You can’t shop with an SDR, nor trade it or even touch it. Unless you crunch numbers for an international organization like the IMF, Andes Reserve Fund, the Arab Monetary Fund, or the Bank for International Settlements (BIS) in Basel, the only time you’re likely to come anywhere near an SDR is if an airline loses your luggage.

The Montreal Convention states that if your bags have not reached you within 21 days of expected arrival, you can claim 1,000 Special Drawing Rights as compensation from the airline.

At today’s valuation, that would mean you receive around $1,500…or £770…or €955…or ¥159,000. Because you can’t be paid in SDRs. In reality they don’t exist. Only a government-issued paper money can bring the SDR’s value into existence.

“Monetary Gold and SDRs issued by the IMF are financial assets for which there are no corresponding financial liabilities,” explains the Monetary Fund. But while gold holds value for people earning all kinds of currency across the world, the SDR is simply an intangible monetary unit. It exists as an accounting tool only, used by the world’s central banks and cross-border monetary organizations.

The value of each Special Drawing Right is calculated as a blend of the Euro, Yen and British Pound’s value against the other member of the four-currency basket — the Dollar. Each SDR equalled precisely $1 when the new units were created in 1969. In terms of the world’s previous international currency — gold bullion — it equalled 0.89 grams.

Given how the U.S. Dollar has fared against the other major world currencies over the last five years, it’s worth asking how it has performed against the SDR:

As this chart shows, while the Dollar lost almost half of its value against the Euro since 2002, it has lost “only” one-third against the unreal, intangible SDR.

Most of the difference comes thanks to the Japanese Yen also losing favor against the Pound and the Euro — the other two members of the SDR basket. But they in turn keep losing value against the goods and services people actually use them to buy.

So wouldn’t a different yardstick prove more useful for the IMF and other international bodies? The IMF itself has called the SDR “paper gold.” And if we looked instead to that truly international unit of money — a unit which does, in fact, exist — what might gold say about the world’s currencies today?

This chart shows the price of gold in terms of the world’s 10 largest currencies over the last eight years.

Weighted by size of economy (GDP) and rebased each year as different economies change positions inside the top ten, this Global Gold Index now shows the value of gold for well over half of the world’s population. And its composition has changed dramatically over the last eight years.

In the year 2000, the U.S. economy accounted for 40% of world GDP. By 2007 that had fallen to barely 30%. The tiger economies of India and China, on the other hand, have moved higher up the list as their aggregate demand has increased.

China has increased its GDP more than five times over between 2000 and 2008. Its share of this Global Gold Index has gone from 5% to almost 16%, while Canada has gone from sixth place to 10th and the United Kingdom has slipped from fourth to 6th.

“Monetary gold and SDRs issued by the IMF are financial assets for which there are no corresponding financial liabilities,” as the Monetary Fund says. But while the SDR is an intangible monetary unit that only holds value when turned into Dollars, Euros, Yen or Pounds Sterling, gold remains a tangible and highly liquid asset across the world — qualities that the SDR so obviously lacks.

The only time most people will, if ever, come into contact with SDRs is if an airline loses their luggage. But how many people across the world continue to demand gold as a “financial asset for which there is no corresponding liability”…?

Regards,
Olivia and Tatiana Van Vredenburch
BullionVault
July 7, 2008

Special Drawing Rights was originally featured on Whiskey and Gunpowder

Just how busy will the IMF get when it helps host the G-7 meeting of policy wonks from the world’s seven richest nations in Washington this weekend?

Rumors were that finance ministers from Europe, Japan, the U.K., Canada, and, of course, the United States wanted to chew over joint intervention in the currency market — buying dollars to support the U.S. currency, easing the surge in commodity prices, and helping export-dependent economies avoid a race to debase as they try to stay competitive.

But could they really be so dumb?

On Monday, the IMF’s managing director, Dominique Strauss-Kahn, called for concerted crossborder intervention and regulation by national governments to stem the ongoing global banking crisis.

On Tuesday, the IMF laid out plans to reorganize its own finances, selling 400 tonnes of gold reserves to help cover a $400 million deficit in its $1 billion budget.

