Olduvaiblog: Musings on the coming collapse

Home » Posts tagged 'Foreign-exchange reserves'

Tag Archives: Foreign-exchange reserves

oftwominds-Charles Hugh Smith: The Only Leverage We Have Is Extreme Frugality

oftwominds-Charles Hugh Smith: The Only Leverage We Have Is Extreme Frugality.

Debt is serfdom, capital in all its forms is freedom. The only leverage available to all is extreme frugality in service of accumulating productive capital.

There are only three ways to better oneself financially: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We’ll leave out lobbying the Federal government for a fat contract, faking disability, selling derivatives designed to default and other criminal activities.)

The only way to accumulate capital to invest is to spend considerably less than you earn. For a variety of reasons, humans seem predisposed to spend more as their income rises. Thus the person making $30,000 a year imagines that if only they could earn $100,000 a year, they could save half of their net income. Yet when that happy day arrives, they generally find their expenses have risen in tandem with their income, and the anticipated ease of saving large chunks of money never materializes.

What qualifies as extreme frugality? Saving a third of one’s net income is a good start, though putting aside half of one’s net income is even better.

The lower one’s income, the more creative one has to be to save a significant percentage of one’s net income. On the plus side, the income tax burden for lower-income workers is low, so relatively little of gross income is lost to taxes.

The second half of the job is investing the accumulated capital in productive assets and/or enterprises. The root of capitalism is capital, and that includes not just financial capital (cash) but social capital (the value of one’s networks and associations) and human capital (one’s skills and experience and ability to master new knowledge and skills).

Cash invested in tools and new skills and collaborative networks can leverage a relatively modest sum of cash capital into a significant income stream, something that cannot be said of financial investments in a zero-interest rate world.

We hear a lot about the rising cost of college and the impossibility of getting a degree without loans or tens of thousands of dollars contributed by parents. I think my own experience is instructive, as there is another path: extreme frugality.

At 19, my two sets of parents were unable to provide me with more than a rust-bucket old car. My father sent me an airline ticket to visit him, but nobody ponied up any cash for tuition, books, or living expenses.


Step One was eliminating housing costs until I earned enough to pay rent. By good fortune, I was able to secure a work-trade housing situation: I was given a room filled with boxes of accounting records, and a path through the boxes to a bathroom and tiny kitchenette in trade for yard work.

Step Two: cut all other expenses to the bone. Since I was working for a remodeling contractor, I needed the car to get to the various jobsites, but I bicycled whenever possible to save on gasoline. I prepared all my own meals and avoided buying snacks, drinks, etc. until my income rose enough to swing such luxuries. I can count the number of drinks or meals I bought on campus in four years on one hand.

Music purchased: none. (We played our own music or listened to the radio on the jobsite.) Clothes purchased new: none. (That’s what church jumble sales/bazaars are for: $1 shirts, etc.) And so on.

Step Three: find a job with upside earnings and skills. I’d worked in snack bars and mowed lawns, but construction opened up opportunities to advance my skills and gain sufficient proficiency to deserve a raise in pay.

Since I wasn’t guaranteed any opportunity for advancement, I volunteered to work Saturdays for my bosses or anyone else on the crew who had sidework on the weekends. I volunteered my construction services to community groups to gain experience (there’s nothing like being responsible for the project, as opposed to just following orders) and open access to new networks of productive, accomplished people.

For example, I rebuilt the rotted redwood rear steps to the historic Agee House in the back of Manoa Valley for free. (Sadly, this wonderful building burned down a few years later.)

In business, the word “hustle” has the negative connotation of high pressure sales or a scam. In sports, it has a positive connotation of devoting more energy and effort as a means of compensating for lower skills or physical size. Step Three requires hustle: when you don’t have any advantages of capital, connections or skills, you have to acquire those by hustle and initiative.

Step Four: apply for obscure, small-sum scholarships. $500 may not sound like a lot, but it means competition will be lower and if you get it, that’s $500 you don’t have to earn. As you build your networks in the community, put the word out you’re looking for small scholarships for next semester’s tuition. In general, people tend to respond more positively to helping you with a specific goal rather than an open-ended or undefined goal such as “I need money for college.”

Step Five: work productively and ambitiously, i.e. work a lot but work smart. It never occurred to me that working 25+ hours a week and taking a full load of classes (4-5 classes and 15+ credits a semester) was something to bemoan–I was having a great time, and earned a 3.5 grade point average and my B.A. in four years.

