China, Japan to Use Yen, Yuan and Not the USD

[Art_from_Ark]

"In the next month China and Japan (China’s main trading partner) will no longer use the U.S. dollar as the *only* currency in trade with each other. They will use the Yuan and the Yen directly with each other. This will see the dollar removed from a large chunk of the world’s trade –in itself, not a very large percentage, but a significant one. It’s the start of a trend that is set to grow. We’ve no doubt that China is tailoring its trade with all its trading partners to use the dollar only so far as it is required to deal with the U.S. and other dollar-dependent nations. Oil from Russia utilizes the Yuan and Rouble, and Australia has arranged a similar deal."

http://www.kitco.com/ind/AuthenticMoney/20120601.html

The headline may be a little misleading, since the two countries will apparently still be using the US Dollar in transactions with each other, but not to the same extent as before. At any rate, it appears to be another step closer to the end of dollar dominance

[Egalitarian Thug]

1. And still the people running the economy fail to see that we're being cut out

of the picture. What do they think is going to happen once the world can afford to move on without us?

[Art_from_Ark]

2. From the Japanese perspective, this makes a lot of sense

Getting paid in dollars (or euros) that have subsequently devalued vis-a-vis the yen has hurt a lot of Japanese companies. Getting paid in yen would provide some stability to pricing and profitability to Japanese sellers. Of course, from the dollar's perspective, it's part of a trend that will weaken the dollar.

As for the people running the economy, it seems they're of the mindset that the dollar will reign forever. But all world currencies eventually lose steam and peter out, the most recent example being the British pound, which has lost more than 95% of its buying power since 1950.

[Egalitarian Thug]

3. Absolutely, but with China being allowed to continue to manipulate the Yuan with no consequence,

every one in every Chinese-Japanese transaction effectively removes a USD from the currency stream. Not immediately a problem, but will steadily and constantly grow into a catastrophe.

[Art_from_Ark]

4. I don't think Japan would have been very eager to sign on to this

if it hadn't been backed into a corner, so to speak. Despite the various interventions by the Bank of Japan to bring the yen to a more reasonable level, and despite the major economic damage wrought on Japan by last year's disasters, the market is still valuing the yen too highly, and that has priced Japanese products out of a lot of markets, or caused Japanese companies to lose money on dollar- or euro-based contracts that were signed when the yen was weaker.

And unfortunately, we can't point the finger at China for currency manipulation since the US has itself done some big-time currency manipulation starting with the Plaza Accord of 1985.

http://en.wikipedia.org/wiki/Plaza_Accord

As a Japanese professor told me back then, the Plaza Accord would have repercussions for the US at some juncture down the road. We may be at that juncture.

[jeanV]

5. Bottom line, only fear of political upheavals maintains the USD as the world reserve currency

In simple business terms, it doesn't make much sense for all other countries to keep the USD as the reserve currency. The reason for that being that the US treasury debt keeps growing. This is due to two main factors 1- the US external trade deficit keeps increasing 2- the US domestic budget deficit keeps increasing because medicaid and medicare keep growing, and are not matched by tax increases (what GHWB called 'voodoo economics'). And since the global US debt keeps growing, the Federal government will have no other way to repay the debt than to ask the Fed to increase the monetary mass (QE 3, 4, 5, n). In simple terms, create inflation and reduce the value of the dollar.

Yet, other countries are stuck for want of alternatives. The Euro short term optimistic scenario is to survive, and there is simply no other currency issued by a large democratic developed economy. China will reach GDP PP parity in 2016, but who would rely on the currency of a state controlled country?

World reserve currency summary: there is a will from many to move away from the USD, but there is currently no way.

[Art_from_Ark]

6. Medicaid and Medicare aren't the culprits

Every civilized country in the world has a similar system, almost always better.

In the US, it's the runaway military budget that is the biggest sucker of money from the public teat.

[Skinner]

7. Welcome to DU, jeanV.

[jeanV]

8. Thank you

Mr Skinner