This is another example why, at least in fiscal terms, Kudrin is more credible than other members of the Russian government:"I don't think any new unions of currencies will appear any time soon," Kudrin said in a panel discussion at the St. Petersburg International Economic Forum. "The shortest way toward this would be for China to liberalize its economy and allow the convertibility of the yuan.For those politicians around the world who continue to use the currency issue as a posturing tool, and to those in the media who continue to treat this as a legitimately plausible possibility in the near future: ENOUGH. Move along. Ten years is the minimum length of time required, which in actuality likely means at least 20 years. Surely this is not worth the news space it's getting in recent weeks.
"This may take 10 years," he said. "But after this, there will be a demand for this currency, and this will be the shortest way to create a new global reserve currency."
It will take "very serious work" to make the ruble a reserve currency, even at the regional level, Kudrin said.
Interesting that ten years is thought by Putin critics to be enough time to have transformed the Russian economy from an utter wreck in 1999 to a fully diversified economy and why hasn't he done it by yesterday...
(oil prices).
If Kudrin is a the voice of reason, that means he doesn't have long to live. God rest his soul, brave man.
RKKA:
FULLY diversified? Maybe English isn't your first language, but that implies there has been diversification. There hasn't. The stock market moves IN TANDEM with the price of oil because Putin has irresponsibly squandered Russian oil revenues on cold war provocation rather than infestment in infrastructure, and has ignored the rule of law necessary to diversify. That's why Russia has suffered far more than any other nation from the global crisis.
Isn't it a bit silly to keep blaming Yeltsin? After all this time, isn't it Putin's economy yet? Democracy is also to blame, right, but not the KGB?
You sound like a Soviet man. Sad.
Phoby, Phoby, Phoby.
And the US stock market moves in tandem with the financial sector, which at its peak accounted for ~40% of all US corporate profits. Too bad the US financial sector was built on fraud, ignorance, and lousy math, huh?
And actually, Ukraine and the Baltics are suffering far worse than Russia. Ukraine's death rate is every bit as high as Russia's while Ukraine's birth rate is stuck about 15% lower. Russia has a current account surplus still, and growing central bank reserves, while Ukraine lives day to day. Latvia is gonna devalue, which will collapse the entire Baltic house of cards, built as it was on borrowing and spending like there's no tomorrow. As it is, Latvia's GDP is down ~18% year on year, twice Russia's rate of decline.
But then, Phoby, facts and knowledge never were your strong point. Just bile and spite. Hope that works out for you
@El Maestro
I'll take that bet on 10 years being the "over/under" on the adoption of a new global reserve currency other than the US Dollar (SDRs, Yuan, Euro, or some basket of many).
See this announcement by the Chinese as another indication of their desire to diversify out of the US Dollar:
http://bit.ly/D4q37
PS: This issue is getting the "news space" because it is the single most important issue confronting the international monetary system. I can guarantee you that it will be on the top of the agenda when the Chinese Premier visits Russia later this month.
Here's more proof that taking the "under" is correct on our bet that there will be a new reserve currency within 10 years:
http://dailyreckoning.com/us-outlook-deteriorates-bond-yeilds-soar/
There is a difference between what we think should happen versus what is realistic to expect to happen. The Chinese and Russians may desire a diversification away from dollars, and they absolutely will discuss it, but this does not mean it has any certainty of happening inside of 10 years. The key point here is not whether other currencies should be included as reserve currencies (they should) nor whether a country or countries consider it in their best interest to eventually make it happen, but rather the complexity of logistical reforms to the international monetary system that must take place in order to make it actually take effect.