Tuesday night saw the IMF warn that total write-downs (i.e., balance sheet losses) due to the collapse of subprime U.S. mortgage lending may reach $945 billion.

“It is now widely acknowledged that public measures are needed in a number of areas,” claimed the IMF — established at the end of World War II to help keep the world’s financial system in check with the U.S. dollar newly crowned as king of world currencies.

“In particular,” the IMF added, “there may be a need to shore up the prices of various types of securities to prevent fire sales.”

And then, on Wednesday, the IMF cut its forecast for world economic growth in 2008 to 3.7 percent, from the 4.2 percent it had predicted only three months before.

“Further,” says the head office of analysis and advice for 185 member nations, “world growth would achieve little pickup in 2009, and there is a 25 percent chance that the global economy will record three percent or less growth in 2008 and 2009, equivalent to a global recession.”

Pretty much the entire globe has been downgraded by the IMF’s chief economist, Simon Johnson, starting with a “mild recession” in the United States. Which leaves him, oddly enough, scratching his head at the collapse of the U.S. dollar.

“The effect of the financial turmoil in the United States has been to lower the prospects of growth,” he said in Wednesday’s 2008 World Economic Outlook, “but somewhat paradoxically, it has also increased oil prices, metal prices, and, of course, food prices.”

Plunging property prices tend to go hand in hand — squeezing tight like a child in a crowd — with a falling exchange rate. Just ask British consumers about their 1990-92 slump in real estate prices.

Or ask them again, jabbing a thumb in their eye, about what’s happened to sterling since the latest house price slump began in late summer ‘07.

That’s why the sudden surge in the dollar of last August presented investors and savers with such a fantastic opportunity to get ahead of the curve and defend their wealth.

The initial surge in the dollar — which pushed the euro down from $1.38 to $1.34 by the start of September — came thanks to a dash for cash by the world’s biggest banks.

The U.S. dollar being the world’s No.1 money, cash equaled greenbacks. And selling everything else to raise money — for settling lost trades and client redemptions — the panic marked what might prove a last chance (during this dollar bear market, at least) to swap dollars for gold below $700 per ounce.

And now? The very week that the IMF said it’s going ahead with a gold sale of 400 tons (pending U.S. approval, which looks a dead certainty)? “It seems that dealing with the risks stemming from the behavior of private sector financial institutions may be the big focus for this coming weekend’s G-7 meeting in Washington,” noted John Hardy at Saxo Bank.

“There are some calls to include currency issues on the agenda, but the G-7 may once again have little to say on currencies, especially if the U.S. dollar is not trading at new lows as the meeting gets under way.

“Even if it is trading at new lows, real intervention beyond verbal remarks is likely some way off,” he concluded.

But the growing call for panglobal financial meddling looks sure to create a “Reverse Plaza Accord” sometime soon in the future:

“In view of the present and prospective changes in fundamentals,” said the communique of Sept. 22, 1985, issued by the rich G-5 nations from the Plaza Hotel in New York, “some further orderly appreciation in the main nondollar currencies against the dollar is desirable.”

Together, therefore, the big guns of the global economy “[stood] ready to cooperate more closely to encourage this when to do so would be helpful.”

Put another way — which was entirely the point — the G-5 would start selling dollars and buying non-U.S. currencies to cut down the looming “super dollar” that towered over the global economy.

(Those changing fundamentals, by the way, were that the United States had become a net debtor for the first time in 70 years. It’s barely looked back…)

What now might cause “close cooperation” in reversing this strategy, buying the dollar to increase its value, and thus aiding non-dollar countries struggling to bear the costs of the dollar’s six-year decline?

There is now agreement in the eurozone about the fact that the depreciation of the dollar is a problem,” said an unnamed French official to the International Herald Tribune back in December.

The finance wonks attending the next G-7 meeting “have to pass the same message to the market,” he went on. But so far — if they’ve passed on that message at all — it’s been ignored:

Of course, it’s not in the United States’ interest to see the dollar go higher.

