Wednesday, 5 January 2011

Latin American countries want to weaken their currencies?

Today I read that Brazil are once again rattling the cage about the strength of their currency (or more to the point, the weakness of the US Dollar). Chile also are concerned about the strength of their currency, and are intervening in the market process by purchasing US Dollars (which strengthens the Dollar, while also weakening their currency at the same time).

This idea to try to out-run the US in debasing your currency is a fool's errand.

If they really want to compete on world markets through having a cheap currency, they should take a leaf out of the European Central Bank's book, and change what it is they're going to debase themselves against. The ECB realised that you can't out-run the US in debasing your currency. Instead, they choose to measure their currency, the Euro, against something other than the Dollar. Something more reliable and stable. Real money. Gold.

All the Brazilians and Chileans need to do, is change the layout of their financial statements. Include in there the marked-to-market value of their gold reserves in the assets column, and on the liabilities column list the issued currency promises. In this way, you gain as the US debases their Dollar (because the value of your gold will go up as a result of that process). But because you have tight control over how much gold you have in your reserves, you can issue and extinguish the amount of your own currency in existence to suit your own purposes. If you want to weaken your currency, no problem just print up some more Reals. If your currency is getting a bit too weak, perhaps the rest of the world is losing confidence in your responsibility levels or perhaps the cost of imported commodities is starting to choke your economy -- no problemo! Just stop issuing your currency any further and allow some of the existing debt to mature and not be rolled over. You are in control of your own destiny, rather than continuing to be tied at the hip to US profligacy.

One day, all currencies are going to be arranged in this way -- so why wait and keep playing the Dollar Game any longer?

Simples.

http://www.telegraph.co.uk/finance/currency/8241635/Brazil-pledges-to-stop-US-melting-the-dollar.html

7 comments:

Fauvi said...

Bonjour!

Take a look at these two links (you'll love them!)

http://www.scribd.com/doc/45802164/jan3rd-v2

a wonderfull crash prognosis we already see starting with some little insignificant PM sell-off!

http://www.forexyard.com/en/news/Eurasia-chief-sees-leaderless-G-zero-world-2011-01-05T122411Z-INTERVIEW

Blank/black despair of some people as they are losing control!!!!

Control, bitchez, to quote ZH!
You ask me.... FOFOA...Well, I enjoyed FOFOA since spring 2009, I see RPG as solution w/t euro, I appreciate his work but... things have changed there. "I will not obey!" has always been mein motto even before ZH.

I think it's happening, monsieur le baron. Bonne chance!

DP said...

Bonjour Fauvi, mon ami. Ca va?

Yes, I think 2011 will be an interesting year as you suggest. I am looking for a year of two halves.

In the first half asset deflation and panic, probable Dollar strength in a misguided flight to safety. Basically pretty much a 2008 rerun I would imagine.

Then I am anticipating a second half of realisation that the US government and its paper Treasuries and Dollar are no zone of true safety, and then a flight to private assets including possibly stocks of selected businesses and physical commodities, likely gold in particular.

I could of course be way off.

For me, stocks are currently of limited interest to me. The way I see it, gold is at the bottom of Exter's pyramid, right there below the Dollar in the Level 2 spot. Everything in the upper layers is attempting to squeeze down steadily into lower and lower layers, with most people still seeing first government bonds and then currencies as the final safety plays, and of course the US lower down the levels than other comparables.

However, I think this time things might get way beyond Levels 2 and 3, with more people starting to rush to the ultimate safety offered by Level 1 - gold. So, right now gold is the only thing of interest to me. However, I am very happy to change my mind as events unfold and suggest a change of course is on order once again. The right course is always a moving target, unfortunately.

Only time will tell, and who am I to say what will happen? :-) But this is what I am currently expecting to see, personally.

I am intrigued by your comment regarding FOFOA. I would be interested to hear more on your thinking there, if you wanted to share it with me? You are always welcome here as you know, but you should also know there is an email link on my profile if you wanted to say anything more privately than this at any time.

A bientot...

Mantis said...

John Exter's Pyramid is true. Mr. Exter was an insider at the highest levels of governance and finance (for better and for worse), a self-proclaimed "accidental" Austrian, and an intellectual whose curiosity of monetary science never led him to stray far from the common man and his uncommon financial predicaments.

As regards Latin American countries, Ecuador finds itself in a precarious position as the US Dollar is its official currency. While this dollarization policy has been successfully implemented by some countries, such as Turks and Caicos, Palau, and El Salvador, a more flexible (and interesting) solution is de facto dollarization, whereby a country maintains a two-tiered currency policy that allows for its own currency to circulate alongside the US Dollar. Gresham's Law comes to mind immediately, and indeed it holds true. Yet because both currencies are fiat, Gresham's Law occurs at a a noticeably much slower and less urgent pace.

DP said...

Hi Mantis, and welcome.

I would imagine those countries are really running a three-tiered currency system then, no? ;-) I bet a lot of those canny Ecuadorians don't have $ buried under their floorboards either.

DP said...

Hi Mantis, and welcome.

I would imagine those countries are really running a three-tiered currency system then, no? ;-) I bet a lot of those canny Ecuadorians don't have $ buried under their floorboards either.

DP said...

Bonjour Fauvi, mon ami. Ca va?

Yes, I think 2011 will be an interesting year as you suggest. I am looking for a year of two halves.

In the first half asset deflation and panic, probable Dollar strength in a misguided flight to safety. Basically pretty much a 2008 rerun I would imagine.

Then I am anticipating a second half of realisation that the US government and its paper Treasuries and Dollar are no zone of true safety, and then a flight to private assets including possibly stocks of selected businesses and physical commodities, likely gold in particular.

I could of course be way off.

For me, stocks are currently of limited interest to me. The way I see it, gold is at the bottom of Exter's pyramid, right there below the Dollar in the Level 2 spot. Everything in the upper layers is attempting to squeeze down steadily into lower and lower layers, with most people still seeing first government bonds and then currencies as the final safety plays, and of course the US lower down the levels than other comparables.

However, I think this time things might get way beyond Levels 2 and 3, with more people starting to rush to the ultimate safety offered by Level 1 - gold. So, right now gold is the only thing of interest to me. However, I am very happy to change my mind as events unfold and suggest a change of course is on order once again. The right course is always a moving target, unfortunately.

Only time will tell, and who am I to say what will happen? :-) But this is what I am currently expecting to see, personally.

I am intrigued by your comment regarding FOFOA. I would be interested to hear more on your thinking there, if you wanted to share it with me? You are always welcome here as you know, but you should also know there is an email link on my profile if you wanted to say anything more privately than this at any time.

A bientot...

Mantis said...

John Exter's Pyramid is true. Mr. Exter was an insider at the highest levels of governance and finance (for better and for worse), a self-proclaimed "accidental" Austrian, and an intellectual whose curiosity of monetary science never led him to stray far from the common man and his uncommon financial predicaments.

As regards Latin American countries, Ecuador finds itself in a precarious position as the US Dollar is its official currency. While this dollarization policy has been successfully implemented by some countries, such as Turks and Caicos, Palau, and El Salvador, a more flexible (and interesting) solution is de facto dollarization, whereby a country maintains a two-tiered currency policy that allows for its own currency to circulate alongside the US Dollar. Gresham's Law comes to mind immediately, and indeed it holds true. Yet because both currencies are fiat, Gresham's Law occurs at a a noticeably much slower and less urgent pace.

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