The ailing US$, a problem?

[trysail]

Lukoil May Switch to Oil, Gas Sales in Rubles in 2009
By Halia Pavliva and Torrey Clark

Dec. 12 (Bloomberg) -- OAO Lukoil, Russia's largest independent oil producer, may start selling crude and gas in rubles within two years as the U.S. dollar weakens, a company official said.

``Selling for rubles is much more attractive,'' Deputy Chief Executive Officer Leonid Fedun said in an interview in New York today. ``Gazprom is considering introducing ruble- denominated contracts and I think that technically Russian companies can do it by 2009 if the banks are ready.''

Lukoil, which is based in Moscow, joins state-run OAO Gazprom, the world's largest natural-gas producer, in suggesting a move to ruble pricing. State-controlled OAO Rosneft is the country's biggest oil producer.

The dollar has dropped 10 percent this year against the euro, reducing the value of exports. OPEC members Iran and Venezuela have lobbied to abandon the dollar, a step Saudi Arabia rejected last month at a meeting of the group's ministers.

Russia is the world's second-biggest producer of crude oil. Crude has surged 54 percent this year, contributing to an increase in inflation that Russian President Vladimir Putin calls one of the biggest threats to a nine-year economic expansion. Lukoil has said the strengthening ruble eats into profits because costs are denominated in the local currency.

The ruble has gained about 8 percent this year to 24.43 per dollar, while it has lost 3 percent versus the euro. Russia's central bank manages the currency against a basket of the euro and the dollar. The dollar has dropped this year amid the worst U.S. housing slump in 16 years.

International Standing
Putin has sought to bolster the country's international standing as an economic power by leveraging its energy resources. A move to price oil in rubles could lend support to the government's plan to create domestic exchanges, some analysts said.

``You get an exchange out there that trades in rubles and you've got it made, but that's a big step,'' said Allen Humbolt, an analyst in Tulsa, Oklahoma, with Samson Investment Co., an oil and gas exploration company. ``You have to get the world to trust that the money doesn't disappear. Would there even be enough rubles?''

Alexander Medvedev, Gazprom's deputy chief executive, said last month the company may start selling its crude and gas production in rubles rather than dollars and euros. The company hasn't given a timeframe.

`Blow' to Dollar
Fedun also told reporters in New York today that the Organization of Petroleum Exporting Countries may switch to using a basket of currencies as early as 2009, ``which will be a blow for the dollar.''

Saudi Arabia, the world's largest oil producer, fought off an attempt last month by Iran and Venezuela to get OPEC to discuss pricing oil in different currencies rather than in dollars. OPEC ministers met in Riyadh last month.

Saudi Arabia will continue to price crude in U.S. dollars, the country's foreign minister said yesterday.

``The dollar remains the only currency for pricing oil,'' Saud al-Faisal said at a press conference broadcast on Al Arabiya television.

Given Saudi Arabia's stance, any shift by Russian oil and gas companies to price in rubles wouldn't affect the dollar, said Meg Browne, a senior currency strategist at Brown Brothers Harriman & Co.

Russia's annual inflation will accelerate to 11 percent this year, above the central bank's forecast of 8 percent, the Paris-based Organization for Economic Cooperation said in a report on Dec. 6.

``Dollar inflation is very high,'' Andrei Gaidamaka, director of strategic development at Lukoil, said today in New York. With the dollar sinking against the ruble, it's ``double the problem.''

 

[Jenny_Jackson]

Let me see. You borrow $1,000,000,000 from the Indians and Chinese because you (a) don't want to raise taxes (that would make you look bad) and (b) want to give your friends (who are the richest people in America) a substantial tax break. Then you outsource 20% of the jobs in the United States to Canada, Mexico and South East Asia.

And you find it surprising that the US economy is in trouble? DUH!

 

[trysail]

Fed's Lower Rates Pressure China to Strengthen Yuan
By Wes Goodman and Kim Kyoungwha

Feb. 18 (Bloomberg) -- Like it or not, China has no choice other than to let the yuan appreciate against the dollar.