If you owed $9 trillion and you owned the printing press, wouldn’t you be just fine with the idea of your debt being inflated away?

But the other G-7 cronies, not to mention the poor Asian and Middle Eastern economies that continue to pile up greenbacks and T-bonds every time they do business…might they want to see some kind of “Reverse Plaza” enacted — and soon! — to support their stockpile of dollars?

And with the International Monetary Fund standing ready to sell 400 tons of gold over the next couple of years, wouldn’t it make a great deal for the central banks of Beijing and Japan?

As the GFMS consultancy here in London points out, China holds barely one percent of its foreign currency reserves in gold at the moment. The rest, pretty much, is in dollars. The Japanese do little better, with a two percent gold holding. They just broke the $1 trillion mark in U.S. dollars, on the other hand.

If this swap — the West’s gold for Asia’s dollars — comes off sometime soon, you won’t have to simply stand by and watch this transfer of wealth as if helpless. You could join the big switch — out of dollars and into truly hard currency — starting today, if you wish.

Or you could wait for that communique from the Beijing Plaza Hotel.

Regards,
Adrian Ash
BullionVault
April 10, 2008

International Monetary Policy was originally featured on Whiskey and Gunpowder

“Individually or together…er…in pretty difficult and uncertain times…er.”

IN TIMES OF CRISIS, IT’S ALWAYS GOOD TO KNOW there are bright, committed people working nonstop to sort things out. Or so everyone seems to believe.

Stormy weather needs strong, decisive characters manning the tiller. Clever people, men of action — men like Alistair Darling, for instance, now chancellor of the Exchequer here in the United Kingdom.

Darling took charge last June when the previous finance minister, Gordon “Gold Sales” Brown, promoted himself to prime minister of the world’s fourth largest economy.

It was right around the time Bear Stearns was closing two heavily leveraged subprime mortgage hedge funds. The Bank of England’s Policy Committee — appointed, but not directed, by the chancellor since Darling’s party, New Labor, first came to power 10 years earlier — was just about to raise U.K. interest rates to 5.75%, a six-year high.

And U.K. house prices — offering less than one-third the square footage of the average U.S. home, and with the smallest room sizes in Europe — were fast approaching an all-time peak price of £184,191, some $350,000:

Barely three months later, in September 2007, however, the global banking crisis had spread onto Britain’s high streets, creating the first open “banking run” in more than 130 years at Northern Rock — one of the nation’s top five mortgage lenders.

Darling has clearly been hard at work ever since…fixing everything that let Northern Rock go from £12.29 per share to £0.52 on the stock market — a full 95% slump — as it soaked up £26 billion ($50.4 billion) in emergency loans from the Bank of England.

The G-7’s Men of Action

“What you can do at an international level, I believe, is make sure we have better early warning systems,” Darling told CNBC in a relaxed chat last week after the G-7 summit in Tokyo.

“[We can] make sure that, er, when it comes to, er, off-balance-sheet arrangements, or when it comes to the way that credit reference…er, credit rating agencies behave, then there does need to be international cooperation.”

A nice slip of the tongue! Credit reference agencies are now busier than ever in the U.K., if not internationally, advising the banks on who does — and who doesn’t — represent a “prime only” risk.

“But of course,” the chancellor went on, “most banking supervision is a matter for the individual countries concerned. The lesson that I think we need to draw, though, is you need to get the right regulatory systems, supervisory systems, and you’ve also got to make sure it works.

“Er, and, you know, the system is only as good as the people who are in it, and the key thing is the prime responsibility for getting these things right lies with the company. It’s for a bank to make sure that it knows what its employees are up to, it’s for a bank to ensure it’s got a business plan that works.”

With it so far? The woman from CNBC sure wasn’t. So she asked again — without bothering to jab a finger into his chest in the way that a BBC radio or television anchor would at home — what did the British chancellor mean by international action.

“Individually — or together,” he replied, “we need to do everything we can, right across the world, to get ourselves through what is a pretty difficult and uncertain time.”

And with Alistair Darling running the U.K. finance ministry, the times ahead are only certain to become less pretty and more difficult.