60-hour work weeks should be considered the minimum effort necessary–but only if those hours are 100% productive work, not hours interrupted with games, phone calls, goofing off, etc. Those 60 hours are flat-out, power-out-the-work hours, not hours diluted by half-effort, distractions, etc.

Step Six: learn to do things yourself that cost money, such as maintaining your car. It’s not that hard to change the oil and other basics of maintenance.

If you push yourself and maintain a disciplined life, huge amounts of work can be ground through in a few hours. This is as true of digging a ditch as it is of plowing through texts and writing papers.

Tuition at the state university I attended (the University of Hawaii at Manoa) has risen enormously in the decades since I worked my way through college (roughly $9,000 a year now), but it’s still possible to work one’s way through if the student pursues all six steps assiduously and with perseverance and hustle and secures full-time work in summers.

One reason I did not bemoan working long hours and practicing extreme frugality was that this was still the default setting in a few dwindling enclaves of our culture and economy. The idea that you could borrow money for everything you wanted had not yet conquered the culture and economy: thrift in service of big goals was still a cultural norm.

In other words, what I did wasn’t heroic or unusual; it was the norm.

I should mention that my university years overlapped with the deepest recession (at that time) since the Great Depression: 1973-74. Work was hard to come by, gasoline skyrocketed in price, and inflation started to outpace wages, especially in the low-wage jobs typically available to college students.

It was not a cakewalk by any means.

The upside of relentlessly pursuing Steps One – Six is tremendous: personal integrity, financial independence, and the other powerful freedoms that accrue to these foundations. Measured by income and things I owned, I was “poor.” But measured by independence and by skills and networks gained, I was wealthy in many important ways.

Extreme frugality enabled me to not just finish college in four years but to buy a (cheap) parcel of land while still a student with cash and have a substantial savings account by graduation day.

I don’t look back on those years of voluntary deprivation in service of independence, freedom, knowledge, and social and human capital as “poor me:” I see them as the extremely positive, productive template that I have followed in the decades since. I never did marry or inherit money, and so whatever I have now is the direct result of extreme frugality in service of integrity, independence and the accrual of capital that can be productively invested.

The only leverage available to all is extreme frugality in service of accumulating savings that can be productively invested in building human, social and financial capital.

Debt is serfdom, capital in all its forms is freedom.

Debt = Serfdom (April 2, 2013)

How Frugal Are You? (August 7, 2010)

 

China Announces That It Is Going To Stop Stockpiling U.S. Dollars

China Announces That It Is Going To Stop Stockpiling U.S. Dollars.

Money - Photo by Pen Waggener

China just dropped an absolute bombshell, but it was almost entirely ignored by the mainstream media in the United States.  The central bank of China has decided that it is “no longer in China’s favor to accumulate foreign-exchange reserves”.  During the third quarter of 2013, China’s foreign-exchange reserves were valued at approximately $3.66 trillion.  And of course the biggest chunk of that was made up of U.S. dollars.  For years, China has been accumulating dollars and working hard to keep the value of the dollar up and the value of the yuan down.  One of the goals has been to make Chinese products less expensive in the international marketplace.  But now China has announced that the time has come for it to stop stockpiling U.S. dollars.  And if that does indeed turn out to be the case, than many U.S. analysts are suggesting that China could also soon stop buying any more U.S. debt.  Needless to say, all of this would be very bad for the United States.

For years, China has been systematically propping up the value of the U.S. dollar and keeping the value of the yuan artificially low.  This has resulted in a massive flood of super cheap products from across the Pacific that U.S. consumers have been eagerly gobbling up.

For example, have you ever gone into a dollar store and wondered how anyone could possibly make a profit by making those products and selling them for just one dollar?

Well, the truth is that when you flip those products over you will find that almost all of them have been made outside of the United States.  In fact, the words “made in China” are probably the most common words in your entire household if you are anything like the typical American.

Thanks to the massively unbalanced trade that we have had with China, tens of thousands of our businesses, millions of our jobs and trillions of our dollars have left this country and gone over to China.

And now China has apparently decided that there is not much gutting of our economy left to do and that it is time to let the dollar collapse.  As I mentioned above, China has announced that it is going to stop stockpiling foreign-exchange reserves

The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation.