As far as the so-called "proof" from the Daily Reckoning: First, at the risk of coming off like a school marm, I have a very hard time taking seriously any opinion on US Treasury yields that actually manages to misspell the word, "yield" (especially in the headline!). That aside, the Daily Reckoning article you post actually posits two explanations for a steepening yield curve before assuming the latter is the case and barreling forth with the familiar doomsday arguments. I don't deny that the dollar's prominence in the world is in peril, but suitable alternatives have yet come forth. The euro, the yen, the yuan and SDRs all still have and for at least the next 10 years will continue to have very serious shortcomings as primary reserve currencies, shortcomings which have been too easily dismissed in the rush to declare armageddon for the dollar. Put another way, the dollar may have problems, but that doesn't mean other currencies don't have worse problems. The moment the US government has trouble selling debt, I will join you in taking the under on 10 years. And by "trouble", I mean that there is a shortfall of buyers (such as what the German government experienced on an attempted 10 year bond issue earlier this year).
Getting back to the point of this post: Alexei Kudrin, unlike many other figures with a global microphone on this issue, has decided to make a statement more based on realistic expectations than on an emotionally-driven politically palatable soundbite. My gripe with the mainstream press is that they seize on every statements about currency policy with the same fervor as breaking news whose ramifications will be felt tomorrow, raising the question of what qualifies something as newsworthy. This question becomes even more relevant and the mainstream press' lack of analytical skills more apparent, when the only headway that seems to be made is more and more soundbites, bolstered by the odd currency swap agreement that proportionally speaking is really more symbolic than anything else (see China-Belarus, China-Argentina...etc etc etc).
"The moment the US government has trouble selling debt, I will join you in taking the under on 10 years......"
Does the Fed buying Treasuries not suggest that the US government is having trouble already? How about long-term rates being so much higher than short-term? Are not Treasury buying reducing risk by swapping their long-term exposure for short-term? Germany's not alone either, England had some trouble selling it bonds this year as well.
Were not the US Dollar the predominant reserve currency, then the US government, itself, would already have had multiple auctions with under-demand. Hence, another reason why the topic of reserve currencies is so topical.
Sounds like you're comfortable taking the "over" on 10 years based on your response. Fair enough, I'll still take the "under." The situation with the US Dollar is not totally dissimilar to that of investment banks or the US real estate market just 2 short years ago. If you or I had posited that both would implode and that Bear Sterns and Lehman would disappear I think conventional wisdom would have said, "Ok, maybe but certainly not anytime soon." However, they would have been wrong.
The US Dollar situation is a contradiction in terms. In other words, it's a knowable "Black Swan."
Yes, I agree that Kudrin is reasonable and the mainstream media alarmist. We shouldn't be surprised by either.
PS: By the way, is El Maestro's first name, "Craig"? If so, who actually choose the username?
@Timothy, no El Maestro is not Craig Pirrong, I can vouch for that. SWP has his own blog.
OK, they just have a very similar style, which is both quite intelligent and sharp.
Also it makes sense because I don't think it's really Craig's style to call himself El Maestro.
Forget for a moment that I used the word “trouble”, and let me restate: The moment the US government cannot place the debt it wants to place whether through direct auction to the international community or routed through the Fed as a de facto quantitative easing tactic, or via whatever other mechanism, I will join you in taking the under on 10 years. The German government debt I am referring to was a 10-year issue in January which originally was planned for 6 bn euro before it was scaled down to 5.2 bn euro, of which 4.1 bn was actually purchased at auction. So, putting it starkly, nobody showed up to buy one-third of the original debt tranche the German government wanted to sell (interestingly, that very same week the Philippine government had 4x more buyers than it could handle for its own 10-year debt issue). For the anchor economy in a currency union that is supposed to serve as a counterweight to the dollar, that’s A LOT of no-shows. In an even more extreme example just last week, the Latvian government couldn’t get ANYBODY to buy their debt. Obviously nobody is suggesting the lat as a reserve currency, the point here is merely to delineate the difference between “Give me a better price and I’ll buy” vs. “I’m not buying, period.” Offhand, I’m not familiar with the British government having no-shows for any of their debt sales, but the US government has at least been able to find willing buyers for its debt in some form or another…so far…
On long term UST yields being so much higher than short term…have patience. Spreads are definitely wider than customary right now, there’s no denying that, but not too long ago the yield curve was basically flat and for a time short term yields even went negative, albeit briefly. At precisely the moment when money was flying out of stock markets around the world, everyone went looking for a safe haven, which was – take a guess – short term US government debt. Uncoincidentally, this is also when the dollar started rallying in currency markets. The inflow was so severe that UST yields went negative, which effectively amounts to investors paying above par to hold US government debt: Put in $101 and get back $100 in three months. Now what does that say? The whole concept of “rational behavior” is in the process of being redefined right now and the game is far from over. But any economists worth their salt who aren’t right now questioning their entire existence are fooling themselves.