The combination of the world's fastest economic growth, the highest inflation rate in 11 years and the rising cost of intervention will force gains in the yuan to accelerate, even as policy makers in Beijing resist calls from the West to let the currency appreciate at a faster pace, say Pacific Investment Management Co. and Pictet & Cie., Switzerland's largest closely held private bank.

Central bankers in Thailand, Malaysia, Singapore and the Philippines are in the same situation, making their currencies attractive, according to money managers at the firms and Merrill Lynch & Co. Nine of the 10 best-performing currencies against the dollar in 2008 will come from Asia, surveys of foreign exchange strategists by Bloomberg show.

``You're likely to see less intervention,'' said Ramin Toloui, who helps oversee more than $60 billion in emerging- market bonds and currencies at Newport Beach, California-based Pimco. ``Several Asian central banks see more rapid exchange- rate appreciation as an important tool to fight inflation.''

After rising 7 percent last year, the yuan has appreciated 1.9 percent to 7.1657 per dollar so far in 2008. New York-based JPMorgan Chase & Co., the world's ninth-biggest currency trader, predicts a further 14 percent increase, while Citigroup Inc. in New York, the third-largest, forecasts a 6 percent advance.

Thailand's baht has climbed 3.7 percent to 32.52 this year, while the Taiwan dollar is up 2.4 percent to NT$31.71. Malaysia's ringgit and Singapore dollar are close to their highest levels in a decade.

Inflation Battle
While the International Monetary Fund expects growth in Asian emerging markets will slow to 8.6 percent in 2008 from 9.6 percent last year, that's still six times faster than the 1.5 percent expansion predicted for the U.S.

Consumer prices in the region's 10 largest economies outside Japan are rising at an average annual rate of 5.30 percent, compared with 4.10 percent in the U.S., data compiled by Bloomberg show. Faster inflation raises the odds that central banks in Asia will increase interest rates, bolstering the appeal of their currencies.

``We are long Asian currencies,'' said Donald Amstad, head of Asia-Pacific fixed-income at Aberdeen, Scotland-based Aberdeen Asset Management Plc, which oversees $205 billion. ``Asia is in relatively better shape than the rest of the world.'' A ``long'' position is a bet that a currency will gain.

To keep their currencies from appreciating too fast and hurting exporters, Asian central banks have bought U.S. dollars, accumulating $4 trillion in foreign-exchange reserves.

Intervention Burden
The downside to intervention is that it increases the supply of the local currency, which tends to fuel inflation. To prevent that from happening, Asian central banks typically sell bonds to remove those funds from the economy.

That option has become more costly because interest on the debt is paid with income from its reserves, which are invested in dollar-denominated securities. The People's Bank of China pays 1.31 percentage points more on its six-month bills than it earns on similar-maturity Treasuries following the U.S. Federal Reserve's five rate cuts since September. Six months ago, the spread was 2.2 percentage points in favor of U.S. debt.

After four years of profits, the bank is now losing $4 billion a month by intervening, according to BNP Paribas SA, France's largest bank. Nine central banks in Asia lost a combined $160 billion in the year started July 2006, said Richard Yetsenga, chief currency strategist in Hong Kong with HSBC Holdings Plc, Europe's biggest bank.

``The losses are definitely a burden,'' Yetsenga said. ``The ultimate endgame is to intervene less.''

Rate Gap
The average benchmark interest rate in Asia is 3.60 percent, weighted by gross domestic product, according to JPMorgan estimates. That's higher than the 3.02 percent average for the Group of Seven nations for the first time in three years.

A global economic slowdown will encourage Asian central banks to keep intervening because letting their currencies appreciate too fast would make their exports less competitive, said Oh Suk Tae, a Seoul-based economist with Citigroup.

