When Will the U.S. Dollar Collapse?

collapsing dominos with international currency symbols on them

A dollar collapse is when the value of the U.S. dollar plummets. Anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments who own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least are individual investors.

When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.


Two Conditions That Could Lead to the Dollar Collapse
Two conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. As of 2017, the U.S. currency was fundamentally weak despite its 25 percent increase since 2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio more than 100 percent. That increases the chance the United States will let the dollar’s value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a viable currency alternative for everyone to buy. The dollar’s strength is based on its use as the world’s reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.

Note: The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.

China and others argue that a new currency should be created and used as the global currency. China’s central banker Zhou Xiaochuan goes one step further. He claims that the yuan should replace the dollar to maintain China’s economic growth. China is right to be alarmed at the dollar’s drop in value. That’s because it is the largest foreign holder of U.S. Treasury, so it just saw its investment deteriorate. The dollar’s weakness makes it more difficult for China to control the yuan’s value compared to the dollar.

Could bitcoin replace the dollar as the new world currency? It has many benefits. It’s not controlled by any one country’s central bank. It is created, managed, and spent online. It can also be used at brick-and-mortar stores that accept it. Its supply is finite. That appeals to those who would rather have a currency that’s backed by something concrete, such as gold.

But there are big obstacles. First, its value is highly volatile. That’s because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.

Economic Event to Trigger the Collapse
These two situations make a collapse possible. But, it won’t occur without a third condition. That’s a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse. China owns $1 trillion in U.S. Treasury. That’s because China pegs the yuan to the dollar. This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasurys. It also wants to keep the yen low to stimulate exports to the United States.

Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn’t help.

Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export market to replace the United States. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, that would further depress the value of the dollar. That means their products, still priced in yuan and yen, will cost relatively more in the United States. Their economies would suffer. Right now, it’s still in their best interest to hold onto their dollar reserves.

Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.

When Will the Dollar Collapse?
It’s unlikely that it will collapse at all. That’s because any of the countries who have the power to make that happen (China, Japan, and other foreign dollar holders) don’t want it to occur. It’s not in their best interest. Why bankrupt your best customer? Instead, the dollar will resume its gradual decline as these countries find other markets.

Effects of the Dollar Collapse
A sudden dollar collapse would create global economic turmoil. Investors would rush to other currencies, such as the euro, or other assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.

U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.

How to Protect Yourself

Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.

Important:  Keep your assets well-diversified by holding foreign mutual funds, gold, and other commodities.

A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.

US Trade Deficit With China and Why It’s So High

The Real Reason American Jobs Are Going to China

The U.S. trade deficit with China was $375 billion in 2017. The trade deficit exists because U.S. exports to China were only $130 billion while imports from China were $506 billion.

The United States imported from China $77 billion in computers and accessories, $70 billion in cell phones, and $54 billion in apparel and footwear. A lot of these imports are from U.S. manufacturers that send raw materials to China for low-cost assembly. Once shipped back to the United States, they are considered imports.

In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods. 

Current Trade Deficit

As of July 2018, the United States exported a total of $74.3 billion in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.

Jul 18
Jan 18
Feb 18
Mar 18
Apr 18
May 18
Jun 18
Jul 18

China can produce many consumer goods at lower costs than other countries can. Americans, of course, want these goods for the lowest prices. How does China keep prices so low? Most economists agree that China’s competitive pricing is a result of two factors:

A lower standard of living, which allows companies in China to pay lower wages to workers.
An exchange rate that is partially fixed to the dollar.

If the United States implemented trade protectionism, U.S. consumers would have to pay high prices for their “Made in America” goods. It’s unlikely that the trade deficit will change. Most people would rather pay as little as possible for computers, electronics, and clothing, even if it means other Americans lose their jobs.

China is the world’s largest economy. It also has the world’s biggest population. It must divide its production between almost 1.4 billion residents. A common way to measure standard of living is gross domestic product per capita. In 2017, China’s GDP per capita was $16,600. China’s leaders are desperately trying to get the economy to grow faster to raise the country’s living standards. They remember Mao’s Cultural Revolution all too well. They know that the Chinese people won’t accept a lower standard of living forever.

China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to support it. In 2016, China began relaxing its peg. It wants market forces to have a greater impact on the yuan’s value. As a result, the dollar to yuan conversion has been more volatile since then. China’s influence on the dollar remains substantial.

China must buy so many U.S. Treasury notes that it is the largest lender to the U.S. government. Japan is the second largest. As of September 2018, the U.S. debt to China was $1.15 trillion. That’s 18 percent of the total public debt owned by foreign countries.

Many are concerned that this gives China political leverage over U.S. fiscal policy. They worry about what would happen if China started selling its Treasury holdings. It would also be disastrous if China merely cut back on its Treasury purchases.

Why are they so worried? By buying Treasurys, China helped keep U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise. That could throw the United States into a recession. But this wouldn’t be in China’s best interests, as U.S. shoppers would buy fewer Chinese exports. In fact, China is buying almost as many Treasurys as ever.