So just what might “everything” mean for policy going forward?

“Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies,” the G-7 statement announced.

Which sounds about as clear and purposeful as Darling’s ramblings to CNBC. Which, in turn, would suit us just fine here at BullionVault…if only the world’s chief policy wonks would stick to talking gibberish, rather than actually trying to put it into practice.

Those sterling men Ben Bernanke and Hank Paulson of the United States, as well as several other financial policy makers from around the world, are now committed to the following course of action:

No. 1: Sell Gold

The G-7 thinks now would be a good time for the International Monetary Fund to swap gold bullion for “income-bearing assets” such as U.S. Treasury bonds.

Or more immediately, in fact, the IMF — founded at the end of World War II — should now be bailed out so it can continue advising poor nations on how to run their budgets.

It’s currently running an annual budget deficit of $400 million all on its own. And as Julian Phillips of Gold Forecaster notes, the IMF’s gold doesn’t actually belong to the IMF yet. The gold still belongs to the original sponsors of the Bretton Woods currency agreement, an agreement that collapsed in 1971 when President Richard Nixon cut the dollar free from what remained of the international gold standard.

But why let detail get in the way of bailing out a failed institution?

No. 2: If at First You Completely Screw Up…

Speaking to the Nikkei news agency just before the G-7 summit, Hank Paulson said, “I believe that you could make a good case…particularly, with the European banks [that] the way they implemented Basel [the international accounting standards agreed to in 1988] may have been partially or largely responsible for the conduit and SIV issues.”

Put another way, the former head of Goldman Sachs thinks the last set of pan-national banking rules threw the door open to precisely the “off-balance-sheet” tomfoolery that’s led us to the current world-banking crisis.

But never let hard-won experience get in the way of cocking things up anew. Right?

“Not only has liquidity dried up since summer,” as Marine Cole reports for Finance Week, “making the funding of [special investment] vehicles more expensive, but with the upcoming application of Basel II capital rules next year, banks will have to start setting aside capital for off-balance-sheet vehicles, which they haven’t had to do under Basel I.”

Basel II specifically demands that banks match their off-balance-sheet risks with some level of funded provision. But the new rules are so complex that their implementation has been delayed by more than three years. As Nouriel Roubini notes in his Global EconoMonitor blog, the new rules still rely on “the same flawed approach of using internal risk models, credit rating agencies ratings, and some Band-Aid capital charges.”

So what to do? “There are a number of things that are being looked at,” says Paulson, the poacher-turned-gamekeeper. “Rating agencies are one of them. We’re looking at the mortgage underwriting, origination process in the U.S., looking at securitization, looking at evaluation and accounting issues and capital issues.”

In other words, nothing is safe from the new slew of regulation about to hit the world’s banking sector. Which will only increase fear and uncertainty on Wall Street and in the City — the perfect policy outcome now that banking confidence has shrunk to nothing.

No. 3: Bail Out Anything & Everything

Within days of returning from Tokyo, Alistair Darling finally took the only course of action he thought left open to him and he nationalized the failed Northern Rock.

Shareholders are irate — not the least of which those who bought into the new people’s bank of Great Britain during its 95% plunge, hoping to turn a quick buck on the bounce.

If current investors aren’t given full value when the Narodny Rock is reprivatized, “the British government’s actions would amount to robbery under the law,” wails Tim Congdon, an otherwise highly respected (and apparently sentient) economist. He pleads in the Financial Times that simply letting the Rock go under was never an option.

“Central banks exist for the purpose of preventing [banking] runs or, at any rate, ensuring that runs are met by lender-of-last-resort loans so the hurried liquidation of assets can be avoided.”

Help me when I screw up, in short, but don’t interfere when I think I’ve been clever. Which in the bigger scheme of things — underpinning the British public’s faith in the security of its banking deposits — is just what nationalizing Narodny Rock will do.

“If U.S. policymakers want to avoid a recession,” writes David Bowers of Absolute Research Strategy — also in the Financial Times — “they need to ensure that America’s $750 billion annual funding requirement from overseas is assured, and at a reasonable price.”

