The Music Goes on and on

[specuvestor]

You got the analogy mixed up. I'm saying RMB from the PBOC is their SAFRA voucher ie fiat money. PBOC can own USD1 and issue RMB6 and tomorrow print another RMB6 (assuming they don't care about devaluation or inflation). Can we say RMB6 was backed by USD1 day before and RMB12 backed by USD1 day after? And next day they declare RMB invalid and use SAFRA vouchers instead... who is there to claim the USD1 from PBOC? Holder of RMB have no recourse. That's where the argument AGAINST fiat comes from, ie hyperinflation.

Frankly nobody can say for sure how much a currency is "worth", except they try to extrapolate using the "balance sheet" method you described, taxing power and economic growth as guide. But the reality is that it is fiat.

You can exchange at the USD rate PBOC determined at this point. But they have no obligation to guarantee any backing, unlike the gold standard. That is fiat.

"money without intrinsic value"
http://en.wikipedia.org/wiki/Fiat_money

[freedom]

Sadly, PBOC has not done such thing "PBOC can own USD1 and issue RMB6 and tomorrow print another RMB6 (assuming they don't care about devaluation or inflation)." yet though it wants that power very much. Are we talking about something not real? I mean, what is RMB today? Fiat money or not? partially limited redemption or not?

Isn't gold standard the same? Did the US government declare 1 ounce of gold is not 28 USD long time ago? Wasn't 28 determined by the US government at that time? What exactly is the difference between the gold standard and the RMB apart from the limited partial redemption and the exchange rate is not fixed?

I am not here to talk about academic theory if it does not have any bearing on real economy. As much as a fiat system the US dollar is, I don't see any fear of hyperinflation with QE. There is simply no reason to fear that. It could well mean the fiat theory developed by the academics is really a theory on paper.

[specuvestor]

RMB devalued from 5.8 to 8.7 in 93/94 just prior and was setting the backdrop for the AFC

Bretton Wood was such that other hard currencies were linked to USD and USD was linked to gold at US$35. Nixon suspended the convertibility but he cannot deny the contract ie backing was valid. It was a unilateral shock. Thereafter the fiat USD currency system was born.

One of the reason for debt ceiling is to prevent runaway debt issuance and leading to hyperinflation.

RMB is fiat money just as most currencies are. There is no implicit or explicit backing. Foreign exchange just converts one faith to another faith...

"Under the contemporary international currency regimes, all currencies' inherent value derives from fiat, thus there is no longer any thing (gold or other tangible store of value) for which paper notes can be redeemed."
http://en.wikipedia.org/wiki/Convertibility

[freedom]

sorry. I mistake 35 as 28. can't remember exactly what it was.

Again, are we talking about RMB in 93/94(I can't find any records about how the devaluation was done at that time, so I have no argument about it) or today? Then again, the exchange rate is not the reason of backing or non-backing. 1 ounce gold = 1 USD or 1ounce gold = 35 USD, both means USD are gold backed before 1976. The redeem-ability of RMB today is as good as the USD before 1976 apart from partially limited redemption and not fixed, of course, one is gold and the other is certain foreign currency. Unless you have evidence of otherwise. Please elaborate, thanks. So the question again, is RMB backed or not? I am not interested in academic definition. I am talking about real currency, real money and real economy.

In your quote, it talks about redemption of gold or tangible store of value. Maybe another way to ask the question. Is RMB backed by fiat foreign currencies, the foreign reserves of PBOC?

Please don't lead to other topic, such as debt ceiling. Let's take one by one.

[specuvestor]

Debt ceiling was to answer this part: "As much as a fiat system the US dollar is, I don't see any fear of hyperinflation with QE". If Treasury can issue debt at will (currently constrained)and Fed can print and monetise them (currently done as QE), guess what happens.

My friend pass me a promissory note ie IOU to say will pay me x amount. I am short of cash and I go to you asking you to lend me x amount of money and I issue you an IOU "backed" by my friend's IOU. Do you consider that as backed?

Conversely I pledge my grandmother's gold to you and borrow x amount.

Pawnshops would know which one they think is actually backed by collateral. Current global system on fiat is based on faith circulating around. Foreign currency is no different from RMB fiat in that it is backed by faith. You're just exchanging one for another. But of course there exist greater comfort in hard currencies.