``They are stuck between a rock and a hard place,'' said Oh. ``They will see losses ballooning. But supporting the economy and defending the currency is a primary concern.''

Korea's Quote
The central bank put foreign exchange before interest rates when talking about 2008 monetary policy, said Li Yang, head of financial research at the Chinese Academy of Social Sciences in Beijing and a former board member. The yuan will rise against major currencies, he said.

The Bank of Korea will put a quarterly quota on won bond sales after losing more than $1 billion intervening in 2007, Lee Heung Mo, director general of the central bank's financial markets bureau in Seoul, said in an interview. South Korea's reserves fell in January for the first time in seven months.

Such actions are encouraging to Pimco's Toloui, who said his funds increased holdings of Asian currencies, favoring the ringgit and the Singapore dollar. The firm is the world's biggest investor in emerging-market bonds and foreign exchange. New York-based Merrill Lynch, the largest U.S. brokerage, recommended the two currencies in a Feb. 13 report.

Wee-Ming Ting, who helps invest the equivalent of $126 billion at Pictet Asset Management in Singapore, said he bought yuan forwards, which are contracts tied to the future value of the currency, last month.

``I'm very much bullish on Asian currencies,'' said Ting, who helps invest the equivalent of $126 billion at Pictet Asset Management in Singapore. ``As the Fed cuts rates, then the costs increase for emerging-market central banks. There's less incentive for them to intervene.''

 

[trysail]

Bernanke's Rate Cuts Force Asia Back to Price Limits, Subsidies
By Shamim Adam

Feb. 18 (Bloomberg) -- Ben S. Bernanke, the champion of free markets, is driving Asia's governments back to controlled economies.

Under Bernanke's chairmanship, the Federal Reserve's steepest interest-rate cuts since 1990 are limiting his Asian counterparts' options to curb inflation. Instead of raising their own borrowing costs or letting their currencies appreciate faster, governments are resorting to regulating meat and egg prices in China, stockpiling cooking oil in Malaysia and subsidizing utility bills in Indonesia and the Philippines.

Such measures may backfire. Artificial price curbs and subsidies only feed more demand for oil and other commodities, and ultimately will make it harder to contain inflationary pressures worldwide, officials from the Group of Seven nations warned at their Feb. 9 meeting in Tokyo.

``These policies run against the grain of what these countries, China for example, have been trying to do over many years, which is to move toward a more market-based economy,'' says James McCormack, head of Asian sovereign ratings at Fitch Ratings Hong Kong Ltd. ``Price controls won't work because they don't address the issue of supply-demand imbalance.''

In China, the worst snowstorms in five decades have stoked inflation that was already above the central bank's target. Consumer-price gains in Sri Lanka exceeded 20 percent in January, while inflation in Singapore has reached levels not seen in a quarter century.

A Widening Spread
Bernanke's Fed has added to Asia's dilemma by lowering its benchmark interest rate 2.25 percentage points since September, to 3 percent. The widening spread between U.S. and Asian borrowing costs draws more foreign money into the region, threatening to feed asset bubbles. That makes central banks such as China's and India's loath to fight inflation by raising rates, which would open an even bigger gap.

In the past year, stampedes in China for discounted food have also caused deaths and injuries, leading the government to increase controls on basic commodity costs.

Since Jan. 15, the National Development and Reform Commission has required producers and sellers of grain, cooking oil, meat products, milk, eggs and liquefied petroleum gas to seek government approval to raise prices in an effort to cool inflation expectations and ease ``social tension.''

Subsidies, Price Controls
Such measures may export Asia's inflation to the rest of the world. Stockpiling, subsidies and price controls do nothing to rein in excess demand in Asia's fast-growing economies, which is already pushing up food and energy costs worldwide. The G-7 in Tokyo said governments should avoid steps to artificially lower energy prices.

``There is no incentive for people to cut down on the consumption of oil or other commodities because they're not feeling the pinch,'' says Bill Belchere, an economist at Macquarie Securities Ltd. in Hong Kong. ``When governments resort to stockpiling, that creates extra demand and prices will only keep rising.''