How to keep money flowing into the U.S. financial sector so that its very real-world trade deficit doesn’t implode? “We believe they should move more rapidly to restore confidence in credit ratings, and, thus, in securitized paper,” says Bowers. “This could be done through more regulatory oversight of the ratings agencies.

“As a last resort, the government could even ‘share’ its credit rating with key private sector operators such as the [ailing bond insurance] monolines” — which is precisely what nationalizing Northern Rock achieves for the failed U.K. mortgage lender.

Expect ever more government meddling, in short, begged for by the Western world’s finance industry and willingly supplied by policymakers desperate to appear decisive.

And for as long as this circus keeps rolling on, you might want to keep buying gold as defense.

The men of action, after all, are trying to sell it.

Regards,
Adrian Ash
BullionVault
February 21, 2008

Government Banking Bailouts was originally featured on Whiskey and Gunpowder

Quoting a Morgan Stanley analyst endorsing the plan, “This is arguably a good time to consider selling some of these gold holdings and investing the proceeds in financial securities with positive yields.”

According to the same article, the head of the IMF said, “There was an acceptance among the G-7 that resources should be raised by selling gold.”

Gold Bulls Should Not Panic

The media does not understand the situation, as usual.

The reports I’ve seen tend to point out that the IMF holds some 103 million ounces of gold, but leaves out the details of the plan discussed so far. Thus, readers are likely to think that it plans to sell all of it.

Au contraire. According to the recommendations of an advisory panel — this includes Morgan’s CEO, Greenspan and central bank heads from Mexico, Saudi Arabia, South Africa, the ECB and China, “only the gold acquired since the Second Amendment of the Articles in 1978…which amounts to about 400 metric tons” are to be sold. Moreover, it:

“Should be handled in a way that avoids causing disturbances to the functioning of the gold market and, accordingly, should be coordinated with current and future central bank gold agreements so as not to add to the volume of sales from official sources… It would simply take the place of some gold sales that would have been done by other parts of the public sector, other official sellers.” — IMF Survey, Volume 36, No. 3 (Feb. 12, 2007)

Did you get that last sentence? I underlined it for you.

When Spain and Switzerland stepped up their selling last year at $700 per ounce, the market speculated that they were covering for some of the other members of the CBGA (Central Bank Gold Agreement) that were coming up short. This idea has substance if you consider that in the first three years of this agreement, central banks have regularly come up short. The cumulative shortfall is over 130 tons to 2007.

Add another 100-200 tons for the total decline in global mine production last year and this year, and more than half of the IMF’s 400 tons is spoken for. Putting aside the fuzzy math, the deal is not yet final. It potentially requires a few amendments to the IMF’s charter and approval by the U.S. Congress.

The U.S. has veto power because it has 16.79% of the voting power, and the charter requires an 85% majority. No one else has much more than 6%, so the U.S. is the only one with veto power. It has vetoed similar proposals in the past. This time could be different. Perhaps it is worth noting that some analysts believe the reason it has not approved gold sales in the past is that some members of Congress know that America does not own the amount of gold it claims. This may not deter approval, however, since the U.S. government could surely come up with 70 tons to keep appearances.

Nevertheless, the media ignore these controversial things.

Neither do they care much for the obvious conflict of interest implicit in the fact that the very same governments that are approving the gold sales happen to be the issuers of the bonds that the IMF intends to buy with the proceeds. That is, the deal allows governments to borrow without pushing up interest rates. It is focused on the more popular rationales motivating the IMF gold sales, such as locking in positive yields, securing a guaranteed source of future income, or funding its future losses.