“It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the central bank, said in a speech organized by China Economists 50 Forum at Tsinghua University yesterday. The monetary authority will “basically” end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. Neither Yi nor Zhou gave a timeframe for any changes.

It isn’t going to happen overnight, but the value of the U.S. dollar is going to start to go down, and all of that cheap stuff that you are used to buying at Wal-Mart and the dollar store is going to become a lot more expensive.

But of even more importance is what this latest move by China could mean for U.S. government debt.  As most Americans have heard, we are heavily dependent on foreign nations such as China lending us money.  Right now, China owns nearly 1.3 trillion dollars of our debt.  Unfortunately, as CNBC is noting, if China is going to quit stockpiling our dollars than it is likely that they will stop stockpiling our debt as well…

Analysts see this as the PBoC hinting that it will let its currency fluctuate, without intervention, thus negating the need for holding large reserves of the dollar. And if the dollar is no longer needed, then it could look to curb its purchases of dollar-denominated assets like U.S. Treasurys.

“If they are looking to reduce these purchases going forward then, yes, you’d have to look at who the marginal buyer would be,” Richard McGuire, a senior rate strategist at Rabobank told CNBC in an interview.

“Together, with the Federal Reserve tapering its bond purchases, it has the potential to add to the bearish long-term outlook on U.S. Treasurys.”

So who is going to buy all of our debt?

That is a very good question.

If the Federal Reserve starts tapering bond purchases and China quits buying our debt, who is going to fill the void?

If there is significantly less demand for government bonds, that will cause interest rates to rise dramatically.  And if interest rates rise dramatically from where they are now, that will set off the kind of nightmare scenario that I keep talking about.

In a previous article entitled “How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System“, I described how China could single-handedly cause immense devastation to the U.S. economy.

China accounts for more global trade that anyone else does, and they also own more of our debt than any other nation does.  If China starts dumping our dollars and our debt, much of the rest of the planet would likely follow suit and we would be in for a world of hurt.

And just this week there was another major announcement which indicates that China is getting ready to make a major move against the U.S. dollar.  According to Reuters, crude oil futures may soon be pricedin yuan on the Shanghai Futures Exchange…

The Shanghai Futures Exchange (SHFE) may price its crude oil futures contract in yuan and use medium sour crude as its benchmark, its chairman said on Thursday, adding that the bourse is speeding up preparatory work to secure regulatory approvals.

China, which overtook the United States as the world’s top oil importer in September, hopes the contract will become a benchmark in Asia and has said it would allow foreign investors to trade in the contract without setting up a local subsidiary.

If that actually happens, that will be absolutely huge.

China is the number one importer of oil in the world, and it was only a matter of time before they started to openly challenge the petrodollar.

But even I didn’t think that we would see anything like this so quickly.

The world is changing, and most Americans have absolutely no idea what this is going to mean for them.  As demand for the U.S. dollar and U.S. debt goes down, the things that we buy at the store will cost a lot more, our standard of living will go down and it will become a lot more expensive for everyone (including the U.S. government) to borrow money.

Unfortunately, there isn’t much that can be done about any of this at this point.  When it comes to economics, China has been playing chess while the United States has been playing checkers.  And now decades of very, very foolish decisions are starting to catch up with us.

The false prosperity that most Americans are enjoying today will soon start disappearing, and most of them will have no idea why it is happening.

The years ahead are going to be very challenging, and so I hope that you are getting ready for them.

 

oftwominds-Charles Hugh Smith: Will the Dollar Lose its Reserve Currency Status to an SDR Currency?

oftwominds-Charles Hugh Smith: Will the Dollar Lose its Reserve Currency Status to an SDR Currency?.

Since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo.

 

Many observers believe the U.S. dollar (USD) will lose its status as the world’s reserve currency sooner rather than later. Proponents of this view often mention China’s agreements with various trading partners to settle trade in their own currencies rather than the dollar as evidence of this trend.

 

More substantial evidence can be found in the diversification of reserves held by many nations. The euro now makes up about a fourth of all currency reserves:

 

 

Here is the IMF (international Monetary Fund) page on voluntarily reported currency reserves: Currency Composition of Official Foreign Exchange Reserves (COFER). Note the large amount of reserves that are not “allocated,” i.e. the currency being held is not specified.

