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Dollar Yuan connection and speculating where it leads.

November 16, 2015

Dollar Yuan connection and speculating where it leads.

Over few days somewhat covered by the negative events in France certain economic realities are taking place behind the scenes.

Yuan will most likely be included in the IMF basket of reserve currencies represented within the SDR the global currency of the central bank exchange between them and international institutes.

Certain interesting thoughts come to mind. Gradual shifting of Yuan to exchangeability will allow some monetization by China of their financial system expanding monetary bases without directly influencing inflation to the population. It will probably aid in covering asset write offs by the system by helping plug financial black holes in the system by providing some liquidity. Furthermore what was a liability or exchange controls will gradually transition to assets. Ergo china will have a floating currency while capital controls will insure it sterilizing the inflation from having ability to print extra-territorially.

Dollar impact that I could fathom is thus. Any and all Yuan monetization is accompanied by dollars being in higher demand since the pair trading if it launches in earnest will carry demand for both currencies within the system. Ergo even if dollars are bought and yuan is sold the demand in future is neutral while the demand in the present is for both as a units of account on some clearing house computer. Thus both central banks will have a vent to expand monetary bases while limiting their entry through the asset system. Basically keeping asset inflation intact while preventing it seeping through toward the real economy, or so they think at least.

One has to wonder what happens when this excess monetary expansion actually makes it through the system. Well, there would perhaps be some preparation for wage-spiral inflation to both de-value the currencies globally and this would aid the dollar in pushing asset prices down vis a vis wages longer term while keeping nominal amounts intact for the financial system.

Imagine Yuan devaluation internally in China via money printing into the exchange rate system which is sterilized from the real economy. Pushing the exchange rate down while the U.S. would do the same on its’ end to keep the tandem in place, also printing into the financial system allowing the monetization of the exchange rate to be pro-rata shared in relation to some unknown benchmark to us. The problem with exporting real purchasing power into an abstract mechanic while letting their respective monetary systems to credit themselves off of it, is the instant devaluation of savings will create an acute shortage of capital. Credit access will not solve the delta between actual capital deploy ability and price containment. There is an undercurrent where clearance will consistently show real prices imploding while those without distress bifurcating into imaginary prices. Ergo velocity of money contracts further while clearance in the economy stratifies the current economic state in stasis thus essentially freezing income social classes while preventing accommodation across the spectrum of businesses and asset classes.

Sooner or later as financing off the carry trade, contract pledging against the currency contract flows, will create a very heavy negative push towards other currencies essentially compressing them beneath their real floors so harshly by the combined pairs that it will create extreme disturbances in global trade and asset prices. Imagine a company that is worth less than an exact same company in U.S. or China by a factor of several magnitudes. Yet, the problem as always in the unwind. When wage-inflation spiral finally permeates both countries it will essentially signal the end of the global exchange system. Hopefully I am wrong. Be well and prosper dear reader.

http://www.imf.org/external/np/sec/pr/2015/pr15513.htm

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