U.S. companies that can’t compete with cheap Chinese goods must either lower their costs or go out of business. Many businesses reduce their costs by outsourcing jobs to China or India. Outsourcing adds to U.S. unemployment. Other industries have just dried up. U.S. manufacturing, as measured by the number of jobs, declined 34 percent between 1998 and 2010. As these industries declined, so has U.S. competitiveness in the global marketplace
What’s Being Done
President Trump promised to lower the trade deficit with China. On March 1, 2018, he announced he would impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum. On July 6, Trump’s tariffs went into effect for $34 billion of Chinese imports. China canceled all import contracts for soybeans.

Trump’s tariffs have raised the costs of imported steel, most of which is from China. Trump’s move comes a month after he imposed tariffs and quotas on imported solar panels and washing machines. China has become a global leader in solar panel production. The tariffs depressed the stock market when they were announced.

The Trump administration is developing further anti-China protectionist measures, including more tariffs. It wants China to remove requirements that U.S. companies transfer technology to Chinese firms. China requires companies to do this to gain access to its market.

Trump also asked China to do more to raise its currency. He claims that China artificially undervalues the yuan by 15 percent to 40 percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People’s Bank of China to strengthen the yuan’s value against the dollar. It increased 2 to 3 percent annually between 2000 and 2013. U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.

The Trump administration continued the talks until they stalled in July 2018.

The dollar strengthened 25 percent between 2013 and 2015. It took the Chinese yuan up with it. China had to lower costs even more to compete with Southeast Asian companies. The PBOC tried unpegging the yuan from the dollar in 2015. The yuan immediately plummeted. That indicated that the yuan was overvalued. If the yuan were undervalued, as Trump claims, it would have risen instead.

Source: The Balance

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Global currencies weaken in currency war against super US dollar; exporters gain

Super dollar
Super dollar rise

Central banks making moves to check appreciating currencies against US dollar

A number of central banks have been making moves to shake up their currencies over the past few months.

Faced with slowing global growth and lower inflation – disinflation or deflation in a number of countries – central banks started taking action primarily by cutting interest rates or injecting liquidity into the system.

From Japan increasing its monetary stimulus to Singapore putting the brakes on its currency’s appreciation against a trade-weighted basket of currencies, stemming currency appreciation has led to talk that a currency war could be brewing.

Using the value of currencies to boost trade-heavy economies has been the flavour, as global economic growth slows.

The International Monetary Fund cut its global growth outlook from 3.8% to 3.5% this year and with growth easing in China, Europe and a number of emerging economies, giving support to such economies has been the focus of governments.

The European Central Bank instituted its own quantitative easing (QE) policy on Jan 22 to get growth going in the European Union.

The effectiveness of that policy has been questioned, but the immediate result was that the euro, which has been weakening against the US dollar, continued to fall against the greenback.

With Japan flooding the market with liquidity to get growth and inflation going with its own QE, the result has been a marked weakness in the currency.

The yen’s steep depreciation against the dollar, according to reports, is causing uneasiness in South Korea, which competes almost head-to-head with Japan in the export markets.

What is allowing countries that have taken action to cut their interest rates has been the slowing inflation.

The steep fall in crude oil prices since June last year to below US$50 a barrel has eased inflationary pressure worldwide, as energy is usually the biggest component of inflation. It’s been reported that over the past six months, 18 out of 50 MSCI countries have cut rates.

The Reserve Bank of India, which has an inflation targeting policy, cut interest rates this month. India, along with Denmark, Switzerland, Canada, Egypt and Turkey, has cut interest rates this month itself.

That was followed by Singapore’s move to slow its rise against a basket of currencies, which saw the Singapore dollar continue its recent drop against the US dollar.

Falling inflation was the primary reason for the Monetary Authority of Singapore (MAS) to make its pre-emptive move to slow down the appreciation of its currency by reducing the pace of increase. But quite a number do not pin that move as a significant competitiveness boost.

“The adjustment does not translate into a massive competitiveness impact,” says Saktiandi Supaat, Malayan Banking Bhd’s head of foreign exchange (forex) research based in Singapore.

MAS’ next policy statement will be due in April where it could give some clarity on the competitiveness angle, but the drop in the Singapore dollar against the greenback does help to boost inflation, which is expected to be lower than had been earlier estimated. The previous outlook was for a -0.5% to 0.5% rise in inflation.

A slower rate of appreciation would also help Singapore’s economy, which is already dealing with cost pressures from a tight labour market where the unemployment rate was a meagre 1.6%.

Furthermore, with non-oil domestic exports reportedly dropping for the past two years, a weaker Singapore dollar will help, especially when exports to China and the United States have fallen on a year-on-year basis.

Pressure is also emerging in Thailand, where the stronger baht is also not helping with exports, which dropped 0.4% last year.

Finance Minister Sommai Phasee was recently reported to have said that the Thai central bank should “in theory” lower borrowing costs, and that exports are under pressure from a stronger baht.

Fundamentals back appreciation

The Philippine peso and the baht are two currencies in this region that have in recent months seen an appreciation against the dollar. The reason for this is that the fundamentals of these economies have improved.

“The Philippines is not reliant on commodities as much as Malaysia, Indonesia and Thailand and that is the biggest driver of its currency,” says a currency strategist in Singapore.

“It just registered its strongest gross domestic product (GDP) growth over three years since the 1950s.”

The Philippine economy grew by 6.1% last year after expanding by 7.2% in 2013.

Thailand, recovering from floods and political unrest, has also been a flavour for foreign investors since stability returned.