The IMF has complained that it is losing money because the developing world does not need its help anymore. It is going through an identity crisis as world governments decide what to do with it. No one really talks about disbanding it, unfortunately. So it is evolving as a portfolio manager and policeman:

“The IMF’s income has fallen with the decline in new lending and recent early repayments by some countries. The institution’s income shortfall is projected at about $105 million in the current financial year, ending April 30. It is projected to reach $368 million by financial year 2010.” — IMF Survey, Volume 36, No. 3 (Feb. 12, 2007)

It is one of the ironies of modern-day progressivism that bureaucrats be allowed the pretense of acting like portfolio managers. Since the advisory board’s recommendations alone — just one year ago — the IMF’s gold portfolio earned more than $30 billion in profits. It would take a similarly sized portfolio of government bonds four-six years to earn that amount at today’s yields. Since the new millennium, this gold portfolio has grown by about $65 billion. It would take 15 years to make the same off a 5% yield.

The IMF’s Track Record Speaks Volumes

The last time that the IMF sold a significant lot of gold was not at the beginning of the bear market in 1980 — as it might have if bureaucrats and ministers were actually wise in these matters.

Rather, it sold gold during 1957-70, and again in the 1976-80 period.

It has not sold any gold since.

And you can bet it sold most of that at prices well below $200-300 per ounce, since prices exceeded that level for less than two years over the aggregate 17-year selling period (1957-70 and 1976-80).

In the former period, the rationale for selling was twofold: To replenish its holdings of “currencies” and to invest in U.S. government bonds in order to generate income to offset operational deficits.

This theme, similar to the rationale offered today, was such a bad trade that by the time 1976-80 came around, the rationale for selling gold mutated to reducing its role in the international monetary system.

That’s right; they came right out of the closet.

What, with gold prices at five-10 times their original pre-1970 fixed level, and bond values depreciating ever since the IMF first started buying government bonds at a secular top in the mid-‘50s, who would believe anything else? They locked in yields somewhere in the neighborhood of 3-7%.

Soon after they finished locking in those “positive yields,” they turned negative, and then soared to just about 20% by 1980. The price of gold never again would fall to the values that the IMF received for most of it in that 17-year time frame — certainly in the 1957-70 and 1976-78 periods.

In the Final Analysis

The market should brush this off as another potential bureaucratic blunder.

The deal is not effective until the IMF ratifies it in April and the U.S. Congress approves it.

The real reason for the program is to cap gold prices and bond yields and to fill the dearth of physical gold that seems to be limiting central bank gold sales. It is far from a sound investment decision, given the supply situation and the policies of central banks today in debasing money at a 5-10% annual clip.

The IMF’s charter keeps it from destabilizing the market, but the market is too strong and big, anyway.

The amount of gold the IMF plans to sell is equivalent to about one day in trading volume on the LBMA.

The Nymex saw daily trading volumes peak at the equivalent of 28 million ounces in 2006 — twice what the IMF intends to sell. Heck, China could buy all 400 tons in one fell swoop and call it a day.

That transaction would be worth some $14 billion at today’s value for gold — that is about 1% of China’s $1.3 trillion in foreign exchange holdings. It’s less than one week in new foreign exchange gains. The market may give back some points in the next few weeks, but it may just be that traders were looking for an excuse to take profits after gaining 250 points in the last six months alone.

More significantly, should the bulls brush it off, we could see bullish confidence soar.

Gold should be bought on any dip, especially those subsidized by gold-unfriendly policies.

Regards,
Ed Bugos
February 12, 2008

International Gold Sales was originally featured on Whiskey and Gunpowder

The fact is when it comes to currency manipulators, you have to ask: Who isn’t one?

With that said, buckle your seat belt for Part II.

If this Fair Currency Act does become law, it won’t take effect until January 2008. Only in spring will the process even begin, with Hank Paulson’s “findings.” Then we have 180 days to wait for China to respond with correcting policies. But if it doesn’t (and why would it) we must enlist the IMF.

On IMF’s heels would follow formal proceedings with the World Trade Organization. The WTO’s legal approval of our trade penalties would not happen until late 2010.

Now hear this: The IMF’s role is essentially null. It hopes to “shame” any currency-manipulating nation into changing its practices. Shame? That’s right. Despite a recent review of IMF procedure for monitoring monetary policies, it neglected to adopt new methods of enforcing its rulings. In the IMF’s June press release, it only announced a tightening up of the definitions set down in haste during the Post-Bretton Woods fallout in 1973.

