Foreigners buying US Dollars?
I’m attempting to put a couple puzzle pieces together so here goes…
1) China has tons of US dollar and dollar denominated debt. Additionally I heard suspictions that China may be purchasing land, companies, etc… with the debt. Considering that we have no real access to their books, and they can really tell us anything they want I find this easy to believe. If they had long-term dollar denominated deals they could exchange their dollars for tangible assets, which protects them from a declining dollar. The US government will probably default on their debt via inflation so China goes and buyes an asset and says we will pay you in US dollars. China’s holdings of US debt pays interest, and has a principle payement at expiration. So, it seems plausible that they could use all their US holdings to buy up tangible assets.
2) BRICs (Brazil, Russia, India and China) are purchasing our debt. Why? What if they were willing to purchase dollars to placate the US only to use them to purchase raw materials, or IMF bonds (see #3). We know China has been stockpiling commodities. Oil has to be transacted in dollars. Are they paying for all the commodities with Yuan or dollars?
3) IMF Bonds… http://online.wsj.com/article/SB12441969…
China is thinking about purchasing $50b in IMF bonds. Since when has the IMF sold bonds? I didn’t see anything (see further down in my post) about which currencies would be used to purchase these bonds, but why can’t we make a leap and say that perhaps they would use US dollars. The IMF holds a multitude of currencies so they buy dollars to keep the dollar stable for a bit and then use the dollars to purchase assets, which may be partially valued in dollars, but not a 100% exposure. The dollars are then held at the IMF, which issues bonds based on a basket of currencies. This pulls dollars out of circulation (for now), helping to strengthen the dollar at least in the short term.
I don’t know if a scheme like this is even viable or makes sense, but it jumped into my head and I wondered if I’m completely off or there may be a bit of truth in it all.
Yet IMF is issuing bonds?
I’m pondering
a) the move by the IMF to issue bonds, and
b) that nations are cashing in their US obligations / cash for these newly created bonds.
So, I did a bit of digging…
http://blogs.wsj.com/economics/2009/06/01/imf-bonds-are-coming-soon-but-you-cant-buy-any/
The International Monetary Fund is putting final touches on its plans to issue its first bonds. Russia has already said it would buy $10 billion of the bonds, which would be priced in the IMF’s quasi-currency, “special drawing rights.” SDRs are a basket of currencies consisting of the euro, yen, pound sterling and U.S. dollar. As of Friday, 1 SDR equals $1.55.
So these are the major players when it comes to currencies, but excludes the Yuan. All of these nations are in trouble. The UK is in worse shape than the US and Europe is fracturing. Perhaps this is an attempt to shore up some of the weaker currencies so they don’t collapse. If hard currencies were to skyrocket (as many predict) this is a nail in the coffin to fiat currencies.
and
http://www.imf.org/external/np/sec/pr/2009/pr09207.htm
Mr. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), issued the following statement today welcoming Brazil’s intention to invest up to US$10 billion in notes to be issued by the IMF:
http://www.imf.org/external/np/sec/pr/2009/pr09204.htm
Same thing as with Brazil, but notice my bolded parts…
“This decision will be beneficial to all,” Mr. Strauss-Kahn added. On one hand, IMF members’ investment in Fund securities will boost the Fund’s capacity to help member countries—particularly developing and emerging market countries—cope with the crisis and thus benefit all members by facilitating an early recovery of the global economy. At the same time, the new notes will offer members a safe investment instrument with reasonable return.
Reading a bit into this I’d say that there is a huge and continued growing concern that the previously risk-free and safe investments are no longer considered so. IE: US treasuries. This is nothing new, but perhaps to prevent an all out run on our debt, by consolidating these first world countries many believe that it will shore up confidence in our debt.
More ideas:
http://blogs.reuters.com/felix-salmon/2009/06/10/switching-from-treasuries-to-imf-bonds/
Perhaps by backing these instruments by a basket of currencies priced in dollars foreign holders will feel better about holding dollar denominated assets backed by a multitude of nations.
What might be the effects of such actions?
Is this to shore up confidence with developing nations? They have the oil, the raw materials, and everything we need to produce the stuff that we buy. For now they need us as consumers, but that gig is about up if not over.
Unless I’m mistaken this look like a move away from the dollar as the reserve currency. As this unfolds I wonder how much transparency there will be as far as IMF holdings with regards to the backing of these bonds. I don’t know enough about the IMF to make any solid presumptions or predictions, except is this slowly a move to a global currency?
What I really want to know is if countries are buying US debt, yet are in serious talks about purchasing IMF bonds… something isn’t adding up here. Say they purchase the bonds in US dollars then the IMF will have a bunch of dollars. Unless the Fed reigns in the money supply somebody has to hold our dollars unless they dump them on the market causing a crash in the dollar, which doesn’t make sense unless they have found a way around this.
I know this is a lot of fragmented thoughts, but something is going on… Will someone please help fill in the missing pieces.