Its stock market in US dollar terms is now bigger than Bursa Malaysia and one of the reasons for the currency’s rise is the drop in oil prices.

The fall in crude oil prices is expected to have the biggest economic benefit to Thailand and the Philippines among countries in this region, according to Bank of America Merrill Lynch.

“Lower oil prices have not resulted in any sizeable GDP growth upgrade as yet for emerging Asia, in part because of slowing global growth outside the United States.

“Lower oil prices have, however, improved the trade surplus significantly, supporting the current account balance and FX reserves positions.

“Lower oil prices have also resulted in a sharp drop in inflation, particularly in Thailand, the Philippines and India, which has allowed central banks to stay accommodative. Emerging Asian countries will likely see a boost to GDP growth in the range of +10bp to +45bp with every 10% fall in oil prices, if the oil price drop was purely a supply shock,” it says in a note.

The low-inflation environment will also allow central banks in this region to become more accommodative.

“Lower crude oil prices and loose global monetary policy will likely keep inflation lower in 2015 with rising probability of rate cuts in Asean,” says Morgan Stanley in a note.

How low will the ringgit go?

The past three months have been a volatile period for global currencies and no more so when it comes to the ringgit, which is the second-worst performing currency in Asia against the US dollar over the past 12 months after the yen.

Directly, the drop in crude oil prices has affected the fundamentals of Malaysia and carved a chunk out of government revenue, as receipts from crude oil production account for slightly less than 30% of income.

With revenues depleted, the Government has revised its budget for this year to take into account crude oil averaging US$55 a barrel in 2015 from an earlier projection that it would average US$105 a barrel when the budget was announced last October.

The revised budget also led to a slight increase in the fiscal deficit to 3.2% of GDP from an earlier projection of 3%.

That percentage is lower than the 3.5% target for 2014.

Apart from fiscal discipline, the ringgit’s fortunes have been loosely linked to the price of crude oil.

With this July marking the 10th year when the ringgit peg to the US dollar was lifted, the decision to remove the RM3.80 to the US dollar peg was to ensure that the ringgit reflected the fundamentals of the economy.

Prior to that decision, the price of crude oil had started to rise, delivering valuable additional revenue to the Government.

When the peg was lifted, brent crude oil was trading at US$55.72 a barrel, and over the years, the ringgit loosely tracked the value of crude oil, often appreciating against the dollar when crude oil prices were high and weakening when crude oil prices dropped.

Anecdotally, the ringgit gained strength against the dollar when oil prices soared and approached the RM3 to the dollar mark when crude oil hit more than US$140 in 2008.

It dropped in value as crude oil prices retreated from there, and as crude oil prices went up again and stayed at elevated levels for a prolonged period, the ringgit then crossed the RM3 level into the RM2.90 range.

Forex strategists say sentiment does affect the movement of a currency, but it moves in parallel with the fundamentals of an economy. With Malaysia’s fortunes closely linked to the price of crude oil, it is inevitable that the thinking of the country’s fundamentals will also change.

“If energy prices continue to drop, then it will hurt the ringgit,” says a forex strategist based in Singapore.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz recently said the ringgit, which is currently trading at multi-year lows against the US dollar, did not reflect Malaysia’s strong underlying fundamentals.

“Once the global events settle down and stabilise, the ringgit will trend towards our underlying fundamentals,” Zeti told reporters at an event.

Apart from lower crude oil prices, the ringgit has also been hurt by capital outflows.

Malaysia’s forex reserves in the first two weeks of January were at its lowest level since March 2011 and foreign investors held 44% of Malaysian Government Securities (MGS) as of the end of last year.

Analysts say while foreigners have sold off a chunk of government debt, the remaining are not expected to do so as long as they are making a decent return on their holdings. The rise in the value of the 10-year MGS will give support to their holdings.

A number of forex analysts think the ringgit will not slip below RM3.70 to the US dollar, but some do admit they did not think it would be trading at the current level of around RM3.63 a few months ago.

“If it does go to RM3.80, then people will get panicky,” says one forex analyst.

By Jagdev. Singh Sidhu The Star/ANN

Semiconductor and rubber glove makers to gain from weak ringgit

Super dollar _ semicon gain

Kenanga Research believes that the semiconductor industry will stay resilient with the global sales continuing to show healthy momentum.

THE decline of the ringgit is generally viewed as a problem for the economy but there are always two sides to the story.

Exporters with high local ringgit-denominated content and strong external demand are the obvious winners as they are expected to benefit from the weakening ringgit.

The winners are said to be the semiconductor and technology, rubber gloves and timber-based sectors. The share prices of a number of those companies have already factored in the benefits to their business from the weaker ringgit after the currency started its decline,which was more pronounced since the beginning of the fourth quarter of last year.

On the semiconductor front, Kenanga Research says believes that industry will stay resilient with the global sales continuing to show healthy momentum. Bottom-fishing is recommended as a strategy especially with the current risk-reward ratio less favourable following rich valuations in some counters.

“Typically, first and last quarters of a calender year, the earnings for the semiconductor players are seasonally weaker.

“That said we see any price weakness in these stocks as opportunities to accumulate as the earnings shortfall could be made up by the seasonally stronger second and third quarters on the back of the resilient industry prospects,” it says in a recent report.

