$134 Billion Suitcase

Two Japanese passport holders were arrested this month in Italy, carrying $134 Billion worth of bonds into Switzerland. It is a sum so large that only a few countries could be behind the move, if the bonds turn out to be real. 

Italian police insist the bonds are fake but the US authorities haven't looked at them yet. US media totally ignores the story. The German press believes the bonds are real.

2 X BERNIE

If the bonds are real then Japan or China is trying to sell off dollar assets secretly. That would be a huge blow to the US. Hence the news blackout?

The background is this: Japan and China are desperate to reduce their investments in US dollars. But they can't do it publicly because the dollar would fall, hurting them as investors. There is good reason to try to sell the bonds secretly.

If they are fake it is the biggest attempted fraud in history. Why did police arrest them? Why not follow them to the big guy? And why, as other bloggers have pointed out, isn't the US media doing some B.S. story implicating North Korea, which has a history of counterfeiting US money?

ZINOVIEV LETTER

This does not stack up as a normal fraud. After all, it is more than two times Bernie Madoff's ponzi scandal.

It's unlikely to be a fraud in the sense that criminals intended to make money. The face values are simply so large that they would have had no chance of selling them. 

If the bonds are fraudulent, think Zinoviev Letter. The "discovery" of $134 Billion of bonds in a briefcase hilights the idea that some government (it could only be a government) wants to secretly offload its dollar holdings. 

That alone would undermine the credibility of the dollar.

Let’s look at the drive to get out of the dollar. Here’s an interview I gave on Russia Today television yesterday, after the leaders of Brazil, Russia, India and China metin Ekaterinburg to discuss, among other things, an alternative reserve currency.

TELEVISION INTERVIEW

The BRIC countries want to reduce their dependence on the US dollar. Why is that?

Well you’ve got to remember how this crisis started. It was a crisis that began in the US but because every uses the dollar for trading in oil, in gold, in property – because everyone is using the dollar the effects of the US dollar hit everyone. 

Secondly, as the US crisis rumbles on, a lot of countries have their investments, their reserves, their foreign exchange, all the profits that they make from exporting, these are all held in dollars, at least a very large proportion of them are. So if the US economy continues to struggle and the dollar falls then the wealth of Japan, of China, of Russia, that’s all at risk. So they are looking at ways to get their asssets out of dollars. 

How can all the countries switch away from the dollar?

Well the trouble is you can’t do it openly because countries like Russia, Japan, China own so many dollars, hundreds of billions, that if any one of them was to sell a significant amount of that money and turn it into something else, into another currency or into gold, that would really cause panic in the markets. You would see the dollar fall very quickly. And that would hurt the countries that were trying to change their assets into another currency, they would be shooting themselves in the foot. 

We had a peculiar story at the start of this month, where two Japanese passport holders were arrested in Italy carrying a briefcase inside which was $134 Billion dollars in bonds. Now no-one knows whether these bonds are fake or real but just this story has highlighted the question that maybe somebody is trying secretly to offload their dollar holdings without doing it publicly.

Well could the BRIC countries, Brazil, Russia, India and China, issue their own reserve currencies?

I’d love it if they could because I’d be the first person to name it, I’d want to call it the Bric. It’s a better name than the euro. Can they do it? A long way down the road, maybe in decades. In the short term what they can do is start trading in their own currencies. Increasingly shift their trade into Roubles, into Yuan if you’re Chinese. In that case you do isolate a bit of your exposure to the dollar, it makes you a little bit less vulnerable And this isn’t just about governments, if course, it’s also about companies, its about individuals who worry about in what currency they should keep their assets. And they don’t want to have that huge volatility that the dollar has inflicted on the rest of the world. So that is what they are looking at doing. 

What about the markets. Do they take such talk seriously?

The markets do, yes. Every time there’s talk about people shifting a significant amount of their trade into other currencies you see the dollar fall. With the Group of Eight finance ministers, they try to stabilize the currencies. Whenever they see the dollar falling they come out and make statements and this is why we get a bit of a conflict: On the one hand people say they want to switch their assets out of the dollar, on the other you’ll see statements from the Chinese, the Russians, from the Japanese saying, “We’re very happy with the dollar”. So there’s what you say publicly and what you plan for over the long term. 
There are various measures that can be taken. There is talk about saving more money in the IMF, putting the rouble into the basket of what’s called SDRs. This would give a higher profile to emerging market currencies, it would give them more votes on the IMF. So that’s another small step. None of these are in themselves big threats to the dollar except this one move that I’ll come back to, the move to trade in their own currencies. That is a slow, long term but genuine threat to the dollar. 

Finally, Mark, the US has announced the reform of its financial system. Has it changed anything?

On the key points, it really hasn’t. They haven’t addressed executive pay, they haven’t addressed the oversight of the banks. From the point of view of people outside the US, they haven’t addressed the Anglo-Saxon domination of the financial system but then you wouldn’t expect that. This is Tim Geithner, the US Treasury Secretary’s report into the US financial system. He’s talked about measures to protect savers, small stuff. A lot of people are surprised that we haven’t heard anything on regulation of the banks, nothing on changing the use of derivatives and these dangerous products which caused the destabilization of the financial system in the first place.

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