The Fed's rapid rate-cutting leaves Asia's policy makers with few good alternatives. China and other export-driven economies have tried to limit the appreciation of their currencies to keep their goods competitive in world markets, at the cost of higher inflation at home.

The U.S. is trying to persuade China, which has allowed the yuan to rise about 15 percent against the dollar since July 2005, to let it appreciate faster.

`Free-Floating Currency'
``Their ability to control the economy, control inflation, is greatly enhanced if in fact they have a free-floating currency,'' U.S. Treasury Undersecretary David McCormick said Feb. 15 at Dartmouth College in Hanover, New Hampshire.

Singapore is reluctant to let its currency rise too rapidly, Finance Minister Tharman Shanmugaratnam told the country's Parliament the same day. ``There is a limit to how fast the Singapore dollar can appreciate without hurting our economic performance and growth, and eventually causing wages to fall,'' he said. ``An overly strong Singapore dollar can bring inflation down, but at the cost of lower growth and higher unemployment.''

China's central bank, after raising rates six times in 2007, to 7.47 percent, may slow the pace this year.

``In this environment where the Fed is cutting interest rates quite aggressively, China cannot lift its own domestic interest rates forever,'' says Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. in Hong Kong.

Accelerating Inflation
Indian Finance Minister Palaniappan Chidambaram said on Jan. 24 that his country's central bank would need to take into account the rate differential with the U.S. when determining policy. Five days later, the Reserve Bank of India held its main rate at 7.75 percent even as inflation accelerated.

The Philippine central bank, Bangko Sentral ng Pilipinas, last month lowered its key rate to 5 percent, the fourth cut in a row, narrowing the gap with the Fed's benchmark.

With monetary policy neutralized, officials will ``use whatever tools they have at their disposal to contain inflationary pressures,'' says Mark Williams, an economist at Capital Economics Ltd. in London.

Asia's governments have experience with the destabilizing effects of runaway prices. China's inflation contributed to the unrest that triggered the 1989 Tiananmen Square demonstrations. Indonesia's attempt to increase fuel costs in 1998 was the spark for protests that led to the ouster of President Suharto after almost 32 years in power.

Protests
More recently, the efforts of Myanmar's junta to reduce oil subsidies set off the biggest anti-government protests in almost 20 years.

Price controls on basic commodities such as food and fuel have long been policy tools in nations with large populations living in poverty, including India and Indonesia. Still, Asia's more affluent consumers in Singapore and South Korea have also been hurt by rising prices, prompting more governments to employ such instruments.

``These measures are proliferating because of the extent of the food and energy-price shocks that the region is facing,'' says Robert Prior-Wandesforde, a senior economist at HSBC Holdings Plc in Singapore. ``No country is really immune.''

Bulog, Indonesia's state food company, said on Jan. 26 that it plans to sell more rice to lower the price of the grain and help the central bank meet its inflation target. Rice is the biggest component of the country's consumer price index.

Stockpiles
India is building stockpiles of food staples to ease supply constraints and curb inflation. The government buys food grains at guaranteed prices from farmers for distribution to the poor at subsidized rates through state-run shops.

Philippines President Gloria Arroyo last month proposed giving National Power Corp., the state-owned electricity generator, a subsidy to help cap prices.

Among Asia's wealthier countries, Singapore last week announced plans to give cash and rebates to needy citizens to offset the highest inflation since 1982. Taiwan imposed a ceiling on gasoline and diesel prices after inflation quickened in November to a 13-year high. And South Korea is studying ways to limit increases in school tuition and heating bills.

``They're distorting their economies, and these policies can't last forever,'' says Jan Lambregts, head of Asia research at Rabobank International in Hong Kong.

Asia's rapid growth also means price controls can't keep inflation bottled up for long, says HSBC's Prior-Wandesforde.