Screening through the semiconductor value chain, Kenanga Research sees Vitrox Corp Bhd, being the leading solution providers of automated vision inspection systems to continue benefiting from the increasing complexity of semiconductor packages, which requires enormous inspection.

The research house is sanguine over OSAT (outsourced chips assembly and testing) players such as Unisem (M) Bhd. Inari Amertron Bhd is among the research house’s top pick.

PIE industrial Bhd managing director Alvin Mui says the group would see its sales rising this first quarter.

“But this is due to the new box built products we are doing for the medical equipment segment.

“The weakened ringgit will of course boost our revenue and bottom line,” Mui says.

Meanwhile, Elsoft Research Bhd chief executive officer CE Tan says the weak ringgit has boosted orders for its LED test equipment for the first quarter of this year.

“We expect to perform by a strong double digit percentage growth over the same period last year,” he says.

Tan says the LED testers the group produces are niche products with competitive pricing.

Rubber gloves players have seen strong price appreciation since late last year. Maybank IB Research likes Kossan Rubber Industries Bhd due to its stronger earnings growth in financial years 2015 and 2016, underpinned by the full contributios of its latest three plants.

Meanhile, JF Apex Securities mentions Latitude Tree, Poh Huat and Heveaboard among the timber-based industry stocks that can benefit from strengthening US dollar against ringgit.

The US market is the biggest for the industry which will gain from cheaper ringgit-denominated local content and stronger US economic growth.

The losers from a weaker ringgit, JF Apex Securities Bhd senior analyst Lee Cherng Wee mentions, are automotive players which import a lot of parts especially for completely-knocked down vehicles.

Lee says counters such as Tan Chong Motors and UMW Holdings are likely to be affected.

RHB Research in a recent report says about 60% of Tan Chong’s manufacturing cost of sales is transacted in foreign currency (80% in US dollars) which RHB sees as a risk.

“Continued US dollar strength will crimp margins that will not be offset by a weaker Japanese yen,” it says.

Lee also predicts the consumer sector players with high imported content in dollar terms could risk slimmer margins coupled with sluggish consumer sentiment due to goods and services tax.

MIDF Investment Research analyst Kelvin Ong said he foresees banking groups with higher foreign shareholdings like CIMB Group Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Public Bank Bhd as banks that can be impacted by the weaker ringgit.

“Foreign shareholding may slip if the domestic currency continues to weaken. The Fed’s tightening of the interest rate turns out to be more aggressive than expected, and crude oil prices continue to be on a downward trend. This will impact valuations of banks, but on the flip side, it will present buying opportunities for investors on a more attractive valuation,’’ he says.

By Sharidan M. Ali and David Tan The Star/ANN

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Ringgit Malaysia slides to lowest vs USD: fears of low oil prices, rate hike, rethink study options

Ringgit slide

PETALING JAYA: The ringgit has fallen to its lowest against the US dollar since August 2009 amid concerns over the impact of low oil prices on Malaysia’s economy and the timing of US interest rate hike.

Ringgit slide_oil

At 5pm yesterday, the ringgit was quoted at 3.5425 against the US dollar, which has been gaining strength against all major currencies in the world. That represented a weakening of 10.81% for the ringgit against the US dollar in the last six months.

According to independent economist Lee Heng Guie, the ringgit would likely remain under downward pressure as investors were concerned about the impact of falling crude oil prices on Malaysia’s economy.

Malaysia, which is a net exporter of crude oil and petroleum, is seen as the biggest loser in Asean of lower oil prices.

“Being a net oil and gas exporter, it will cause a sharp slowdown in oil and gas investments and affect the Government’s ability to spend as it struggles to manage its fiscal deficit on account of falling oil revenue,” RHB Research Institute said in a recent report.

Low oil prices would result in some loss of income for Malaysia through lower dividends from state oil producer Petroliam Nasional Bhd and lower tax and excise duties. Petroleum-related revenues account for around 30%-40% of total government revenue each year.

Savings from recent subsidy reforms might not be sufficient to offset the loss in income for the Government that was looking to cut its fiscal deficit to 3% of gross domestic income (GDP) in 2015 from 3.5% of GDP this year, economists said.

There were divided views as to whether Malaysia would momentarily slip into twin deficits, a situation where an economy is running both fiscal and current deficits, in the coming months.

Brent crude oil, an international benchmark, fell to a fresh five-year low at 5pm yesterday when it was quoted at US$54.23 (RM192.11) per barrel. That represented a decline of more than half from the peak of around US$115 (RM406.80) per barrel in mid-June.

Investors are expecting the US Federal Reserve to raise interest rates in the coming months, following the end of its third round of quantitative easing (QE3) programme last October.

QE3, which was launched in September 2012, involved the buying of long-term US Treasury bonds to push long-term interest rates low to support the country’s economic recovery.

In the last six months, the ringgit had also weakened against other regional currencies, including the Singapore dollar, against which it fell 3.63% to 2.6493. The ringgit fell 0.91% against the South Korean won to 0.3184; and 2.9% against the Indonesian rupiah to 0.02801.

Nevertheless, the ringgit had appreciated against the British pound, euro, Australian dollar and Japanese yen over the last six months.

Yesterday, the ringgit was quoted at 5.4080 against the pound, 4.2249 against the euro, 2.8541 against the Australian dollar and 2.9397 against 100 yen.