That's why confidence in the system is paramount. Any run turning into a panic like what we see in GFC can be easily be catastrophic if faith in the system is broken. There is certain truth in that the system sounds like a HUGE ponzi scheme, like some conspiraciy theorists like to point out, but it's a pretty robust one because global output actually produces something

Back to square one: if China have a choice would it hold oil field or USD equivalent as asset? Which is a safer despite immobile asset?

PS imagine u in the 70s shipping gold to the superpower in exchange for USD which are like gold certificates. And suddenly one day this supposedly superpower renege on his word and also losing the Vietnam war. Effectively US the anchor had lost credibility. It was uncertain times and gold spiked to 800 on the 1st gulf war. Fiat does sound like a scam.
It will take another half generation for people to accept fiat as it is and taken for granted as now. That's why central banks still kept gold and only started selling last decade.

[BlueKelah]

Found this on google
Definition of 'Fiat Money'
Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for "it shall be".

Is U.S. currency still backed by gold?
Federal Reserve notes are not redeemable in gold, silver, or any other commodity. Federal Reserve notes have not been redeemable in gold since January 30, 1934, when the Congress amended Section 16 of the Federal Reserve Act to read: "The said [Federal Reserve] notes shall be obligations of the United States….They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank." Federal Reserve notes have not been redeemable in silver since the 1960s.

The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.

http://www.federalreserve.gov/faqs/currency_12770.htm
-----------------------------------------------------------

So looks like USD is no longer "美 金 mei jin" (beautiful gold) as my grandfather used to say Therefore it can be considered as FIAT

So having some gold in small pieces at home as standby is still a good thing to guard against the 0.001% chance there is another world war or event that screws up all the financial markets.

I personally feel that since 2009 US has been in depression and subsequently deflation as well. That is why the inflationary effects of QE are not apparent. The constant QE is masking both a recession and deflation. How long this will last before a clearer picture forms is anyone's guess...

[WolfT]

You know, after reading all these, It really make me ponder if i should increase my gold and sliver(physically)...

[BlueKelah]

You know, after reading all these, It really make me ponder if i should increase my gold and sliver(physically)...

just keep enough for your family as emergency fund loh and no need to buy all at once, can accumulate slowly whenever gold price dips.

Our world should be safely ticking along into the next decade!

[specuvestor]

Most of my learning comes from observation of real time events and what the different stakeholders do and say at that point of time, rather than post-ante, vs what theories and textbook 101 says

So it might be interesting for some to follow the Ukraine event for those who missed Iceland and Greece

BN) Ukraine Leader Warns of Economic Danger as New Rule Takes S
hape

+------------------------------------------------------------------------------+

Ukraine Leader Warns of Economic Danger as New Rule Takes Shape
2014-02-23 22:19:15.702 GMT


(For more on the crisis in Ukraine, click EXT2.)

By Daryna Krasnolutska, Kateryna Choursina and Ilya Arkhipov
Feb. 24 (Bloomberg) -- Ukrainian parliament Speaker
Oleksandr Turchynov, handed presidential powers as lawmakers
prepare to form a coalition government, warned that the economy
was in a “pre-default situation.”
Lawmakers in Kiev worked on reshaping government after
ousting Viktor Yanukovych from the presidency for a role in the
violence that killed at least 82 people last week. The U.S. and
the European Union pledged aid for a new cabinet. Border guards
stopped Yanukovych at an airport in the eastern city of Donetsk
two days ago. He wasn’t detained.
With protesters in control of the capital and Yanukovych
denouncing events as a “coup d’etat,” his opponents face a
contentious period after the release from prison of opposition
leader Yulia Tymoshenko. Jailed more than two years ago for
abuse of power, she vowed to return to the fractured political
scene before presidential elections on May 25.
“Ukraine’s economy is spinning out of control,” Turchynov
said on parliament’s website late yesterday. “The new
government’s task is to stop the country’s slide, to stabilize
the currency rate, to ensure timely salary and pension payments,
to win back investors’ trust, and to create new jobs. Another
priority is to return to the European integration path.”
Mykola Tomenko, a member of Tymoshenko’s Batkivshchyna
party, said the former premier was a candidate for the
premiership, along with party leader Arseniy Yatsenyuk and
billionaire ex-Economy Minister Petro Poroshenko. Tymoshenko
later ruled out such a role for herself, as did Vitali
Klitschko, who heads the UDAR party.

