Daily dictionary update : "De-peg"

If there is one word you should likely put into your vocabulary, it's "de-peg". Because China will be doing it, and may in fact already be doing it. Amongst news that China may be offering to extend monetary aid to Portugal (in addition to previously indicated Greece), it appeares to me that China has realized that a European debt restructuring may hurt their savings less than an American inflationary default. And the yield on PIIGS debt is rather tasty, compared to the US equivalent.

In addition to this, China is ringing the bell ever louder that they are fed up with eating US inflation just to keep a steady currency rate towards other countries. A large part of the emerging world is starting to see that it is they who are implicitly backing the US trade & budget deficit by being constrained to using the dollar in their trade. The profligerate empire is meanwhile rotting according to the guidelines issued by every empire in history. Spend and print. Warfare and corruption.

What few people realize is that a dollar-collapse is now only indirectly in the hands of US authorities. Any significant selling of dollars by other nations would likely start a downward spiral. And China is carrying the most significant load. Put it like this - some people say that the US dollar is undervalued according to PPP (Purchasing Power Parity) and should enter a correction phase. I say that the PPP in regards to the dollar value is overvalued, and will enter a correction phase. Translation : If the Big Mac index says that the US dollar is undervalued by 15%, then US prices will go up 15% sometime soon. And like that, you are back to parity. Unfortunately it doesn't stop here - because the dollar is seriously overvalued - which will soon be recognized.

So, what does this have to do with the "de-pegging" of China? It is actually quite simple - I think that China is trying to flush out their dollar reserves and will thereafter try to enter into agreements with all their major trading partners (except the US) to try and keep their currencies fairly balanced against a basket of the majors (EUR, USD, GBP, JPY and maybe AUD+CAD). Thus, the "de-peg" from the US-dollar will mean a return to fixed exchange-rates for a large part of the world. This is inevitable, and only a pre-cursor to the coming second gold-standard. When every country in the world realize that we are all rising in a synchronized fashion as the dollar sinks to new lows - we can choose either to go down with it or "de-peg".

What is most likely to trigger the next shock wave of dollar devaluation is the combination of Mad Ben Bernankes asset-purchases and rising interest rates in the rest of the world. The inflationary storm that is waiting around the corner will be countered by rate-hikes in most of the world. Except the US. Because the US is broke, and until it can bring its spending into line with tax revenue, higher rates means fiscal suicide. Not that it matters because it will happen anyway - but I suspect that within a year, the dollar will be falling like a rock, and domestic inflation will make the PPP-measurements point towards an overvalued - not undervalued dollar. Despite the fact that the trajectory is more or less the same as gravitation.