By Celilia Kok The Star/Asia News Network

Weakening ringgit forces parents to rethink study options


PETALING JAYA: Parents planning to send their children to study overseas, particularly the United States, are beginning to feel the pinch with the ringgit continuing its slide against the greenback.

Many are reconsidering their options by looking at other destinations for their children’s higher studies.

Some are also planning to shorten the study period of their children to cope with the extra costs incurred, while there are those who are thinking of asking their children to take up part time jobs to help finance their education.

The ringgit has slipped to its lowest since August 2009 at 3.5280 to the US dollar.

A media practitioner said he enrolled his daughter for an American degree programme with a local college two years ago.

“She’s doing a twinning course with two of the four years to be spent in the US. At that time, the ringgit was holding up fairly well against the US dollar.

“With the ringgit’s slide now, I’ll have to cough up much more to finance my daughter’s studies in the US,” he said.

Retired pilot Wong Yoon Fatt, a father of two, said he planned to send his 18-year-old daughter overseas as he had saved up funds for his children’s education.

“However, if the ringgit continues to weaken, I may shorten the duration of their studies abroad. From three years, I may consider cutting it to just a year or two abroad,” he said, adding that he would encourage his children to take up part-time jobs during their vacation.

Housewife Noorhaidah Mohd Ibrahim, 61, said if the economic situation worsened, she was prepared to send her 21-year-old daughter Tasneem to study at a local university.

“If we can get the same quality of education here, then why not?” she said, adding that she was planning to send Tasneem to pursue higher education in Britain.

Mass communication student S. Samhitha, 21, said she had a choice of continuing her final-year overseas but opted to stay back because of increasing costs to study abroad.

“I can still get the same degree here. However, the thing I will miss is the exposure of studying in a different country,” she said.

Law student Janani Silvanathan, who is in Britain, said she would feel the pinch of the weakening ringgit in her next term when she would have to travel back and forth from Bristol to London weekly.

“Transportation will be more expensive. A train ticket from Bristol to London costs RM180 each now,” the 24-year-old lamented.

A 20-year-old film making student who identified herself as Stephanie said she was planning to study in Canada but would have take up a part-time job.

“The depreciating ringgit will not severely affect me but my parents will definitely incur higher costs,” she said.

Law student Lisa J. Ariffin, 25, who is studying in Cardiff, Wales, said she was more careful in spending money, even on food.

“I can’t eat out as often and will always look out for good bargains or offers,” she said.

By Yuen Meikeng The Star/Asia News Network

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Global bank profits hit US$920bil, China accounted for 1/3 total; Globalized RMB to stabilize world economy

LONDON: China’s top banks accounted for almost one-third of a record US$920 billion of profits made by the world’s top 1000 banks last year, showing their rise in power since the financial crisis, a survey showed on Monday.

China’s banks made $292 billion in aggregate pretax profit last year, or 32 percent of the industry’s global earnings, according to The Banker magazine’s annual rankings of the profits and capital strength of the world’s biggest 1,000 banks.

ICBCLast year’s global profits were up 23 percent from the previous year to their highest ever level, led by profits of $55 billion at Industrial and Commercial Bank of China (ICBC). China Construction Bank, Agriculture Bank of China and Bank of China filled the top four positions.

Banks in the United States made aggregate profits of $183 billion, or 20 percent of the global tally, led by Wells Fargo’s earnings of $32 billion.

Banks in the eurozone contributed just 3 percent to the global profit pool, down from 25 percent before the 2008 financial crisis, the study showed. Italian banks lost $35 billion in aggregate last year, the worst performance by any country.

Banks in Japan made $64 billion of profit last year, or 7 percent of the global total, followed by banks in Canada, France and Australia ($39 billion in each country), Brazil ($26 billion) and Britain ($22 billion),The Banker said.

The magazine said ICBC kept its position as the world’s strongest bank, based on how much capital they hold – which reflects their ability to lend on a large scale and endure shocks.
China Construction Bank jumped to second from fifth in the rankings of strength and was followed by JPMorgan , Bank of America and HSBC .

ICBC, which took the top position last year for the first time, was one of four Chinese banks in the latest top 10.

Wells Fargo has this year jumped to become the world’s biggest bank by market value, after a surge in its share price on the back of sustained earnings growth. Its market value is $275 billion, about $75 billion more than ICBC.

The Banker said African banks made the highest returns on capital last year of 24 percent – double the average in the rest of the world and six times the average return of 4 percent at European lenders.- Reuters

Globalized RMB to stabilize world economy

RMBBEIJING, June 27 (Xinhua) — The globalization of the yuan, or renminbi (RMB), will not only benefit the Chinese economy, but generate global economic stability, a senior banker has said.

The yuan did not depreciate during the 1997 Asian financial crisis or the 2008 global financial crisis, helping stabilize the global economy, Tian Guoli, chairman of the Bank of China, said at a forum in London last week, according to the Friday edition of the People’s Daily.

China’s economy ranks second in the world and its trade ranks first, so it is thought that use of the RMB in cross-border trade will be a mutually beneficial move for China and its trade partners.

The yuan has acquired basic conditions to become an international currency as China’s gross domestic product took 12.4 percent of the world’s total and its foreign trade 11.4 percent of the world’s total in 2013, Tian said.

