Begun the currency wars have.

November 24, 2010 9:14 AM

China, Russia Quit the Dollar on bilateral trade. Are India and Brazil next? BRIC leaders aim for 'multipolar' world order.
posted by AElfwine Evenstar (49 comments total)

I am uncertain of the implications for the United States. It seems to me that U.S. monetary policy will have less influence over global trade. While U.S. power brokers might freak over this, I don't see that this is such a bad thing. At least U.S. policy won't be to blame when some of those deals go south.

Of course, I must be one of those goofy liberal types that thinks people should treat each other fairly and with integrity, and not try to extract every tenth of a percentage point out of the other party in a strong arm deal that one can. Yeah, I am a lousy businessman.
posted by Xoebe at 9:23 AM on November 24, 2010 [1 favorite]

Comrade, can you spare a dime?
posted by Joe Beese at 9:25 AM on November 24, 2010 [1 favorite]

Yeah, I am a lousy businessman.

Nah, there are plenty of good businessmen who don't do this. They might not be among the world's richest, but they aren't exactly Asking Metafilter about health insurance options, either.
posted by circular at 9:26 AM on November 24, 2010 [1 favorite]

There's a joke in here somewhere about trading in "R"s.
posted by Ahab at 9:32 AM on November 24, 2010 [1 favorite]

The idlest of speculation here, but I suspect China wants to keep its reserve of dollars high as an to offset QE. Spending the dollars it has in reserve puts them on the open market at a time when China wants to inflate the value of the greenback to keep the price of American goods and services high.
posted by banal evil at 9:35 AM on November 24, 2010

It's so cute how that a former superpower and an economic superpower think they can agree on how much each other's currency is worth.

20 bucks says Russia starts whining about China's unwillingness to let its currency appreciate and China saying a ruble isn't worth the paper its printed on.
posted by Talez at 9:37 AM on November 24, 2010 [6 favorites]

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

Either sic transit gloria mundi or sic semper tyrannis. Depends on who you ask.
posted by The Bellman at 9:37 AM on November 24, 2010 [2 favorites]

Maybe I'm just an idiot, but I don't see the advantage of having the dollar be the international reserve currency. Plenty of countries seem to have done well without having their 'dollar' be the global standard, so what is the upside/downside here?
posted by r_nebblesworthII at 9:38 AM on November 24, 2010

I don't see this as having any significant effect on the dollar at all.

Before: They trade in dollars, and prior to making the trade, correlate the value of the trade against their own currency ("I'm going to pay you X dollars, which I know is worth Y rubles."). They do this out of fear of the extreme volatility of their own currency. ("I don't trust you not to play games with your currency's day-to-day value. Let's just trade in the currency of this neutral third party.").

After: They just trade in their own currency, skipping the middle conversion step because everyone's comfortable with their own currency valuations.

This hurts the U.S. ... how? Seems to me like Russia and China only become more valuable trading partners overall, because their economies solidify.

The thing that would hurt the U.S. would be a shift away from Treasury bills as investment vehicles. Which ain't happening.

Please, correct me if I'm wrong.
posted by Cool Papa Bell at 9:41 AM on November 24, 2010

This hurts the U.S. ... how?

I think it means the countries no longer have to buy dollars in order to conduct bilateral trade, which weakens the value of the dollar, which makes it more expensive for people in the US to import goods, which is a pretty big part of US spending.
posted by jedicus at 9:46 AM on November 24, 2010 [1 favorite]

which makes it more expensive for people in the US to import goods, which is a pretty big part of US spending.

Wouldn't this drive the American economy and create jobs?
posted by Blazecock Pileon at 9:54 AM on November 24, 2010 [4 favorites]

It depends on how much the american economy is based on cheap imports.
posted by empath at 9:55 AM on November 24, 2010

Yeah... Why isn't this a good thing?

Well, sure it might be bad for profits if your business depends on Chinese manufacturing, but isn't it potentially good for jobs?
posted by saulgoodman at 9:57 AM on November 24, 2010

which makes it more expensive for people in the US to import goods, which is a pretty big part of US spending.

Wouldn't this drive the American economy and create jobs?

