Memphis, Nova, My Ladies and Friends: "To Depeg or Not to Depeg?-That is the Question"

MVL:  Crazy question: Martin Armstrong  maintains that pegs don't last forever. A good example is what the Swiss did this past spring. China has let the yuan slide; what's to keep them from de-pegging from the dollar altogether, once they are using CIPS?

MEMPHIS: The actions of China this week are in fact a de-facto breaking of the USD peg.  I believe we are already witnessing it.  The answer to your Q Mike is of course: "nothing".

IMO tho an official break won't happen soon and a way to measure the timeline might be any evidence that they are further lowering their reserves in USD. 

As to Armstrong's assertion that all pegs fail?  I doubt many could explain WHY this statement is true and yet the answer is right there in front of us.  It goes back to Adam Smith's invisible hand and a basic tenant that ALWAYS holds true:
....

Any sovereign nation will (in the extremes) always act in it's own best interest.  This gets to the heart of why a global reserve currency can never last IF it belongs to any one nation or more to the point; to the degree that the US must act in IT'S own best interest (domestic mindset) then the world at large suffers. 

No conspiracy's at work, simply sovereign interests playing out.

The rubber band is getting tight.

MEMPHIS:  Another thought along these lines:

The press has been quite slanted on China's currency move and yet the rumors being laid out don't hold up to close scrutiny! 

Consider that the entire globe (economically of course) is contracting.  the reasons for this are many and I have spoken to them often in trying to point folks to this trend.  Given this global reality does it really seem so simple (so linear) to deduce that China did this to screw the world and boost it trade?

Such thinking can only be true to the extent that an unlimited number of buyers exist and in a world beset with deflation THAT statement is not true!

We must think deeper and harder and that hurts too much for the average "expert".  ;(

Continue to stay close to Armstrong and I promise you will stay on point and close to the truth. 

When we read that the sky is falling because China is bumping close to a 10% currency reduction we ought to drop our newspaper and begin doing what?  Asking questions!

Is this within the range of normal or "to be expected" or is it truly a case of China being divergent?  Well, how much has the Euro slid against the USD this year?  Almost 10% you say?   hmmm.  And the $A has slid 13% in 2015? 

All of these facts (and many many more) were contained within articles brought HERE this week by Princess and others.  We simply (and this is my challenge) must all see the value in these things and that comes by 1st having the questions in our mind.  (highfive)

MVL:  Thanks, Memphis. I'm inclined to agree it's not a tomorrow thing for China, but possibly a ways out yet.

MY LADIES: CORRECT MEMPHIS THE SIMPLE ANSWER IS NOTHING IS STOPPING ANYONE FROM DEPEGGING.

AND MVL IN FACT THAT IS THE TOTAL PLAN WHERE EVERYONE WILL DEPEG FROM THE DOLLAR WHEN THE INDEX BECOMES THE SDR MODEL. INSTEAD OF A SIGULAR COUNTRY PEG THERE WILL BE A BASKET.

MVL: Awesome. Thanks, ML

PrincessDD:  Depeg-To remove a previously instituted peg on a currency. For example, if Currency A is pegged to Currency B at a 1:1 ratio, but the central bank for Currency A decides to let it float, it is said to be depegged from Currency B. Depegging may occur if the peg is causing inflation or if the central bank is unable to sustain the peg for other reasons.

MEMPHIS: OK, while my 1st coat of paint dries here is one more reality regarding currency pegs. (I write this because it is a key to seeing what's playing out in China and elsewhere)

A currency peg is simply an effort to manipulate, to control, to ignore the business cycle.  More on that in a minute but we must not elevate such a thing to any high plane.  

China's central planners are unique in that they appreciate, understand, and to a large extent work within, the business cycle.  What is the business cycle?  It is that unstoppable force that cannot be ignored.  Man can (and does!) manipulate markets for a time but in the end the business cycle will always have it's way.  When we see a sudden crash or fall in financial markets we are witnessing the business cycle.....winning.

In a broad view this is what I see unfolding behind all of China's recent actions; that thing which is driving their decisions.  What we might call a bubble can be viewed as pressure; an imbalance of capital, caused by man's many manipulations and in their markets (bonds & equities) China has been PROACTIVE in allowing some of this pressure to be released.

This is consistent with long term planning and is (among other things) evidence that they are worthy of "confidence"!

And confidence does what?  haha, it is the key to everything!

Will their $ be added to the global reserve?  For the above reasons (added to the fact that theirs is the largest economy of the world) it is a certainty. 

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AW:  Question.............what is the effect to the USD as more countries depeg their currencies from the USD?   Hint:........after posting this question, I remembered that NOVA has addressed this question before.