According to the central bank, RMB flow from China hit 340 billion yuan (55.74 billion U.S. dollars) in the first quarter of 2014, replenishing offshore RMB fluidity. The balance of offshore RMB deposits hit 2.4 trillion yuan at the end of March, 1.51 percent of all global offshore deposits. Offshore trade between the yuan and foreign currencies doubled in the first quarter from the fourth quarter of last year.

Analysts widely forecast five steps in RMB internationalization: RMB used and circulated overseas, RMB as a currency of account in trade, RMB used in trade settlement, RMB as a currency for fundraising and investment, and RMB as a global reserve currency.

Already, some neighboring countries and certain regions in developed countries are circulating RMB, indicating the first step has been basically achieved.

Data provider SWIFT’s RMB tracker showed that in May, 1.47 percent of global payments were in RMB, a tiny amount compared to the global total but up from 1.43 percent in April. This indicated progress in the second and third steps.

Some countries in southeast Asia, Latin America and Africa have or are ready to take RMB as an official reserve currency. It indicated the fourth and the fifth steps are burgeoning.

Investors are also optimistic about RMB globalization. Bank of China’s global customer survey shows that over half of the respondents expect RMB cross-border transactions to rise by 20 to 30 percent in five years. And 61 percent of overseas customers say they plan to use or increase use of RMB as a settlement currency.

Li Daokui, head of the Center for China in the World Economy under Tsinghua University, said RMB internationalization is a long-term process and should be made gradually based on China’s financial reforms, including freeing interests and reforms on foreign exchange rates.

Dai Xianglong, former central bank governor of China, forecast that it will take about 10 to 15 years to achieve a high standard of RMB internationalization.

Among the latest moves toward RMB internationalization is the naming of two clearing banks to handle RMB business overseas.

The central bank announced last Wednesday that it has authorized China Construction Bank to be the clearing bank for RMB business in London, and the next day named the Bank of China as clearing bank for RMB business in Frankfurt.- Xindua

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The euro crisis just got a whole lot worse

Jeremy WarnerWith Europe plunging back into recession and unemployment soaring, Francois Hollande, the French president elect, is calling for growth objectives to be reprioritised over the chemotherapy of austerity.

Riot policemen lead away a right-wing protestor holding a placard reading

Riot policemen lead away a protester holding a placard reading ‘Let’s get out of the Euro’ during May Day demonstrations in Neumuenster, Germany Photo: Reuters

Angela Merkel, the German Chancellor, has meanwhile continued to insist that on the contrary, Europe must persist with the hairshirt. What’s needed is political courage and creativity, not more billions thrown away in fiscal stimulus. Stick with the programme, she urges, as the anti-austerity backlash reaches the point of outright political insurrection.

Hollande and Merkel are, of course, both wrong. What Europe really needs is a return to free-floating sovereign currencies. Only then will Europe’s seemingly interminable debt crisis be lastingly resolved. All the rest is just so much prancing around the goalposts, or an attempt to make the fundamentally unworkable somehow work.

The latest eurozone data are truly shocking, much worse in its implications both for us and them than news last week of a double-dip recession in the UK.

Even in Germany, unemployment is now rising, with a lot more to come judging by the sharp deterioration in manufacturing confidence. For Spanish youth, unemployment has become a way of life, with more young people now out of a job (51.1pc) than in one. In contrast to the US, where the unemployment rate is falling, joblessness in the eurozone as a whole has now reached nearly 11pc. Against these eye-popping numbers, Britain might almost reasonably take pride in its still intolerable 8.3pc unemployment rate.

There is only one boom business in Spain these days – teaching English and German. No prizes for guessing where these students are heading.

Hollande’s opportunism in calling for a growth strategy he must know cannot be delivered looks like being answered only by intensifying recession. Maybe Mario Draghi, president of the European Central Bank, will surprise us after Thursday’s meeting with a rate cut and a eurozone-wide programme of quantitative easing. But even if he did, it wouldn’t fix the underlying problem, which is one of lost competitiveness manifested in ever more intractable levels of external indebtedness.

To think these problems can be solved either by fiscal austerity or, as advocated by Hollande and others, by its polar opposite of fiscal expansionism is to descend into fantasy.

By reinforcing the cycle, and thereby exacerbating the slump, fiscal austerity is proving self-defeating. Far from easing the problem of excessive indebtedness, it is only making it worse.

But it is equally absurd to believe that countries in the midst of a fiscal crisis can borrow their way back to growth. Who is going to lend with the certainty of a haircut or eurozone break-up to come?

I’ve been looking at the comparative numbers on fiscal consolidation, and they reveal some striking differences. The hairshirt prescribed for others is most assuredly not being donned by austerity’s cheerleader in chief, Germany.

In fact, German government consumption is continuing to rise quite strongly, even in real terms, and the fiscal squeeze pencilled in by Berlin for itself for the next three years is marginal compared with virtually everyone else. Germany is requiring others to adopt policies it has no intention of following itself. What’s so odd about that, you might ask?

Right to spend

Germany has earned the right to spend through years of prior restraint. It’s got no structural deficit to speak of and, in any case, isn’t that the way things are meant to work, with those capable of some fiscal expansionism compensating for the squeeze imposed by others?