Wouldn't this drive prices up, because "things" are more expensive to make in the US?
posted by OneMonkeysUncle at 9:58 AM on November 24, 2010

Russia and China have some kinda sorta wonky currencies. We'll see how well this plays out for them...
posted by Theta States at 9:58 AM on November 24, 2010

I can see how, short term it will be a bad thing, since it means many consumer products will be more expensive, disproportionately impacting those on the lower end of the economic scale, but over the long term, doesn't this potentially encourage more US manufacturing?
posted by saulgoodman at 9:59 AM on November 24, 2010

I wonder if this will have the effect of a more direct pressure on China to set its currency loose rather than controlling its value so stridently.
posted by stoneweaver at 10:01 AM on November 24, 2010

BRIC leaders aim for 'multipolar' world order.

Denver International Airport isn't going to stand for that.
posted by sexyrobot at 10:03 AM on November 24, 2010 [7 favorites]

Just to chime in. I don't know whether this is good or bad and don't know enough about the specifics to make an informed comment. I didn't mean to imply good or bad in the fpp; I was just posting what I thought was an interesting development.
posted by AElfwine Evenstar at 10:03 AM on November 24, 2010

I think it means the countries no longer have to buy dollars in order to conduct bilateral trade

But ... correct me if I'm wrong ... I don't think they were actually buying dollars to do that (if they were, that'd obviously be a huge blow, and much bigger news). I think they were using the dollar as a kind of marker for valuation.
posted by Cool Papa Bell at 10:09 AM on November 24, 2010

This isn't exactly a surprise after the G20 talks, is it? The U.S. was practically begging China to let the RMB float, which was met (I will use ironic understatement here) pretty coolly by China. One, they would never want to be seen as taking orders from the U.S. and two, they might have a longer term plan (bolstered by this announcement, I think, but I'm not an international financier) to replace the dollar in "currency baskets", possibly as an early gambit to create an Asia equivalent to the Euro. Combine that with things like Caterpillar's announcement of an RMB backed bond and it's pretty easy to construct a narrative where China's staging a soft takeover of world leadership.

I dunno, I dunno. Maybe rather than convincing them to float their currency, it'd be easier (but harder politically) to start adding tariffs to all Chinese manufactured goods. I know, sounds crazy, but all of the options do to some extent.
posted by boo_radley at 10:15 AM on November 24, 2010 [1 favorite]

Oh dear.
posted by clavdivs at 10:18 AM on November 24, 2010

This article is Krugman's breakdown of China's currency policy, I find it to be a good primer.

As for the reserve currency question, it can be seen as good because it allows America to export more than it imports as the rest of the world subsidizes America's trade surplus.

It can be seen as bad because it keeps America a net importer, it stifles any chance at export led growth which occurs in countries like Germany and China.
posted by banal evil at 10:28 AM on November 24, 2010

Correction: as a reserve currency America can import more than it exports
posted by banal evil at 10:31 AM on November 24, 2010

Either sic transit gloria mundi or sic semper tyrannis. Depends on who you ask.

I prefer Romanes eunt domus myself.
posted by TheWhiteSkull at 10:32 AM on November 24, 2010 [3 favorites]

This is sort-of decoupling from the dollar. Its sort-of what the US wanted, just, on preview, as what boo_radley said, it allows the Chinese to take credit for the proces. On the downside, effectively they do so and as an added bonus now can dictate a large portion of the terms in doing so.

For the US though the dollar will become worth less for a few reasons.

1. China now gets to sell off its dollars, floating more currency into the system.
2. The US must also purchase Yen, which, since the Chinese don't want dollars anymore, we'll need to export some goods to them - which while we already do, this will sort of be like giving something away on a promisory note - since up until now we haven't had to handle chinese currency like actual currency.
3. On the plus side, this may mean exports from the US go up,
4. ...Unfortuantely you can counter this by just not importing as much - which since the dollar is now worth less, that isn't that hard to do.

Now this doesn't change that the chinese government subsidizes its country's exports, making it hard for the US to compete with the price of chinese goods - even against a decoupled dollar. For the US, tarrifs will have to be applied to these goods to combat that.