As for conventional wisdom, forget for a moment the real estate market or investment banks and let’s stay with the topic of currencies. Two short years ago, conventional wisdom had bought into a notion called “decoupling”, which posited that emerging markets and their currencies had graduated from dependence on riding the coattails of the US and Europe. A handful of people said that the run-up in emerging market currency values was becoming a bubble and conventional wisdom laughed at them. Conventional wisdom got that one wrong too.
We tend to see the patterns that we want to see. The challenge is to ask yourself what would make you turn 180 degrees on whatever opinion or perception you have become accustomed to reinforcing, and that goes for not just economics, but politics, society, religion, what have you. For me, as it regards this discussion, the answer for now is : people stop buying US debt. People talking about not buying US debt, sure, that’s interesting but it becomes tiresome without any action backing it up. People actually not buying US debt – that would definitely turn my head.
@El Maestro
Very well written and I agree completely that the rumblings we are now hearing do not automatically doom that US Dollar in its role as reserve currency of choice.
What I find interesting is that one of the most common, and often quoted, reasons for the US Dollar remaining as the reserve currency of choice is because there is no other obvious alternative.
I agree with you that the troubles in Germany (the country which should be Europe's strongest economically) do make it hard to imagine that the Euro will replace the US Dollar. It's also hard for me to envision that the Yen, Ruble, or even the Yuan will replace the US Dollar. I feel it more likely that the IMF's SDRs representing a fully diversified basket of currencies is most likely.
I found Zhou Xiaochuan's speech on the topic to be the most interesting and intelligent I have read in a long time. See this link for a transcript:
http://www.pbc.gov.cn/english/detail.asp?col=6500&id=178
To switch gears a little bit, I would suggest that the "...odd currency swap agreement(s)..." are more than simply "symbolic." My understanding is that almost all of the oil traded throughout the world is denominated in US Dollars and that somewhere around 60% of international trade is denominated in US Dollars.
While it may be quite challenging for you or me to find a replacement to the USD as a "store of wealth" for central banks (i.e. reserve currency), it is not so hard for me to see many more countries starting to make the switch from USD as a "medium of exchange."
I found it fascinating that Russia and Belarus had as their sticking point regarding loans, which currency those loans would be denominated . Russia wanted Rubles while Belarus wanted USD.
Russia has set-up a relatively new oil exchange in St. Pete that denominates in Rubles. As you pointed-out, China is cutting commodity-based deals around the world, which are being denominated in the Yuan and the currency specific to the counter-party.
Basically, the situation for the USD is analogous to death by a thousand cuts. The "cuts" keep coming and at some point they will reach critical mass and the USD will become less important.
Coming back to your point about US Treasuries, these currency swap agreements directly impact the demand for these bonds. Specifically, if China has less US Dollars accumulating it will have less need to "park" those extra US Dollars in US financial instruments.
The big unknown is whether China will park these new currencies in financial instruments denominated in those currencies (e.g. Brazilian government bonds, equities, etc.) or whether they will, for once, sell them on the currency exchanges and buy Yuan.
Let me pose the question to you. How can this bubble in the US Dollar be deflated in an orderly and controlled fashion. If we do nothing and the USD does, in fact, lose its standing at some point in the future (short, medium, or long-term) the impact of the US economy and society will be catastrophic. Do you see the SDRs as a viable alternative? How would you unravel this mess?