All these things are true, but there is something faintly hypocritical about a country prescribing policy for others that it wouldn’t dream of imposing on itself. Germany’s supposed love of self-flagellation is actually something of a myth.

By the way, despite the rhetoric, Britain is hardly an outrider on austerity either. Now admittedly, the Coalition’s plans for fiscal consolidation have been somewhat derailed by economic stagnation. We were meant to be further along than we are. But in terms of what’s left to do, the UK is no more than middle of the pack.

On current plans, by contrast, the fiscal squeeze in the US, land of supposed fiscal expansionism, ratchets up substantially to something quite a bit bigger than what the UK has pencilled in for the next two years. It remains to be seen what effect that’s going to have on the American recovery. Will renewed growth melt away as surely as it did in early 2011, or is it self-sustaining this time?

Back in the eurozone, the stand-off between creditor and debtor nations shows few, if any, signs of meaningful resolution. During the recession of the early 1990s, there was a famous British Property Federation dinner at which the chairman introduced the then chief executive of Barclays Bank, Andrew Buxton, as “a man to whom we owe, er, more than we can ever repay”. It was a good joke, but it also neatly encapsulated what happens in all debt crises.

When the debtor borrows more than he can afford, the creditor will in the end always take a hit. The only thing left to talk about is how the burden is to be shared. The idea that you can force the debtor to repay by depriving him of his means of income is a logical absurdity, yet this is effectively what’s going on in the eurozone.

When such imbalances develop between countries, they are normally settled by devaluation, which provides a natural market mechanism both for restoring competitiveness in the debtor nation and establishing the correct level of burden sharing.

Least tortuous form of default

It’s default in all but name, but it is the least tortuous form of it.  Free-floating sovereign exchange rates also provide a natural check on the build-up of such imbalances in the first place.

The reason things got so out of hand in the eurozone is that investors assumed in lending to the periphery that they were effectively underwritten by the core, mistakenly as it turned out. Interest rates therefore converged on those of the most creditworthy, Germany, allowing an unrestrained credit boom to develop in the deficit nations.

None of this is going to be solved by austerity. For now, there is no majority in any eurozone country for leaving the single currency, but one thing is certain: nation states won’t allow themselves to be locked into permanent recession. Eventually, national solutions will be sought.

The whole thing is held together only by the fear that leaving will induce something even worse than the current austerity. This is not a formula for lasting monetary union.

Euro, death approaching soon ?

Death of a currency as eurogeddon approaches

It’s time to think what hitherto markets have regarded as unthinkable – that the euro really is on its last legs.

It's time to think what hitherto markets have regarded as unthinkable – that the euro really is on its last legs.

They need to wake up fast; it’s happening before their very eyes. In its current form, the single currency may always have been doomed, but it has been greatly helped on its way by an extraordinarily inept series of policy errors. Photo: AFP

 By Jeremy Warner, Associate editor – Telegraph

The defining moment was the fiasco over Wednesday’s bund auction, reinforced on Thursday by the spectacle of German sovereign bond yields rising above those of the UK.

If you are tempted to think this another vote of confidence by international investors in the UK, don’t. It’s actually got virtually nothing to do with us. Nor in truth does it have much to do with the idea that Germany will eventually get saddled with liability for periphery nation debts, thereby undermining its own creditworthiness.

No, what this is about is the markets starting to bet on what was previously a minority view – a complete collapse, or break-up, of the euro. Up until the past few days, it has remained just about possible to go along with the idea that ultimately Germany would bow to pressure and do whatever might be required to save the single currency.

The prevailing view was that the German Chancellor didn’t really mean what she was saying, or was only saying it to placate German voters. When finally she came to peer over the precipice, she would retreat from her hard line position and compromise. Self interest alone would force Germany to act.

But there comes a point in every crisis where the consensus suddenly shatters. That’s what has just occurred, and with good reason. In recent days, it has become plain as a pike staff that the lady’s not for turning.

This has caused remaining international confidence in the euro to evaporate, and even German bunds to lose their “risk free” status. The crisis is no longer confined to the sinners of the south. Suddenly, no-one wants to hold euro denominated assets of any variety, and that includes what had previously been thought the eurozone safe haven of German bunds.

Investors have gone on strike. The Americans are getting their money out as fast as they decently can. British banks have stopped lending to all but their safest eurozone counterparts, and even those have been denied access to dollar funding. The UK hardly has anything to boast of; it’s got its own legion of problems, many of them not so dissimilar to those of the eurozone periphery.

But almost anything is going to look preferable to a currency which might soon be assigned to the dustbin of history. All of a sudden, the pound is the European default asset of choice.

What we are witnessing is awesome stuff – the death throes of a currency. And not just any old currency either, but what when it was launched was confidently expected to take its place alongside the dollar as one of the world’s major reserve currencies. That promise today looks to be in ruins.

Contingency planning is in progress throughout Europe. From the UK Treasury on Whitehall to the architectural monstrosity of the Bundesbank in Frankfurt, everyone is desperately trying to figure out precisely how bad the consequences might be.

What they are preparing for is the biggest mass default in history. There’s no orderly way of doing this. European finance and trade is too far integrated to allow for an easy unwinding of contracts. It’s going to be anarchy.