Not having any widely excepted economic theory on how to manage exchange rates is a big part of the problem. And in fact, the same Articles of Agreement the senators wish to invoke are written so broadly that they give immense leeway for how countries choose to handle exchange rates. The only mechanism the IMF has in its arsenal is the “supplemental consultation.” This is a special investigation of a country’s interest rate problems.

Moral Suasion: Pressure Without Force

The supplemental consultation has been invoked only two times in 29 years: Sweden in 1982 and South Korea in 1987. The result: not successful. The U.S. failed to get the IMF to agree that South Korea’s account surplus should be reduced by half, from $10 billion. And post-IMF consultation, that account surplus actually grew to $14 billion.

In today’s case, the IMF does want the yuan to move, but says the timing should be left to China. All in all, the only tactic the IMF has is “moral suasion.” A consultation with Investopedia offered a stunning definition replete with examples: “closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or vague threats.” Those last two are my favorite. The “good example” they provided: When the Fed chairman speaks, stocks fly or fall. Wow, and do we ever cave in to that pratfall.

Too bad the IMF’s suasion won’t be so effective. Especially since our own stance on IMF intervention is confounded. We, against the majority of Europe, championed the idea that China (as well as India and Turkey) needed to have more power in the IMF…not less.

This struck me as counterintuitive until I read the rationale of one Treasury undersecretary, Timothy D. Adams:

“I would urge that by re-engineering the IMF and giving China a bigger role, China will have a greater sense of responsibility for the institution’s missions.”

Now, it strikes me as just plain stupid (however much an appeal to “community spirit” that it is). That’s like saying our founding role in the U.N., with all its attendant power, makes the United States more likely to feel its responsibility to all the members of the U.N. and to its unified cause and mission.

So shame and responsibility are to save the day? That’s like saying corporations should have “feelings” simply because they are legally classified as “persons.”

But the decision to give China more veto power doesn’t fall into our lap. It belongs to the likely successor to the current IMF managing director: Frenchman Dominique Strauss-Kahn.

So how’s the preliminary “shaming” going? Back in April, the People’s Bank of China rejected the IMF’s yuan advice — emphasizing the importance of stability within member countries. So I wouldn’t hold my breath for IMF action. And in fact, our legislative pressure hardly seems to bristle the Chinese media.

How China Reacted to the Fair Currency Threat

Frankly, Xinhua made it seem about as consequential as swatting a fly. Before the Senate legislation gained its finance and banking following, the general line was that Hank Paulson knows the real story. The legislation is foolish. Hank is on our side.

Then, on Aug. 8, Mr. Ambrose-Evans-Pritchard screamed the headline, “China Threatens ‘Nuclear Option’ of Dollar Sales” from his privileged U.K. Telegraph view. The source was “state media.” But none of the phrasings of the officials he cited ran quite that way. The finance chief at the Development Research Center, Xia Bin, called the foreign reserves a “bargaining chip.” And that, folks, is simply moral suasion right back at you.

Supposed “NUCLEAR OPTION” Would Be Sinocidal

Call me a fool, but I believe the People’s Bank of China officials were speaking the truth when they resoundingly denied a huge treasury sell-off in response to Mr. Pritchard’s outcry.

After all, it’s really NOT in China’s interest. And since China has yet to return to true “empire” status, it doesn’t have the swollen balls to make a point outside of fiscal interest…

When you’ve got $1.33 trillion in greenbacks, you’re not going to sell them off en masse. It would be “Sinocidal.” China could only dump a tiny fraction of the reserves on the market, or else its remaining reserves would take a huge hit in value. Secondly, the yuan is not yet unpegged from the dollar, which is why buying Treasury reserves works so well for China in the first place. This limits the yuan from rising — by propping up the dollar.

Truth is China doesn’t have to do much of anything. Aren’t we already imploding?

Don’t Place the Entire Trade Deficit on the Yuan’s Doorstep

My personal favorite post-Senate approval remark comes from the chief economist of Hong Kong’s BNP Paribas Peregrine Securities. It didn’t get much press:

“They have stuck to their anti-China stance simply to win over voters.”