To you and I this means, that from both fronts, the imported price, and the tariffs associated on the goods will ultimately raise the price of imported goods over the next few months, not only as the China does this, but as other asian nations follow suit.
posted by Nanukthedog at 10:35 AM on November 24, 2010

Wouldn't this drive prices up, because "things" are more expensive to make in the US?

Wouldn't it all even out in the end?
posted by pjaust at 10:37 AM on November 24, 2010

"In the long run we're all dead."
posted by entropicamericana at 10:41 AM on November 24, 2010

The idlest of speculation here, but I suspect China wants to keep its reserve of dollars high as an to offset QE.

But the effect is the opposite. Russia has a trade deficit with China, so were increasing China's dollar reserves.
posted by ssg at 10:41 AM on November 24, 2010

Yeah, but in the mean time iphones, ipads, laptops, tvs, and pretty much everything else gets more expensive.
posted by empath at 10:42 AM on November 24, 2010

China doesn't get to sell off all of it's dollars. Having an agreement with Russia isn't the same as China giving up dollars.
posted by stoneweaver at 10:50 AM on November 24, 2010

I think the worry is that this is just the first step to China (and everyone else in the international community) giving up dollars as a reserve currency

empath: Yeah, but in the mean time iphones, ipads, laptops, tvs, and pretty much everything else gets more expensive.

Indeed. One of the many reasons why outsourcing American manufacturing jobs was a fucking terrible idea--we got some cheap shit in the short term, but this was bound to happen at some point.
posted by joedan at 11:06 AM on November 24, 2010 [4 favorites]

Yeah, but in the mean time iphones, ipads, laptops, tvs, and pretty much everything else gets more expensive.

Given that this would slow our horrifically destructive consumption of rare earth minerals, this might also have its good points.
posted by Iridic at 11:07 AM on November 24, 2010 [2 favorites]

But the effect is the opposite. Russia has a trade deficit with China, so were increasing China's dollar reserves.


According to the info I have Russia is running a surplus against China
posted by banal evil at 11:33 AM on November 24, 2010

I think the worry is that this is just the first step to China (and everyone else in the international community) giving up dollars as a reserve currency.

My understanding is that the dollar's fading status as a reserve currency is one of few things keeping our house of cards standing.

I'm pretty sure that no one in Washington is indifferent to this news.
posted by Joe Beese at 11:40 AM on November 24, 2010

So... Why aren't we just having one giant universal currency for global trade (like the Mixed Basket that China is going to) and just use whatever sort of average or ratio? Then again it doesn't matter if you can just print money and change the value in relation to it anyways?

Money is so stupid.

Also - why is the currency called Renminbi, but the unit called Yuan (wiki gives a little overview)... Is there any other currency that has a different name than the unit? Euros, Pounds, Dollars, Rubles? Aren't these all the currency and the unit? Anything else have a difference?
posted by symbioid at 11:41 AM on November 24, 2010

Well, we're printing a whole lot of dollars over here right now. And countries backing away from it as a reserve currency means there's going to be less demand. More supply and less demand for your currency means big time inflation.

Which means my $90,000 mortgage isn't going to be such a big deal in about 10 years.
posted by keratacon at 11:45 AM on November 24, 2010

Is there any other currency that has a different name than the unit? Euros, Pounds, Dollars, Rubles? Aren't these all the currency and the unit? Anything else have a difference?

The same thing is the case with the British pound. The unit is the pound, the currency is sterling.
posted by banal evil at 11:45 AM on November 24, 2010

Which means my $90,000 mortgage isn't going to be such a big deal in about 10 years.

Wages don't seem to be going up, though.
posted by Blazecock Pileon at 11:56 AM on November 24, 2010 [1 favorite]

The U.S. currency is the "dollar or unit" as it literally says in the Constitution. But those pieces of paper in your wallet are not "dollars." They are "banknotes" or just "notes."
posted by Cool Papa Bell at 11:57 AM on November 24, 2010

keratacon: More supply and less demand for your currency means big time inflation. Which means my $90,000 mortgage isn't going to be such a big deal in about 10 years.