It’s worth stressing here that for the moment the contingency planning is confined to officialdom. This week, for instance, we’ve had the Financial Services Authority’s Andrew Bailey admit that he’s asked UK banks to plan for a disorderly breakup of the euro. He’d be failing in his duties if he hadn’t. Europe’s political elite, as ever several steps behind the reality, still regards the prospect as unimaginable.

They need to wake up fast; it’s happening before their very eyes. In its current form, the single currency may always have been doomed, but it has been greatly helped on its way by an extraordinarily inept series of policy errors.

First there was the disastrous suggestion from Angela Merkel and Nicolas Sarkozy that if Greece didn’t buckle under it might be chucked out. Markets reacted logically, which was to sell bonds in any country that looked vulnerable and chase “safe haven” assets, thereby making it much harder for governments to fund themselves.

The blunder was compounded by attempts to underpin confidence in the banking system by forcing banks to mark their sovereign debt to market. This may only have recognised the reality, but it also destroyed the concept of the “risk free asset”, forcing banks for the first time to apply capital to their sovereign debt exposures. Unsurprisingly, they stopped buying sovereign bonds, again making it harder for governments to fund themselves.

But perhaps the biggest sin of the lot was effectively to render all credit default swaps (a form of insurance against default) on sovereign debt essentially worthless, or void, by making the Greek default “voluntary”.

This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it’s made investors believe that the euro cannot be trusted, that it’ll repeatedly find ways of reneging on contract. That’s the point of no return. This is no longer a serious currency.

Euro fallout is bad news for world economy

Eurozone map in 2009 Category:Maps of the EurozoneImage via Wikipedia

Global Trends By Martin Khor

The IMF-World Bank meetings last week confirmed the global economy has entered the ‘danger zone’ of a new downturn and possibly recession. This time it could be more serious and prolonged than the 2008-2009 recession.

THE last two weeks have seen a clear downward shift in expectations on the global economy. The dominant view now is that the world has slipped into stagnation that may well become a recession.

Warnings that the economy had entered a “danger zone” generated the gloomy mood at the annual Washington gathering of the International Monetary Fund and World Bank, as well as the G20 finance ministers’ meeting.

Prominent economists are predicting the new crisis will be more serious and prolonged than the 2008-09 recession.

If the United States and its sub-prime mortgage mess was the immediate cause of the last recession, the epicentre this time is the European debt crisis.

The eurozone’s GNP grew by only 0.2% in the second quarter, and the European Commission predicts the rates will be 0.2% and 0.1% in the third and fourth quarters.

As the domino effect of contagion hit one European country after another (rather like how Asian countries were affected in 1998-99), European leaders have scrambled for a solution.

But none has worked so far.

In the Greek debt tragedy, the government has had to announce one painful austerity measure after another, but its economic condition continues to worsen and the social protests and strikes indicate the approach of the political breaking point.

The costs of austerity are already being seen (by the public at least) to outweigh the benefits.

Several British newspapers last week reported a set of big measures to tackle the European crisis was reportedly being worked on by unnamed European officials.

The centrepiece is a Greek debt default with creditors repaid only 50%, and two measures to cushion that shock – an injection of fresh capital into European banks that would suffer big losses from the default, and the boosting of the European bailout fund from 400-plus billion euros to almost two trillion euros to enable hundreds of billions of euros in new credit to countries like Italy and Spain to prevent them from becoming new debt-crisis economies.

However, this leaked news of a big Plan B was not confirmed by any policy maker, so its status or even existence is unknown.

Instead, the news out of Washington last week was of continued paralysis in European policy.

Greece this week is facing a new crunch time – waiting to see if the European institutions and IMF will approve the next bailout instalment of US$8 billion to service loans that are coming due, and what would happen if they do not. Would it be time then to declare a default?

Meanwhile, the US has its own budget deficit tug-of-war between the President and Congress and between Republicans and Democrats.

What this means is that Europe and the US are not able to make use of the policies (massive increases in government spending, interest rate cuts and pumping of money into the economy) that pulled them quickly out from the last recession.

Moreover, the coordination of policy actions among developed countries (and several developing countries as well, that also undertook fiscal stimulus policies) that fought the last recession no longer seems to exist, at least for now.

Thus the new global slowdown or recession is likely to last longer than the short 2008-09 recession.

The developing countries should thus prepare to face serious problems that will soon land on them.

We can expect a sharp fall in their exports as demand declines in the major economies.

Commodity prices are expected to climb down; they have already started to do so.

There may be a reversal of capital flows, as foreign funds return to their countries of origin.

The currencies of several developing countries are already declining and it may be the start of sharper falls.

It’s beginning to look like 2008 all over again.

But this time the developing countries are starting this downturn in a weaker state than in 2008, since they have not yet fully recovered from the last shock.

And as the downturn proceeds, there will be fewer cushions to blunt the effects or to enable a rapid recovery.

It is also clear that there is an absence of a global economic governance system, in which the developing countries can also participate in.

All countries are affected when the global economy goes into a tail spin.

Once again, the developing countries are not responsible for the new downturn, but they will have to absorb the ill effects.

Yet there is no forum in which they can put forward their views on how to lessen the effects of the crisis on them and what the developed countries should do.

As the new crisis unfolds, there will be renewed calls for reforms to the international financial and economic system.

This time there should be a more serious reform process, otherwise more crises can only be expected in the future.

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