitative easing” are new fancy words the U.S. government use to describe printing money out of thin air. (Would you be surprised if the U.S. media do not refer to this as “currency manipulation”?) At the recent G20 Summit, world leaders were upset at the U.S. for being so irresponsible as the USD is the reserve currency for the world. If Russia and China successfully execute on this arrangement in the coming years, I think other countries could follow suit.
$1.4 trillion out of thin air
The U.S. government has created out of thin air (“manipulated” into existence if you prefer) $1.4 trillion since September 2008 (around the time of the financial crisis) to March 2010. (Source: U.S. Fed.) In December 2008, James Grant wrote an article in the WSJ criticizing the Fed “printing like mad … and is the wrong approach with potentially dire consequences.”
What’s the point? Everyone who hold assets denominated in dollar are immediately going to have their wealth diluted in proportion to the amount “printed” (it’s computer based now, and so the physical printing is no longer necessary). China and Japan are the two largest foreign holders of American debt, so the value of their holdings decrease. The vast majority of holders of dollar denominated assets are in fact Americans. Their purchasing power is now reduced. Who is “manipulating” who?
In 2002, the GDP of China was 10.2 trillion yuan, and the GDP of the US was 10.6 trillion US dollar. At the year-end exchange rate, China’s GDP was 11.7% of the US’. In 2007, the GDP of China was 24.7 trillion yuan, and the GDP of the US was 14.0 trillion US dollar. At the end-end exchange rate, China’s GDP was 24.0% of the US’.
If we assume the relative paces of the underlining economic numbers remain the same, China will catch up the US in 2019. That’s scenario #1. The key underlining economic numbers are: nominal GDP growth and currency exchange rate. Continue reading