That's the idea, isn't it? With Total Public Debt Outstanding at 95% of GDP and given that the only thing we "make" in this country anymore is synthetic financial products (read: bullshit paper shuffling), our only option at this point seems to be inflating our way out of it.

Of course, as BP points out, wages aren't going up, either. So while the folks at the top are going to reap the benefits of inflation, it looks like the rest of us are pretty well fucked. But hey, what else is new?
posted by joedan at 12:08 PM on November 24, 2010

According to the info I have Russia is running a surplus against China

On further research, it looks like it depends who you ask. The Chinese say they ran a $3B surplus, the Russian say they ran a $6B surplus (PDF). Either way, $3-6B is pretty much coins in the sofa as far as China's USD reserves.
posted by ssg at 12:09 PM on November 24, 2010

Economist Michael Hudson on the currency conflict:

The Fed and Congress have told China to revalue its currency, the renminbi, upward by 20 per cent. This would oblige the Chinese government and its central bank to absorb a loss of half a trillion dollars – over $500 billion – on the $2.6 trillion of foreign reserves it has built up. These reserves are not merely from exports, much less exports to the United States. They are capital flight by U.S. money managers, Wall Street arbitragers, international speculators and others seeking to buy up Chinese assets. And they are the result of U.S. military spending in its bases in Asia and elsewhere – dollars that recipient countries turn around and spend in China.

Chinese authorities have tried to make it clear that what they object to is the U.S. policy of creating “electronic keyboard credit” at one quarter of a percent (0.25 per cent) to buy up higher yielding assets abroad (and nearly every foreign asset is higher yielding). The Group of 20 in Seoul Korea last week accused the United States of competitive currency depreciation and financial aggression, and countries stepped up attempts to shun the dollar and indeed, to avoid running trade and payments surpluses as such.
link

posted by wuwei at 12:36 PM on November 24, 2010 [1 favorite]

Just tell me who to blame and I'm on it!
posted by Ad hominem at 12:38 PM on November 24, 2010

My question is why is Canadian Tire Money still pegged to the Canadian Dollar?
When will the Canadian Tire Corporation let the "Sandy McTires" float freely on currency markets?

I want to see some steep depreciation so that I can buy me a snowblower.
posted by Kabanos at 12:59 PM on November 24, 2010 [1 favorite]

Either sic transit gloria mundi or sic semper tyrannis. Depends on who you ask.

I think it's sic transit gloria tyrannorum.
posted by No-sword at 1:08 PM on November 24, 2010

20 bucks says Russia starts whining about China's unwillingness to let its currency appreciate and China saying a ruble isn't worth the paper its printed on.

Wouldn't that be a broad agreement?
posted by pompomtom at 6:52 PM on November 24, 2010

Where to even start with this one. First off, China wants to deal in US $ for a whole bunch of reasons, including that the US$ is stable, its what our trading partners will have and all of the "rules" related to the US$ are fairly well understood. The Chinese (and it's a little absurd to call them all "the Chinese") have shown themselves to be very conservative fiscally. So an aggressive industrialization based on a traditional mercantile framework has left China sitting on a very large sum of US$, which was all well and good until quite recently.

Now there is a lovely quote from some years ago - and the essence of it was an American official noting that its our currency, your problem. There was certainly no begging being done by the US officials - these are the people who set the rules (with some EU - especially UK assistance), establish that stability that everybody loves, and they define how much the US$ is. The bank bailout has changed many of the rules, and really represents the first quantitative easing, and now there is a second. The US may be preparing to substantially change its approach to trade with China (and by extension pretty much everybody) as it is already changing the framework around the US$. Everyone else is complaining about it because it makes their US$ holdings worth a bit less, and worse, it is destabilizing.

So now China has a giant asset it "owns" but doesn't define the value of, and a trade policy that sustains a large portion of their economy, but aggravates its main trading partner. One path is to get trade deals & systems going that don't rely on the US$ framework, and considering that Russia is it's main weapons partner that would be the most strategic relationship to start with. The only surprising thing here is that this didn't happen years ago, just another part of the great unwinding.
posted by zenon at 8:46 PM on November 24, 2010

Really interesting, thanks for posting.
posted by maiamaia at 5:40 PM on November 27, 2010