 

Some see the replacement of the U.S. dollar by some other currency as a welcome development, not just for the world economy but for the U.S., as the reserve currency has substantial burdens. Regardless of whether such a replacement would be positive or negative, many analysts see no plausible alternative to the USD as the primary reserve currency for a host of reasons.

 

Another camp sees China’s purchases of gold as paving the way for China’s currency (renminbi a.k.a. yuan) to replace the dollar as the global reserve currency. Those who have studied China’s policy makers doubt this is the goal; rather, they see China as most likely pursuing a multi-polar world in which no one nation issues the reserve currency.

 

One set of observers has long held that the ideal replacement for the dollar is a hybrid currency issued by the IMF called SDRs (Special Drawing Rights). The IMF describes the SDR thusly:

 

“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies.”

 

The four currencies are the U.S. dollar, the euro, the Japanese yen and the British pound. China is widely seen as working toward floating the renminbi (that is, no longer pegging it to the dollar) so it could be included in the SDR currency.

 

The SDR seems to many to be the ideal replacement of the USD as the reserve currency, especially if China’s currency joins the basket of currencies that make up the SDR.

 

Though the advantages of a multi-currency basket are fairly self-evident, questions remain if the SDRs are a realistic or practical option. These questions come to mind:

 

1. Since the SDR is just a basket of currencies, doesn’t it simply aggregate the weaknesses of all fiat currencies? In other words, what happens to the value of the SDR when priced in gold, oil or other commodity if every nation in the basket prints its currency with abandon? The SDR will lose value just like any any fiat currency, because it is simply a composite fiat currency.

 

2. Couldn’t a nation simply hold all currencies in the SDR in the same percentages as in the SDR basket? Clearly, this is possible: a nation could acquire the same basket of currencies held by the SDR and in the same weighting. In that case, what is the purpose of the SDR?

 

3. What happens to the relative value of one of the constituent currencies in the SDR if the issuing nation experiences a currency crisis or devalues its currency by one means or another? Clearly, the relative weighting of that currency would decline within the SDR basket.

 

The SDR, then, does nothing to impede currency crises or devaluations; it is simply a risk-management tool that works by diversifying the risk of holding too much of any one currency. But since any nation can pursue the same risk-management strategy directly by diversifying its reserves with multiple currencies, what’s the point of holding SDRs as a risk-management tool?

 

4. Since the SDR is just an aggregate of existing currencies, it is not an independent currency. An independent currency would need to be supported by either enforceable taxation rights or some commodity or basket of commodities: gold, for example, or a “bancor”-type basket of commodities (gold, oil, grain, etc.) owned by the issuing nation/entity.

 

(Another potential independent currency that could serve as a reserve currency is a non-state issued digital currency such as Bitcoin: Could Bitcoin (or equivalent) Become a Global Reserve Currency? (November 7, 2013). Digital currencies’ valuation is based not on taxation or gold but carefully managed scarcity.)

 

Since the SDR is just an aggregate of fiat currencies, it cannot really change the fundamentals of the current status quo.

 

Boiled down to its essence, the SDR is presented as a shortcut solution to deeply seated problems. The reserve currency problem cannot be fixed by a basket of fiat currencies, as fiat currencies (and the trade imbalances they generate) are the problem.

 

 


go to Kindle edition

 

 

How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System

How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System.

China vs. America - Photo by Wangdora92

The death of the dollar is coming, and it will probably be China that pulls the trigger.  What you are about to read is understood by only a very small fraction of all Americans.  Right now, the U.S. dollar is the de facto reserve currency of the planet.  Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars.  More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it.  As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world.  Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.

As I mentioned above, nations all over the globe use U.S. dollars to trade with one another.  This has created tremendous demand for U.S. dollars and has kept the value of the dollar up.  It also means that Americans can import things that they need much more inexpensively than they otherwise would be able to.

The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars…

Are You Ready For The Death Of The Petrodollar - Photo By Revisorweb

Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary.  For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this.  This has created tremendous demand for U.S. government debt and has helped keep interest rates super low.  So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates…

United States Treasury Building - Photo by Rchuon24

And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system.  For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.

Our entire way of life in the United States depends upon this game continuing.  We must have the rest of the world use our currency and loan it back to us at ultra low interest rates.  At this point we have painted ourselves into a corner by accumulating so much debt.  We simply cannot afford to have rates rise significantly.

