Keynes on Inflation - The Economic Consequences of the Peace

A must-read, 'The Economic Consequences of the Peace' by John Maynard Keynes:

Available free online from Project Gutenberg.

Wikipedia Entry.

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers,", who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

China Unambiguously Signals Intent to Abandon the Dollar

Reuters 2011/03/03
China aims to settle nationwide trade in yuan by 2011:

China hopes to allow all exporters and importers to settle their cross-border trades in the yuan by this year, the central bank said on Wednesday, as part of plans to grow the currency's international role.
In a statement on its website www.pbc.gov.cn, the central bank said it would respond to overseas demand for the yuan to be used as a reserve currency. It added it would also allow the yuan to flow back into China more easily.

IBTimes 2011/03/03
China to allow all trades to settle in yuan, encourages use as reserve currency:

Other moves on the part of China to internationalize its currency include allowing foreign companies to issue yuan-denominated bonds and relaxing rules for foreign financial institutions to access the yuan.

Is China Buying US-Treasuries via the UK ?

- Is China Secretly Buying US Treasuries via UK Accounts?
- United Kingdom Suddenly Owns Over $500 Billion of US Treasury Securities

NYTimes - Jan 2011\
Data Shows Less Buying of U.S. Debt by China:

It is not easy to see how the Chinese government managed to keep its currency from rising more rapidly against the dollar if it did not continue buying Treasuries in 2010, and there has been speculation that it shifted purchases to accounts managed by British money managers.

If so, such purchases would show up as British purchases. As it turns out, Britain is estimated to have been the largest purchaser of Treasuries over the 12-month period, adding $356 billion to its holdings. That made it by far the largest buyer, followed by Japan. The only other major seller during the period was Russia, according to the government estimates.

If China has been buying through money managers, it may be easier at some point for it to begin selling Treasuries through the British channel without others understanding where the selling pressure is coming from.

BIS 2010 Forex Market Analysis

BIS Page
Actual Report in PDF format

Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2010 - Final results
December 2010
Activity in the Foreign Exchange Market

Every three years, the Bank for International Settlements (BIS) coordinates a global central bank survey designed to yield comprehensive and internationally consistent information on the size and structure of foreign exchange (FX) and over-the-counter (OTC) derivatives markets. By increasing market transparency, the survey aims to help monetary authorities and market participants better monitor patterns of activity and exposures in the global financial system.

Fitch Indicates that US Debt Should Be Downgraded

iMarketNews.com
Wednesday, January 19, 2011 - 13:41
Fitch: US Fiscal Metrics To Be Worst Among 'AAA' Sovereigns
By Yali N'Diaye

WASHINGTON (MNI) - Fitch Ratings Wednesday said it believes "the U.S. fiscal metrics will be the worst of any 'AAA'-rated sovereign," due to the higher-than-expected deficits and debt levels expected following the extension of the Bush era tax cuts.

This despite the expected boost to U.S. GDP this year and in 2012.

And just like their peers at Standard & Poor's and Moody's, analysts at Fitch Ratings warned in their latest Credit Outlook that "the absence of a credible medium-term fiscal consolidation strategy is eroding confidence in the sustainability of public finances and commitment to low inflation, with potentially adverse implications for the U.S. sovereign credit standing."

Still, they note the "higher debt tolerance than for other 'AAA' and highly rated sovereigns" due to the "extraordinary fundamental credit strengths" of the U.S., the flexibility and dynamism of its economy and the status of the greenback as a global reserve currency.
...
This echoed Moody's analysis last week, saying that the U.S., the UK, France and Germany "still possess debt metrics, including debt affectability, that are compatible with their Aaa ratings."


Germany 1. USA -1.

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2011-02-03
S&P says no plans to cut U.S. rating in medium term:
Ratings agency Standard & Poor's does not have any plans to downgrade the U.S. sovereign debt rating, but it believes credit risk may increase in the long term, a senior official at the agency said on Thursday.

POMO - Permanent Open Market Operation

a POMO, is not a queer p, but a Permanent Open Market Operation, a P-OMO - a direct intervention in the market by the US monetary authority.

NY Fed: Permanent OMOs

The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

On March 18, 2009, the FOMC announced a longer-dated Treasury purchase program with a different operating goal, to help improve conditions in private credit markets.

On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

On November 3, 2010, the FOMC decided to expand the Federal Reserve's holdings of securities in the SOMA to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

BoC-HongKong Swap Makes Yuan Available for IPO's

The Bank of China has arranged currency swap facilities with the Hong Kong Monetary Authority, resulting in Yuan being available outside the PRC for the first time without the previously associated premium. The Yuan deposits have been made available in order to allow Yuan-denominated IPO's to take place, decreasing reliance on foreign money.

2010-12-23
Yuan Offshore Premium Drops as HKMA Starts 20 Billion Yuan Fund

usd-jpy - Japan and the Trillion Dollar Question

Japan intervenes in currency market to weaken yen for first time since 2004
Shino Yuasa, On Tuesday September 14, 2010, 11:18 pm EDT
Dollar fades after durable-goods, home-sales data. Greenback at lowest versus Swiss franc since March 2008
Sept. 24, 2010, 3:33 p.m. EDT
Yen falls against dollar, euro after Japan intervention
AFP - 15 September 2010
Japan moves to combat rising yen
15 September 2010
Japan intervenes in currency markets to weaken yen
The Irish Times - Thursday, September 16, 2010
Yen sinks on Japan intervention; global stocks drift
By Walter Brandimarte - NEW YORK | Wed Sep 15, 2010 6:11pm EDT
Japan suspected of yen intervention, doubts arise
By Masayuki Kitano and Yoshiko Mori - TOKYO | Fri Sep 24, 2010 9:02am E

Currency

International Currency Symbols
Oanda Corp Official WebSite

"Continuous Linked Settlement is a process by which a number of the world's largest banks manage settlement of foreign exchange amongst themselves (and their customers and other third-parties)."
- WikiPedia Entry
- Official CIS Site

WikiPedia Entry on the Forex Market