Nation Divided

Ukraine spiraled into crisis in November when protesters
took to the streets to oppose Yanukovych’s rejection of a deal
to deepen ties with the European Union. Violence crested last
week in fighting in central Kiev before a peace agreement
brokered by EU foreign ministers ended the clashes and triggered
Yanukovych’s flight from Kiev.
The peace deal bolstered Ukrainian assets, with the yield
on the government bond maturing in April 2023 falling 77 basis
points, or 0.77 percentage point, on Feb. 21 to 10.33 percent.
With western nations and Russia tussling for sway over the
country of 45 million people, the International Monetary Fund is
ready to help Ukraine “not only from a humanitarian point of
view but also from an economic point of view,” Managing
Director Christine Lagarde told reporters in Sydney following a
meeting of Group of 20 officials yesterday.

Checkbook Ready

Treasury Secretary Jacob J. Lew said the U.S. was prepared
to help Ukraine return to a path of democracy, stability and
growth. U.K. Chancellor of the Exchequer George Osborne agreed.
“We are here ready to help just as soon as there is
someone at the end of the telephone,” Osborne said in an
interview yesterday in Sydney. “We should be there with a
checkbook to help the people of Ukraine rebuild their country.”
The EU’s foreign policy chief, Catherine Ashton, will
travel to Ukraine today to meet party leaders. Russia halted a
$15 billion bailout for its neighbor after the unrest and talks
on resumed financing may continue only after a new government is
formed, RIA Novosti reported yesterday, citing Russian Finance
Minister Anton Siluanov in Sydney.
Yanukovych’s departure is a blow to Russia, whose President
Vladimir Putin wanted Ukraine, a route for its energy shipments
to Europe, to join a trade partnership of former Soviet states
to rival the EU.
In Ukraine, the political crisis polarized sentiment
between its western and central regions bordering the EU
and those in the south and east that are home to more Russian
speakers and ethnic Russians.

Lenin Toppled

While people toppled Vladimir Lenin’s statues across the
county as protests, according to TV channel 5, more than 2,000
rallied for closer ties with Russia in the southern city of
Odessa. In Kerch, also in the south, marchers replaced a
Ukrainian flag at the mayor’s office with Russian and Crimean
flags, the Unian news service reported.
The opposition is following the lead of “armed extremists
and thugs whose actions pose a direct threat to the sovereignty
and constitutional order in Ukraine,” Russian Foreign Minister
Sergey Lavrov said in a statement On Feb 22.
Russia called its ambassador to Kiev back to Moscow for
consultations due to “aggravation of the situation” in
Ukraine and a “need for in-depth analysis,” its Foreign
Ministry said in a statement on its website yesterday.

‘Grave Mistake’

White House National Security Adviser Susan Rice said the
U.S.would work with European partners to help finance Ukraine’s
economic recovery, while warning Russia that any insertion of
its troops would be “a grave mistake.”
“It’s not in the interests of Ukraine or of Russia or of
Europe or of the United States to see the country split,” Rice
said on NBC’s “Meet the Press” program. “It’s in nobody’s
interest to see violence return and the situation escalate.”
Russia should recognize Ukraine’s “European Choice,”
Turchynov said in the statement.
“We are ready for a dialog with top Russian officials to
build relations on new, truly equal grounds,” he said.
Turchynov, the deputy chairman of Tymoshenko’s
Batkivshchyna party, also has temporary control over the
outgoing cabinet. That administration has shrunk after lawmakers
voted out the foreign, interior and other ministers.

‘Escape, Cowardice’

Turchynov said he would give up his leadership positions
once an executive is formed.
Parliament also approved measures aimed at bringing those
responsible for the violence to justice, while Yanukovych’s
Party of Regions blamed him for the bloodshed.
“We condemn Yanukovych’s escape and cowardice,” the party
said in a statement on its website yesterday. It decried
“criminal orders that led to victims, an empty treasury, huge
debt and shame in the eyes of Ukraine and the whole world.”
Border officials stopped Yanukovych’s plane in Donetsk two
days ago and refused an offer from armed men of money in
exchange for permission to depart, Oleh Slobodyan, head of the
Border Service media department, said by phone yesterday.
Yanukovych left the airport in an armored car and hasn’t
been seen trying to cross the border again. Former Interior
Minister Vitaliy Zakharchenko, ex-Prosecutor General Viktor
Pshonka and former Tax Minister Oleksandr Klymenko were also
denied permission to leave at the same airport.