``Rate increases are required now, and they're falling behind the curve,'' he says. ``Ultimately, policy tightening will need to be bigger than it would otherwise have been.''

While a few of the region's central banks, including Vietnam's and Australia's, have chosen to raise rates, ``the others are just delaying the inevitable, and it's a matter of time before they reach their `inflation pain' threshold,'' Prior-Wandesforde says.

 

[colddiesel]

Small print

In the small print of the 'Paulsen Plan' if it can be called that is a proposal to take funds from the Exchange Stabilisation Reserve (established in the 1930's) and use them to pay for a Money Market Mutual Fund 'insurance scheme'. Unless I'm missing something it appears to me that this must make holding dollars and trading with them less attractive because it will inevitably tend to drive the dollar even lower than the impost of a $700 million liability ( which is a separate issue )

In particular it will make the mountains of $US held by the Chinese worth considerably less. Thus the value of the $US as a reserve currency will be impacted. It seems to make the US very vulnerable to the Chinese dumping large quantities of $US, but equally I suppose the Chinese will not want to realise such losses.

I would appreciate any thoughts on this because I may well have missed something, orders of magnitude for example.

 

[JAMESBJOHNSON]

COLD DIESEL

The ESR is a pot of money Congress has no control over. So Presidents use it when Congress opposes funding bailouts for domestic or foreign corporations.

 

[gauchecritic]

Something you might find interesting...

...that I'm pretty certain I've said before. Gleaned from the political comedian Rob Newman's "History of Oil."

30 october 2000. The Wall Street branch of French bank bnp held a UN administered account under which Iraq was selling 2.3 million barrels per day under oil for food.
The Iraqi's switched from a dollar denominated account to a Euro denominated account.
The Euro was worth 80 US cents.
The switch was made at the end of 2000.
In 2001 the Euro gained 25% against the dollar which forced Iran to switch their Central Bank Reserve funds from Dollars to Euros.
December 7th 2002 North Korea decided it would do all its commodity trading in Euros.
The chairmanship of OPEC fell to Hugo Chavez, President of Venezuela. In April he convened an open meeting in Spain which had on the table a proposition that every oil exporting nation switch unilaterally from Dollars to Euros.

And then the exporting of Freedom and Democracy happened.

 

[trysail]

gauche,
You have implied a correlation between a proposal to denominate petroleum prices in a currency other than the USD and a date certain for exportation of a political philosophy. That putative correlation is, at best, nothing more than a coincidence and, at worst, flat out erroneous. I submit that the initial instance of exportation of the particular philosophy may have been 1917 when the Archangel Woodrow (as Mencken dubbed him) led the charge to "Make The World Safe For Democracy." That particular world-saving impulse had antecedents in 1836, 1846, 1861, and 1898. It was followed by other notable efforts in 1941, 1948, 1950, 1961 and 1991.

Confusing cause and effect is a grievous analytical error— but one for which you can be forgiven. Incompetent securities analysts and amateur investors frequently make the same mistake, confusing a rising stock price with improved value.

Conversely, the long-term direction of a reserve currency exchange rate represents the collective judgment of millions:

http://farm4.static.flickr.com/3222/2803651364_d225d8ba1b_o.jpg

 

[Roxanne Appleby]

The problem is neither "liberal" nor "conservative" (whatever the hell those words mean), as Rob has acknowledged. The problem is one of "living within one's means." I'll leave it to you to define whether Warren Buffett or "Pete" Peterson or any of the multitude of other intelligent observers are "liberal" or "conservative." Here are some estimates:

Balance Sheet
The United States of America

Assets.....................................Liabilities

..............................................Social Security.....$11,000,000,000,000
..............................................Medicare................ 66,000,000,000,000
..............................................Treasury Debt..........9,000,000,000,000

..............................................Total Liabilities...$86,000,000,000,000


Against these known liabilities, the government has the ability to tax:

