|Our concern was if the administration was trying to influence this rating decision, some -- above what would be a normal practice| Neugebauer
One which I have discussed before is that both the International Monetary Fund (IMF) and the Bank of England believe the world should at least entertain a revisit to the Bretton Woods agreement? Well at least Mervin King and Strauss Kahn think so but as we know Strauss Kahn is no longer part of the IMF's grand plan.
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"Bernanke offered an optimistic forecast during his testimony to congress but tempered the prediction by saying that measures to encourage a recovery such as purchasing treasury bonds remain on the table if growth falls short of what is expected" | International Business Times
If the US government misses a payment, it goes to D, Chambers said. That would happen right after August 4th, when the bills mature, because they don't have a grace period. | Chairman of S&P
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His speech opens directly on the topic of trade - If flexible exchange rates were allowed to determine the relative values of different currencies in competitive markets, why should there be any need to change "the rules of the game". Do we need an international currency? Indeed, why is that so. The UK is not alone with this line of thinking, France has also selected this topic for the theme of the presidency for the G20 discussions this year.
The key motivation for rethinking the world currency for trade is based around the following concept "one country's actions can distort the choices open for others".
As it stands the US dollar is currently the generally accepted currency for pricing and settlement of trade however, over the last couple of years the world has seen a weak floor-less dollar drive many trade and social disorders.
The fragile state of the US dollar or perhaps its potential collapse is in fact a deeper conundrum than simply the relative value of price differentials for similar goods in different locales:
Annual output in high saving economies has expanded by 10 trillion, 1 trillion more than the growth in domestic demand of the same economies. The rise in output relative to demand in these countries was only possible because there were matching capital flows. In effect, capital flowed uphill from many of the emerging markets to advanced deficit economies and the deficit economies predominately the US, UK and the Euro have been borrowing almost $1 trillion dollars more each year. This has resulted in unsustainable paths for domestic demand, net debt and long term real interest rates | Bank of England
This subversive cross effect spurs on many unwanted economic issues which need to be kept in balance.
 Some supposedly first world countries are unable to sustain domestic spending without additional borrowing.
 These deficit countries additionally can't raise output enough to allow them to service this increasing debt line.
 With a suppressed manufacturing sector, developed countries are seeing a decline in manufacturing and rising unemployment.
 As Mervyn rightly points out, the current exchange rate regime makes it difficult for local production firms in developed countries to drop prices relative to overseas production centres. They can do this of course but it usually results in taking on additional burdens of debt.
The arguments between the US treasury and the Chinese government over the weakness of the Renminbi or Yuan (whichever label you prefer to use) comparative to the US dollar, is fundamentally based around resolving this deficit issued for the United States.
Mervyn's speech is without any doubt an interesting and extremely well thought through piece of work. The Bank of England doesn't seem to be simply playing with academic ideas here either and it isn't the only central bank with these sentiments. A month before Mervyn's work, the International Monetary Fund also published similar remarks from its leader. Back then of course Dominique Strauss-Kahn's IMF speech was a turning point in thinking and that speech can be found here "Towards a more stable international monetary system"
From an IMF perspective or perhaps the Dominique Strauss-Kahn speech, arguments around the "don't fix it if it isn't broken" are in his sentiment only partly invalid. In reality the statement that the US dollar served the world during the global financial crisis isn't true because  extraordinary international policy cooperation had to be enacted and  the recovery that we are seeing today is not the recovery we wanted. We have high unemployment, widening income inequality, global imbalances are back and worse than before the credit crisis, volatile capital flows and exchange rate pressures are present and rapidly growing excess reserves that are sowing seeds for the next crisis.
The similarities or overlap in concepts between Mervyn King and Dominique Strauss are strong enough to indicate that at some point in the future we are likely to endure a rethink of the world currency for pricing and settlement. We may end up in a better place but the transition won't be straight forward.
How real is this?
Central Banks Moving onto Gold
I personally believe the world of fixed income gives us a better long term view on global economic health, none the less; to stay with the currency argument here, it is becoming apparent that there are some very interesting dynamics in play. I take to highlight a few of these indicators below.
Firstly if you didn't know anything about gold twenty four months ago, you'll find most people do today. The value of gold on the world index against the US dollar seems to be an endless rocket to the stratosphere. This is driven by both a quantitatively weakened US dollar as well as an incredible appetite for the commodity.
This hoarding frenzy is also not entirely based around the Exchange Traded Funds domain of the retail bubble lovers either. Reserve banks the world over are going long on gold.
Back in 2009 the Reserve Bank of India made large acquisitions of gold from the International Monetary Funds limited gold sales program. This was an off market transaction for about $1045 an ounce and for India Gold has become a safe store of value compared to the US dollar.
India is not alone and other Asian nations have noticeably been diversifying their stockpiles of foreign currency onto this commodity. Many analysts two years ago were simply shocked by the move of central banks onto gold at such high prices yet now the value of gold is half as much again. Further, these type of transactions are actually not that common and the India move was the first sale from the IMF in nearly a decade.
Comparing the Euro to the US Dollar is akin to comparing two falling rocks although people do it for many reasons. It is probably an inappropriate way of thinking, if you are looking for an indicator on which state of nations or nation of states is going to save the other in terms of a recovery. One is as bad as the other and you profit from shorting which headache you believe is worse and going long something that isn't quite as bad, as bad can be.
This argument is hypothetical and it is just as possible that everything might just slide back to a normal range of trading but there are also serious indicators that we are in for a big change.
In part II of this blog, we are going to look at how importers and exporters can effectively hedge against volatility in currency markets and a collapse of the US dollar, using both traditional and derivative methods.
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The FCA will not have explicit responsibility for financial stability. That will be the responsibility of the Bank of England, the FPC and the PRA | FSA Announcement, June 2011 [ Link Here ]
This operational objective will be central to the FCA's supervision of the institutions that provide market infrastructure and the crucial role they play in delivering capital and risk transfer mechanisms and creating confidence in the financial system.
The FCA will be a risk-based regulator and its risk framework will be the engine room of the business, providing support to the key activities, namely : supervision, policy, enforcement and authorization. | FSA Announcement, June 2011 [ Link Here ]
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