For example, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has been much higher than that at various times in the past), we would be paying more than a trillion dollars a year just in interest on the national debt.

But it wouldn’t be just the federal government that would suffer.  Just consider what higher rates would do to the real estate market.

About a year ago, the rate on 30 year mortgages was sitting at 3.31 percent.  The monthly payment on a 30 year, $300,000 mortgage at that rate is $1315.52.

If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage would be $2201.29.

Does 8 percent sound crazy to you?

It shouldn’t.  8 percent was considered to be normal back in the year 2000.

Are you starting to get the picture?

We need other countries to use our dollars and buy our debt so that we can have super low interest rates and so that we can afford to buy lots of cheap stuff from them.

Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency.  In particular, China is leading the call for a “de-Americanized” world.  The following is from a recent article posted on the website of France 24

For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback’s role as the default global reserve unit.

But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China’s official Xinhua news agency called for a “de-Americanised” world.

It also urged the creation of a “new international reserve currency… to replace the dominant US dollar”.

So why should the rest of the planet listen to China?

Well, China now accounts for more global trade than anyone else does, including the United States.

China is also now the number one importer of oil in the world.

At this point, China is even importing more oil from Saudi Arabia than the United States is.

China now has an enormous amount of economic power globally, and the Chinese want the rest of the planet to start using less U.S. dollars and to start using more of their own currency.  The following is from a recent article in the Vancouver Sun

Three years after China allowed the yuan to start trading in Hong Kong’s offshore market, banks and investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.

And over the past few years we have seen the global use of the yuanrise dramatically

International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.

Of course the U.S. dollar is still king for now, but thanks to a whole host of recent international currency agreements this status is slipping.  For example, China just recently signed a major currency agreement with the European Central Bank

The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.

“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Brooks. “It’s a bit like cutting out the middleman, all of a sudden there’s potentially no U.S. dollar risk.”

And as I have written about previously, we have seen a bunch of other similar agreements being signed all over the planet in recent years…

1. China and Germany (See Here)

2. China and Russia (See Here)

3. China and Brazil (See Here)

4. China and Australia (See Here)

5. China and Japan (See Here)

6. India and Japan (See Here)

7. Iran and Russia (See Here)

8. China and Chile (See Here)

9. China and the United Arab Emirates (See Here)

10. China, Brazil, Russia, India and South Africa (See Here)

But do you hear about any of this on the mainstream news?

Of course not.

They would rather focus on the latest celebrity scandal.

Right now, the global move away from the U.S. dollar is slow but steady.

At some point, some trigger event will likely cause it to become a stampede.

When that happens, demand for U.S. dollars and U.S. debt will disintegrate and interest rates will absolutely skyrocket.

And if interest rates skyrocket that will throw the entire U.S. financial system into chaos.  At the moment, there are about 441 trillion dollars worth of interest rate derivatives sitting out there.  It is a financial time bomb unlike anything the world has ever seen before.

There are four “too big to fail” banks in the United States that each have more than 40 trillion dollars worth of total exposure to derivatives.   The largest chunk of those derivatives is made up of interest rate derivatives.  In case you were wondering , those four banks are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.

A huge upward surge in interest rates would absolutely devastate those banks and cause a financial crisis that would make 2008 look like a Sunday picnic.

Right now, the leader in global trade seems content to use U.S. dollars for most of their international transactions.  China also seems content to hold more than a trillion dollars of U.S. government debt.

If that suddenly changes someday, the consequences for the U.S. economy will be absolutely catastrophic and every single American will feel the pain.

The standard of living that all of us are enjoying today depends largely upon China.  They can bring down the hammer at any moment and they know it.

 

9 Signs That China Is Making A Move Against The U.S. Dollar

9 Signs That China Is Making A Move Against The U.S. Dollar. (Source)

On the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar.  You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely.  Right now, China is the number one exporter on the globe and China will have the largest economy on the planet at some point in the coming years.  The Chinese would like to see global currency usage reflect this shift in global economic power.  At the moment, most global trade is conducted in U.S. dollars and more than 60 percent of all global foreign exchange reserves are held in U.S. dollars.  This gives the United States an enormous built-in advantage, but thanks to decades of incredibly bad decisions this advantage is starting to erode.  And due to the recent political instability in Washington D.C., the Chinese sense vulnerability.  China has begun to publicly mock the level of U.S. debt, Chinese officials have publicly threatened to stop buying any more U.S. debt, the Chinese have started to aggressively make currency swap agreements with other major global powers, and China has been accumulating unprecedented amounts of gold.  All of these moves are setting up the moment in the future when China will completely pull the rug out from under the U.S. dollar.