Sager:  I'll take a quick stab. Depeg as a consequence means less use. Less use is less demand, which ultimately means less value. Add the fact that the supply is huge so that doesn't help.

That's just one aspect I would think.  I'm open to be wrong and learn from this

MVL:  Learning opportunity: if the yuan is pegged to the dollar, which it is, then it also is subject to U.S. inflation, and the effects of quantitative easing. That said, times...they are a changing. The dollar is saddled with a lot of debt, and unfunded liabilities.

The yuan's future, as part of a currency basket that includes the dollar, but isn't pegged to it, appears much brighter. This is, of course, dependent upon convertibility at the IMF. The endgame for me is that I'd be better off investing in yuan-based Silk Road debt, than I would be to hold dollar-based investments in the long run. Dear Lord, don't fail me now!

I half-expect either a swat with a paper, a brush with the broom, or a punch in my nose. Just kidding...kind of. Either way, I really want to learn. God willing, I'll have the chance to put it into practice soon...and I know...I know...soon is a relative term. (nerd)

MEMPHIS:  AW asked: what is the effect to the USD as more countries depeg their currencies from the USD?

As you've phrased this the only answer would be "no effect".  The value of a currency is not directly affected by others pegging relative to it BUT there would certainly be TRUE indicators that would shift.  Most notably...confidence.

I would reword your question and ask can and will the USD continue it's meteoric rise despite moves such as China's? 

And the answer to this lies in capital flows.  All indications are that yes, capital will continue to flow into our treasuries.  If we stop here then we can all lay our heads down and purr like kittens tonite but ...

If we then ask why? then we must get into some of the ugliness of the world!  Capital is not so much "flowing" into the USD as it is "fleeing" from other places.  We must not think that this is a marker of a strong US economy ANY MORE THAN to presume that the strong $ is in any way a good thing for our economy. 

The $ is not finished rising and as we see Europe and others continue their madness with no end yet in sight we should expect that the trend is not yet near it's end.  All of these forces are actually setting America up for the big fall.  What goes up...must come down.... (handshake)

For a mass exit of nations de-pegging from the USD as you suggested would 1st suggest that it no longer is the preferred reserve.  That day is coming but is not yet.

AW: Thanks, Memphis….. continue to think about your statement:......"As you've phrased this the only answer would be "no effect".  The value of a currency is not directly affected by others pegging relative to it BUT there would certainly be TRUE indicators that would shift.  Most notably...confidence."

MEMPHIS:  Sagar your answer touched on many of the forces that must 1st play out before the dollar's funeral can take place!’

AW: Does an increase in depeg from the $ equal a decrease in the use of the $ (as in confidence)?.........we will see.

MEMPHIS:  not so easy to answer.  it is not a linear relationship.  What might be in the best interest of nation A might not hold true for B and C. 

For example some might view a FALLING $ as a bad thing and therefore choose to move away from the peg (i.e. Switzerland)

IQD NOVA: How will there be a "Funeral For The Dollar" when the new Banking System that the BRICS have formed is Capitalized with USD and then USD is then Loaned out?

MEMPHIS; good point Nova and further evidence that this topic is not settled by one liners.  The death of the USD is not a thing that I subscribe to and has been put out there by folks who have not seen the world as a whole!

MY LADIES:  ISOLATION OF THE DOLLAR IS NOT A QUESTION OF IF, BUT MORE HOW SOON.

 DEATH OF DOLLAR AND ISOLATION ARE DIFFERENT THINGS, DEATH IS NOT ABOUT TO HAPPEN

CURRENCIES DEPEGGING IS A SOON TO BE FACT..

AND THERE ARE MANY OTHER CURRENCIES ON THE HORIZON OUT SIDE THE YUAN.

CIPS AND SWIFT ARE ONE IN THE SAME ONLY DIFFERENT IN OPTIONS

AND WE CAN PEEL THESE LAYERS BACK ONE BY ONE LIKE AN ONION OR AN ARTICHOKE WHICH EVER YOU PREFER

BUT IT IS IMPORTANT TO UNDERSTAND WE NEED TO LOOK AT THINGS FROM ALL DIRECTIONS AND NOT IN A FISH BOWL

Bandito Rox:  IMF: Yuan reforms could bring China 'quite close' to floating rate

Recent changes to how China manages its currency could bring the country "quite close to a float" in its exchange rate, a top International Monetary Fund official said on Friday in a review of the country's economy.

Read the article here https://www.dinardaily.net/t46174-imf-yuan-reforms-could-bring-china-quite-close-to-floating-rate#250986