OT: US dollar and US bank phase-out?

Life of US dollar will not end, if New Zealand and China trade in their currencies.

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New Zealand is a pretty small economy, but it will be interesting to see if they set a fixed conversion rate or let it float.

If it's fixed, it means nothing much. It's already fixed for all intents and purposes -- despite some symbolic gestures to the contrary.

If they let it float, then it could be monumental. That would effectively put the remnimbi on the world currency market. So I doubt if they'd do that in this way. If they're going to do it, they'd just let it float across the board. That is, unless there's some kind of game going on below the waterline.

You mean renminbi? (Thanks, Wikipedia!)

New Zealand would be stupid to fix their dollar to renminbi: they'd end up being the tail on the Chinese Currency Dog, and China's currency policy is driven by it's own needs and internal politics.

But really, it is a very large yawn as direct conversion of currencies has been going on for years and years. The Singapore dollar and the Brunei dollar for example. Been going on for nearly 50 years in one instance.

In order to facilitate economic and trade relations, Brunei, Malaysia and Singapore adopted a system of free interchangeability of their respective currencies, which took effect from 12 June 1967. This tripartite arrangement was terminated in 1973 when Malaysia opted out of it. However, Brunei and Singapore decided to continue with the arrangement, which exists until today.

You can spend Brunei dollars at a shop in Singapore or vise-versa.

Yeah, I can never pronounce it right, which results in my never being able to spell it right. When I wrote about US - China trade I set it up as a keyboard macro so I wouldn't keep screwing it up.

Well, they wouldn't fix their currency to the renminbi. The renminbi would be fixed to the NZ$. Otherwise, NZ's currency would continue to float against the rest of the world's currencies.

Currently the renminbi is roughly fixed to the US$. Technically it floats, but only within a very limited range.

Because NZ's currency floats, letting the renminbi float against the NZ$ would effectively let it float against other world currencies. I don't think the Chinese are ready to do that yet, which suggests they'll have two separate, unrelated, semi-fixed exchange rates.

It could work against a very small economy, but it would be weird, and it seems like it would open the door to somebody exploiting triangular currency arbitrage.

I should go read what they're doing but it's more fun to guess. My real guess is that there won't really be any currency exchange going on. It will just be two-way payments for traded goods and services.

Watch -- all guesses will be wrong...

I don't see a practical difference between the NZ $ being fixed to the renminbi or the renminbi being fixed to the NZ $. In a world that allows currency arbitrage, the practical result -- via the mechanism of the triangular currency arbitrage that you mention below -- will be the NZ $ (and hence the NZ economy) following the Chinese economy.

Supposition is much more fun than actually getting the facts and thinking. That's why we have extremists.

The world does, but China doesn't. I'd have to go back and see how it works. I haven't thought about it for a long while, but China keeps their currency fixed within a very narrow range. It has something to do with how it's exchanged -- or not exchanged.

Anyway, that's for someone with more time. I'm up to my elbows at the moment.

It's so much less work, too. I can see why they enjoy it. d8-)

It's just avoiding the intermediate step of USD, nothing to do with determining the value of the currency conversion.

Pegging means that the country doing the pegging accepts the _monetary policy_ of the peggees. So, loose or tight monetary policy has to be mirrored.

Some currencies such as the Chinese Yuan and the Indian Rupee are partially convertible only- on the current account, but not the capital account. That means that local people and companies can freely convert money to foreign currency ONLY for designated purposes such as imports and travel, but not completely freely (for example, to make foreign investments). Some countries have different conversion rates for the capital and current accounts, or exchange controls.. eg. South Africa:

Here's a chart of China's currency vs. the US dollar:

You can see they cut it free from the USD during 2010, and it's been gaining value significantly relative to the USD.

Here's the Indian Rupee which they seem to like depreciating:

Both will probably be fully convertible at some point, but there are dangers from speculators who have access to vast amounts of money. Soros was able to "break" the Bank of England in 1992, for example, a vast transfer of wealth favorable to Soros.

The NZ story and others are just baby steps toward that end. It makes a lot of sense for Chinese exporters to price in CNY rather than USD or JPY and for NZ purchasers to take on or hedge the NZD-RMB risk rather than involving a third (and rather unstable) fiat currency into the mix. At one time, not that long ago, even Japan's exports were priced in USD rather than JPY.

BTW, as of a year or two ago, I can now make deposits at my local Canadian branch of the Bank of China in RMB, though the interest rate is close to zero. Note the limits on remittances of CNY into China:

Only the equivalent of $13,000 petty cash per day unless it's for a specified purpose such as goods or services, with documents to show for it. At less than $5m/year per account it would take forever to cause much trouble.

Many countries I've visited have had at one time or another laws prohibiting or limiting the local currency that you can bring in (sometimes out too). I remember stashing Ostmark notes in my sock before crossing into East Germany in Berlin (on the S-Bahn rather than Checkpoint Charlie). Taiwan dollars- they never checked, but you had to declare all currency amounts in writing and there were limits.

We have a winner.

By avoiding the US dollar/banks, needless costs to the trading countries are also avoided, albeit this is a loss of "profit" from the banks perspective as well as a source of business intelligence.

This also helps reduce U.S. governmental influence over by lateral trade, where we have no legitimate interests, but excessive opportunities for egregious meddling/manipulation.