Friday, October 16, 2009

A Bit of Clarity.... opposed to the "dollar is dead, or dying and governments are getting close to abandoning its in favor of the [yen, euro, yuan, SDR, virtual currency, Krugerrand, pick any or all, or make up you own]...." being sung in harmony by the hustlers, hucksters, flim-flammers of pseudo-left, populist right, China promoters, Lula lovers, Russian dolls etc. etc. etc.

First point of clarity: governments do NOT and cannot control currency exchange markets. Central bank reserves of the world's largest central banks combined do not approach the currency reserves of the private speculators, traders, funds, investment- merchant- commercial banks making and trading in those markets. And while those private sources trade the dollar down, central bankers continue to purchase dollar-denominated instruments for holding reserves.

Why do the central banks do this? Because there is no alternative. Because there is no market as huge, as liquid, as accessible as the market for US Treasury instruments.

Second point of clarity: the movement away from the dollar and into other currencies is not a vote on the future of the US economy; is not an index to the "cracking" of the facade of US primacy; and certainly does not occur in isolation.

The movement away from the dollar by those same funds, traders, etc. is part of the general "relaxation," the sigh of relief and hope that the worst is over, and a return to "RISK" as a way to generate some actual RETURNS.

The movement away from the dollar is part of a trend, process, dynamic that has driven up prices and volumes in the stock exchanges of the US, the developed countries, and emerging markets.

The movement away from the dollar is part of the trend that has seen increases in aluminum prices despite immense overproduction, improvement in steel prices, oil cracking $70/barrel, the issuance of huge amounts of corporate debt snapped up in the bond markets, the rise in commodity prices, etc. etc.

The trading in the markets is being fed by streams of liquidity moving out of the safety of government guaranteed programs and issues; other streams of liquidity provided directly to banks and traders by governments, bankers and traders who, while more than happy to borrow from the Fed or the Treasury at zero interest rates, will not invest in Fed or Treasury instruments that do not offer enough return, or enough return to offset the risks in the instrument itself [i.e. FNMA, FMAC security issues].

Those who think the flight from the dollar indicates the weakness of US capitalism, the loss of the dollar's centrality to capitalist exchanges, are making an equal and opposite mistake to those who not so long ago saw the soaring price of oil as an index to the approaching post "peak" production era, and the soon to disappear supplies of oil. In the case of oil, there was the confusion of use-value with exchange value. In the case of the dollar, there is confusion of money as a store of value and a means of circulation, with its, money's own need, to function as "capital"-- seeking out profit, an expansion of value.

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