With this, the Asian chief economist shrugged. His conclusion: This nation of deficits will suffer from its own detrimental behavior, no matter what happens with China.

What “We the People” don’t fritter away on higher-cost consumer goods from China we’ll lose snapping goods up from lower-cost nations. And besides, China’s labor costs are so low that there will be no shot in the arm for American manufacturing. It’ll go to China’s increasingly competitive neighbors!

So what really is all this China business but a waving of a red flag in front of a bull? (That is, a flagging bull coming to the edge of easy-money pastures.) How else to divert Americans from the clear and present dangers in the economy? For example, the recent $120 billion liquidity injection from our fearless central bankers? Instead, we ask for a good old “enemy.”

Because surely the recent “consumer confidence” numbers for August at their “highest in five months” aren’t enough to keep us buoyant. Nor do we see in them the chastisement I think we deserve.

Exercise Your Way to a Healthy Economy

Hmm…our less than 1% savings rate compared with China’s personal savings at 40% of an individual’s income. Believe it or not, we have some liberty to “vote” with our dollars.

Hillary Clinton recently got her panties in a bunch over this yuan game, preaching the prevention of America’s being “held hostage to economic decisions being made in Beijing, Shanghai, or Tokyo.” What you’re not allowed to say on the campaign trail is the truth: “You are held hostage by your own purchase of gewgaws, SUVs, and houses you couldn’t pay for…”

Sure, you can say, “We were tricked into thinking they [the houses, at least] would appreciate so much.” But you, dear reader, surely needn’t be pointing that finger.

And if we all acted like Sara Bongiorni, the business writer who penned A Year Without “Made in China”: One Family’s True Life Adventure in the Global Economy, at least we could have a high horse to ride into the China Currency War on.

Bet you could do it. One of Ms. Bongiorni’s big complaints was not having a coffee maker once the old one broke. Try boiling water in a saucepan on the stove. Add grounds. Strain if desired. Or better yet, forget the coffee. Take a shot of good ol’ American bourbon whiskey — we’re gonna need it in the coming months.

I agree with the Hong Kong economist. Don’t let the congressmen yank our chains. To take the words straight from the China Currency Coalition’s press release on the Fair Currency Act of 2007:

“American manufacturing workers, their industries, and their communities are counting on Congress to act.”

But as I hope we’ve uncovered above, this is an act promising no action. Let’s not forget that Bush is keen to veto it anyway. This would be one of the better moves in the twilight of his presidency.

To paraphrase the character Vizzini, from my generation’s cult classic film The Princess Bride: The most famous classic blunder is never get involved in a land war in Asia…And (I add) only slightly less well known, never get involved in a currency war where you have no weapons — just IOUs.

Here’s how that battle unfolds. Send out a spokesman, say, Treasury Deputy Assistant Secretary Mark Sobel. This ersatz “rear admiral” tells Congress:

“While China’s currency policy is critical to the United States and to China, currency movement alone will not significantly reduce China’s trade surplus nor eliminate the distortions in the Chinese economy. China’s trade surpluses are rooted in the structure of the Chinese economy and are not solely the result of currency policy. China needs to restructure its economy so that household consumption, rather than exports and excess investment, powers growth…Vibrant domestic consumption is key to the welfare of the Chinese population and is the only way that China can grow without generating huge trade surpluses.”

In fact, that’s exactly what Sobel said in May 2007, in his testimony on how currency manipulation affects U.S. workers. Hmmm…that’s all he’s got?

How far are we really going to get by telling China to become like America? We, with our oh-so-well-oiled economic machine.

Since currency talk has “gone nuclear,” let’s call America’s weapon of spreading the gospel of household consumption “bioterrorism.” Because the urge to consume, nicknamed “keeping up with the Joneses (or Chens),” is surely the result of some overactive gene.

So let’s leave off with the revised headline “Bioterrorist U.S. Bids China CONSUME.”

Till Congress makes its next blunder,
Samantha Buker

August 24, 2007

Why the IMF Won’t Make Our Day was originally featured on Whiskey and Gunpowder