Wealth Disparity

With Yanukovych on the run, thousands of people visited his
former residence over the weekend after lawmakers voted to
revert it to state ownership. People milled around the man-made
lakes, the life-sized galleon, the private zoo and a garage full
of antique cars and limousines that surround a towering mansion,
according to images on website Censor.net.
The luxurious estate dominated news broadcasts in Ukraine,
where the average nominal wage is 3,619 hryvnia ($404) a month,
according to data from the national Statistics Office.
Tymoshenko, jailed in 2011 for abuse of office on charges
EU leaders have called politically motivated, spoke by phone
with German Chancellor Angela Merkel and European Union
Enlargement Commissioner Stefan Fule yesterday.
After telling journalists two days ago that she would run
for president in May, Tymoshenko yesterday said she didn’t want
to be considered for prime minister of the new cabinet.
“I was surprised by information that I am proposed for the
post of prime minister,” she said in a statement on her
website, addressing lawmakers in parliament. “Thank you very
much for respect, but I ask you not to consider my candidacy.”

[specuvestor]

The failure of National Carriers is well known in the value investing circle as they are national "treasures" and high capex. Which is why it was quite surprising when Bill Miller starts turning positive on airlines. JAL will go through fire but National Carriers will seldom cease to exist come what may.

We now have a real life event happening for us to observe. No tickets needed but great learning session on how the real world works and the myriad of considerations besides simple PnL

Malaysian Air Falls Most Since 1998 Amid Bankruptcy Concerns
2014-05-19 02:33:43.488 GMT


By Choong En Han and Kyunghee Park
May 19 (Bloomberg) -- Malaysian Airline System Bhd., the
unprofitable national carrier that’s still searching for Flight
370, dropped the most since 1998 amid investor concern the
government may let the company fail.
The government should consider giving up its stake in the
airline, Sinar Harian newspaper reported, citing Malaysia’s
Public Accounts Committee Chairman Nur Jazlan Mohamed.
Bankruptcy may be an option to allow Malaysian Air to
restructure, the Wall Street Journal said last week, citing an
interview with Prime Minister Najib Razak.
“People believe that this time around, there would not be
a bailout like before,” said Mohshin Aziz, an analyst at
Malayan Banking Bhd. in Kuala Lumpur. “It may be heading”
toward bankruptcy, he said.
Malaysian Air fell 21.1 percent to a record low of 15 sen,
the biggest retreat since the Asian financial crisis. The
airline’s shares have dropped 63 percent over the last year,
compared with the 6.2 percent increase in the FTSE Bursa
Malaysia KLCI Index.
Government investment company Khazanah Nasional Bhd. owns a
69.4 percent stake in the airline, according to data compiled by
Bloomberg. Malaysian Air Chief Executive Officer Ahmad Jauhari
Yahya didn’t answer his mobile phone when called by Bloomberg
News for comment.

Additional Stress

The airline said last week the disappearance of Flight 370
has put additional stress on the company’s operations, forcing
it to reexamine more urgently its business plan after reporting
the biggest quarterly loss since 2011. It had a net loss of
443.4 million ringgit ($138 million) in the three months ended
March 31, compared with 278.8 million ringgit a year earlier.
Flight 370 vanished from civilian radars with 239
passengers and crew on March 8 on a flight from Kuala Lumpur to
Beijing. No physical trace of the aircraft has been found in
what has become the longest hunt in modern aviation history.
Malaysian Air had been struggling with increased
competition and higher costs even before the disappearance of
the jet as rivals such as AirAsia Bhd. flooded the region with
planes and drove down fares.
The Subang, Malaysia-based company has lost a total 4.57
billion ringgit since the start of 2011. The company missed its
target to be profitable last year as rising prices for items
including fuel, maintenance and financing wiped out revenue
gains, and pointed to an unfavorable foreign exchange rate
environment as an additional challenge this year.