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Monday 13 July 2009

China is concerned about the Dollar

Reading - China is concerned about the Dollar http://www.daralhayat.com/p...

China is insisting on the need to reform the global currency reserve system, sparing no occasion without reasserting and restating this demand, even in front of the U.S. officials themselves.

During the G8 summit last week (in Italy), China led one of the harshest and most direct attacks against the hegemony of the dollar on the global economy, while explicitly calling for the world to diversify its currency reserve system, and to seek to achieve the relative stability for currency exchange rates. It emphasized that "We should have a better system for reserve currency issuance and regulation so that we can maintain relative stability of major reserve currencies' exchange rates and promote a diversified and rational international reserve currency system."

China, like Russia, India and other countries, fears that the financing of the American deficit will have a negative impact on the stability of the U.S. dollar’s exchange rate. This is because the financing of large deficits entails an expansion of the process of “creating money”, and consequently, a decline in the value of the dollar itself.

In fact, the deficit in the U.S general budget is estimated to rise from 5 percent of the GDP in 2008 to 13 percent this year. This budget, which expires next September, requires certain returns and revenues to cover the expenses of the U.S administration that are estimated at 3250 billion dollars. But due to the reduction in tax revenues – stipulated by the economic stimulus plan – the American administration finds itself compelled to resort to public borrowing, where the public debt is expected to become a major burden on the U.S Treasury.

In the 1990s, this debt did not exceed 60 percent of the U.S. gross domestic product. It is however expected to rise this year to 80 percent of the GDP, and up to one hundred percent, and possibly 114 percent by 2014, provided that the economic activity will recover and restart next year.

Although keeping public debt in check vis-à-vis the GDP requires the enactment of various associated measures - the most important of which

is protecting financial institutions and all other funds - fixing interest rates on treasury bonds at low levels remains the most important condition for controlling this debt. This is because any gains brought by public debt (in a given country) are eroded when the debt’s interests exceed the rate of economic growth (in the same country).

Meanwhile, it is noted that the returns on U.S treasury bonds issuable over ten years have been strongly rising since the beginning of this year, reaching 4 percent in early June and currently beyond, but on the other hand, growth has shrunk by about 4 percent also this year. Perhaps it is the estimates that a recovery will occur in the second quarter of the year, as well as the forecasts of increasing inflation in addition to the large U.S treasury’s needs for financing, that are all behind this climb in treasury bonds revenues over the long term. Nonetheless, these financial needs are placing pressures on the prices of treasury bonds, thus raising their interest costs. The Federal Reserve Council however, led a counter-effort against the high returns on Treasury bonds, and announced last March that it will buy treasury bonds worth 300 billion dollars. This course of action "created money" in order to ease the pressure on the bonds market, but it has also rocked the lending countries. The reason is that “creating money” subjects the dollar to fluctuations and causes the deterioration of its value, which is exactly the situation the dollar finds itself facing right now.

Continue reading -http://www.daralhayat.com/portalarticlendah/37579

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