The whole stock market.........................~$18,000,000,000,000
All of the privately owned real estate.....~35,000,000,000,000
(basically, that's the net worth of everybody in the whole country)

Now comes the $64,000 question: is the U.S. solvent? The answer is: yes, of course- the government can print money. The only problem with printing money is that when the government chooses that alternative, it automatically creates inflation. That's the choice Weimar Germany made- look how well that worked out! So, if the government decided not to print money, where else can it get it? Well, the ugly answer is that it might be forced to tax away the entire net worth of all its citizens. That's right folks- even if you took away ALL of Bill Gates' money and all of Warren Buffett's money and all the money of all the rich people, there still isn't enough to pay for all the promises the politicians have made. Taking all the rich people's money (and everybody else's for that matter), of course, begs the question of why anyone would bother working if the government decides that it's simply going to take away everything anyone earns.

The politicians in this country may not have invented the concept of "something for nothing," but they sure as hell have perfected the art and science of it by promising everything to everybody.

Correction, Trysail, those first two "liabilities" are fictions, not real liabilities in the sense that people who have respect for accounting and honesty understand them. The government doesn't really owe them to anybody, it's all a sham, with all the substance of a politicians promise - which happens to be exactly what it is.

~~~

Oh, and by the way - the "balance sheets" in all the other other welfare state countries containing all of their politicians' impossible promises are just as phony.

 

[colddiesel]

Correction, Trysail, those first two "liabilities" are fictions, not real liabilities in the sense that people who have respect for accounting and honesty understand them.

~~~

.

Roxanne, Those "fictions" have to be paid. Simple as that. Therefore they have a net present value which should be in the accounts. I don't wish to be unnecessarily rude but your comment is at best utter nonsense and at worst is precisely the reason why politicians get us into trouble - because they come to believe their own lies.

I have spent an entire career dealing with long tail liabilities and they should always, always be included in the accounts. The fact that other politicians mis-account similarly is no excuse.

 

[gauchecritic]

gauche,
You have implied a correlation between a proposal to denominate petroleum prices in a currency other than the USD and a date certain for exportation of a political philosophy. That putative correlation is, at best, nothing more than a coincidence and, at worst, flat out erroneous.

I don't imply anything, it was a political comedian's work. I merely noted several remarks by various people and realised they corresponded with something I remembered.

Confusing cause and effect is a grevious analytical error— but one for which you can be forgiven. Incompetent securities analysts and amateur investors frequently make the same mistake, confusing a rising stock price with improved value.

so by the same leap you want me to believe that Iraq was invaded because of WMDs and no other cause.

Denying a possible connection is an error made by people that deal in supposed facts. The larger problem is that they involve the world rather than their own grubby pot of money.

Going down the drain still lands you in the sewer however slowly you spin.

(Spin. Did you see what I did there?)

 

[trysail]

I don't imply anything, it was a political comedian's work. I merely noted several remarks by various people and realised they corresponded with something I remembered.

The act of posting someone else's assertion, most assuredly, implies an endorsement— unless, of course, you simultaneously write a disclaimer disassociating yourself.

so by the same leap you want me to believe that Iraq was invaded because of WMDs and no other cause.

Denying a possible connection is an error made by people that deal in supposed facts. The larger problem is that they involve the world rather than their own grubby pot of money.

Going down the drain still lands you in the sewer however slowly you spin.

(Spin. Did you see what I did there?)

Ye must think me daft. Prosyletize you? Pffft. I recognize lost causes when I see them and do not believe in either the power of prayer or miracle conversions.

 

[neonlyte]

The act of posting someone else's remarks, most assuredly, implies an endorsement.



Ye must think me daft. Prosyletize you? Pffft. I recognize lost causes when I see them and do not believe in either the power of prayer or miracle conversions.

Says the great quoter.

Trysail, engage, don't preach. Your viewpoint is valid, just like the next persons. Contradicting is not engagement any more than quoting is endorsement. Pffft.