Today, the U.S. financial system is the core of the global financial system.  Because nearly everybody uses the U.S. dollar to buy oil and to trade with one another, this creates a tremendous demand for U.S. dollars around the planet.  So other nations are generally very happy to take our dollars in exchange for oil, cheap plastic gadgets and other things that U.S. consumers “need”.

Major exporting nations accumulate huge piles of our dollars, but instead of just letting all of that money sit there, they often invest large portions of their currency reserves into U.S. Treasury bonds which can easily be liquidated if needed.

So if the U.S. financial system is the core of the global financial system, then U.S. debt is “the core of the core” as some people put it.  U.S. Treasury bonds fuel the print, borrow, spend cycle that the global economy depends upon.

That is why a U.S. debt default would be such a big deal.  A default would cause interest rates to skyrocket and the entire global economic system to go haywire.

Unfortunately for us, the U.S. debt spiral cannot go on indefinitely.  Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable.

The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing.  In the aftermath of a U.S. collapse, China anticipates having the largest economy on the planet, more gold than anyone else, and a respected international currency that the rest of the globe will be able to use to conduct international trade.

And China is not just going to sit back and wait for all of this to happen.  In fact, they are already doing lots of things to get the ball moving.  The following are 9 signs that China is making a move against the U.S. dollar…

#1 Chinese credit rating agency Dagong has downgraded U.S. debtfrom A to A- and has indicated that further downgrades are possible.

#2 China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.  This agreement will result in a lot less U.S. dollars being used in trade between China and Europe…

The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.

“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Brooks. “It’s a bit like cutting out the middleman, all of a sudden there’s potentially no U.S. dollar risk.”

#3 Back in June, China signed a major currency swap agreement with the United Kingdom.  This was another very important step toward internationalizing the yuan.

#4 China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.

#5 Mei Xinyu, Commerce Minister adviser to the Chinese government,warned this week that if the U.S. government ever does default that China may decide to completely stop buying U.S. Treasury bonds.

#6 According to Yahoo News, China has already been looking for ways to diversify away from the U.S. dollar…

There have been media reports this week that China’s State Administration of Foreign Exchange, the body that handles the country’s $3.66 trillion of foreign exchange reserve, is looking to diversify into real estate investments in Europe.

#7 Xinhua, the official news agency of China, called for a “de-Americanized world” this week, and also made the following statement about the political turmoil in Washington: “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized.”

#8 Xinhua also said the following about the U.S. debt deal on Thursday: “[P]oliticians in Washington have done nothing substantial but postponing once again the final bankruptcy of global confidence in the U.S. financial system”.  The commentary in the government-run publication also declared that the debt deal “was no more than prolonging the fuse of the U.S. debt bomb one inch longer.”

#9 China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations.  But instead of slowing down, the Chinese appear to be accelerating their gold buying.  In fact, money manager Stephen Leeb says that his sources are telling him that China plans to buy another 5,000 tons of gold.  There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

So exactly what would happen if the Chinese announced someday that they were going to back their currency with gold and would no longer be using the U.S. dollar in international trade?

It would change the face of the global economy almost overnight.  In a previous article, I described some of the things that we could expect to see happen…

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy.  Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.  At that point you could forget about cheap gasoline or cheap Chinese imports.  Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively.  If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.  Today, most U.S. currency is actually used outside of the United States.  If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.

The fact that we get to print up giant mountains of money and virtually everyone around the world uses it has been a huge boon for the U.S. economy.

When that changes, the word “catastrophic” is not going to be nearly strong enough to describe what is going to happen.

According to a Rasmussen Reports survey that was released this week, only 13 percent of all Americans believe that the country is on the right track.  But the truth is that these are the good times.  The American people haven’t seen anything yet.

Someday people will look back and desperately wish that they could go back to the “good old days” of 2012 and 2013.  This is about as good as things are going to get, and it is only downhill from here.

 

 

%d bloggers like this: