Rumor Mill: New Reserve Currency May Rock U.S. Dollar in October (Op-Ed)
Westerners are funny people. Westerners have never experienced currency devaluation, EVER! “The Almighty Dollar” has ruled the world their entire lives.
Westerners are funny people. Westerners have never experienced currency devaluation, EVER! “The Almighty Dollar” has ruled the world their entire lives. Telling a Westerner there might be a problem with the U.S. Dollar is like saying the sun might not show up tomorrow morning. It has never happened; could never happen! Well, it turns out the U.S. Dollar isn’t as “almighty” as it used to be, and some new global currency might be ready to shock the world, literally.
And no, I’m not talking about Bitcoin.
How the World Sees America
Before I get into what the exact problem is for Westerners, and really the world as a whole, I must explain how this problem came to be, and the nature of the situation at hand. You’ll need some context to understand what’s going on. I don’t know everything about it, but I know enough to paint the broad strokes of a likely upcoming scenario for CT readers.
The U.S. Dollar has been the world’s “global reserve currency” for over 70 years, since the Bretton Woods Conference during WWII. The amount of debt England incurred during war time forced it to pass the global reserve currency status over to the United States in front of the representatives of all the major nations.
You might have heard about a great economic boom time in the 1950’s within the United States. This was when everyone bought new televisions, drove new Chevrolet Bel Airs, had a white picket fence, and one male salary easily covered it all with plenty to spare.
This is the benefit of having “global reserve currency” status. It allows a currency to be worth much, much more than any other country’s currency. It allows Americans to pay US$2.50 for a gallon of gas while other countries pay US$6-9 USD a gallon. It allows the U.S. to build the greatest military in the history of mankind and put a military base in virtually every country on the planet, just because.
But while this expansion of economic and military power has been great for the Americans, it has led to some negative feelings elsewhere.
If you were an American, would you be cool with Russia putting an active military base in the middle of Los Angeles? Or sending a Russian military drone to attack buildings in Memphis?
Welcome to how the rest of the world sees the United States. In effect, America is seen as an international thug, a global bully with nuclear warheads, and an unlimited credit card to make as many as they want and put them wherever they want.
Nothing lasts forever
Times have changed, and the shoe is on the other foot. America -- land of perpetual warfare -- is swimming in US$18 trillion in national debt. The U.S. owes almost US$3 trillion to just Japan and China alone as it prints about US$696 million per day. According to the International Monetary Fund (IMF) or the world’s loan shark, China has even passed the U.S. as the world’s largest economy.
A large part of having a global reserve currency is your currency becomes global in demand. It is the international baseline currency for all trade. Countries are agreeing, in principle, to trade with your currency being the means to an end. Over the last several years, many countries, especially in East Asia, have stopped using the U.S. Dollar for trading purposes. These are called “bilateral trade agreements,” and they’re becoming as popular as cat videos on YouTube.
So what are other countries starting to use instead?
The Chinese Yuan, also known as the Renminbi. Countries are trading so much Yuan that it has become the second most used currency in the world, passing the Euro in 2013 whereas ten years ago, it wasn’t even considered tradable.
That’s how powerful China has become as a global trade partner within the last decade. And the IMF along with the World Bank have taken note and are rumored to be ready to do something about it.
Will dominoes start falling in Peru next month?
Next month, the IMF and World Bank will hold their annual meeting on October 9-11 in Lima, Peru. Every five years, the IMF discusses reserve currency status, and the Chinese Yuan will be evaluated at the 2015 annual meeting. The word on the street is that during or soon after this annual meeting, these organizations will announce that the Chinese Yuan will become a global reserve currency.
It will not replace the U.S. Dollar per se, but it will become an officially recognized option for global trade as a reserve currency. The Euro, Canadian Dollar, Japanese Yen, British Pound are also reserve currencies, and the Yuan would join this “basket of currencies.” In other words, the U.S. Dollar will have some real competition.
But what does this mean for the U.S. and dollar values?
Nothing good; we are witnessing China dumping almost US$100 billion in U.S. Treasuries, financial centers like Toronto, London and New York dealing directly in Chinese Yuan, and China opening their own financial support organizations like the BRICS Development Banks and the AIIB (Asian Infrastructure Investment Bank) to work around the IMF and World Bank.
The Chinese have not gotten much respect from the western-run, U.S. based IMF and World Bank, and so they have built their own infrastructure to go around them, globally.
The rest of the world loves the idea! Even longtime BFF of the United States, Great Britain, has joined up as a “founding member” with the AIIB, even against the behest of the U.S. Why? It is because the world sees the handwriting on the wall. China is the economic future, and you’re either on board or you are on the Titanic with the U.S. while England is just hedging their bets, and rightly so. The Chinese Yuan is kind of the “bitcoin of the fiat currency world” or FOREX markets. And the smart money is moving out of the US dollar, which has been slowly happening over the last decade.
So why did I write this article about this “rumor”? I believe this will come to pass, as does Bloomberg Business, and here are three reasons why.
3 reasons why the Yuan will become a reserve currency
One, as I mentioned before, the Yuan is the second most used global credit currency, and fifth most used for payments in the world, according to SWIFT (Society for Worldwide Interbank Financial Telecommunications), which is reason alone to place it amongst the leading currencies extant, officially.
Secondly, these decisions are handled every five years by the IMF, and the Yuan was almost granted reserve currency status back in 2010. The reason the Chinese did not get the designation was that global adoption was too low at the time and was no “freely usable.” It has gone from under 2% usage to around 10% of all currency trade since. Problem solved.
And third, the Chinese are getting to the point where they can create their own financial system with the assistance of Russia with the BRICS and AIIB banks.
The IMF and World Bank need to decide whether they’re in on the Yuan or out? My guess is that they will be smart loan sharks and vote to include the Yuan this year.
What does this mean for the U.S. Dollar? Is this “the collapse” every non-conformist economist and doomsday-sayer has been preaching about for the last decade or more? Yes and no. Think of it as you’re an only son or daughter, and you’re three years old, and your parents have a new child. Who is getting 90% of the love over the next couple of years? Who will all of the friends and who will the extended family come by the house to see?
Is the U.S. Dollar still THE world’s currency? Yes, but it will be about as attractive as a red-headed stepchild. In other words, it is set up for a soft-kill scenario. No “Ole Yeller” type stuff, but some bullets will be on hand for use in the near future.
If you live in the West, and this goes down, be afraid, be very afraid. The world is starting to prepare for life without the dollar and westerners should, too!
What would this mean for bitcoin?
It could actually mean a lot of good things, as far as U.S. Dollar values are concerned, if that is what’s important to you. If the Yuan goes global, or viral, officially, demand for dollars will go down noticeably. This will likely not be a full collapse, but a devaluation of unprecedented proportions. If you remember American economic times in the late 1970’s, you’re getting warm. With a global Yuan to use freely, its values will climb, and countries will start dumping U.S. Treasuries at a record pace (see: August’s US$94 Billion UST selloff by China).
When you are the global reserve currency, over 50% of your currency resides overseas. As countries around the world see a better, appreciating option to use, they will see China dumping out of U.S. Treasuries and will follow the leader. Many, many dollars will eventually return back to the only place they have good value in the short-term, i.e. the United States. The Federal Reserve is known as “the buyer of last resort,” usually because nobody else wants American debt products anymore. This would accelerate under such conditions.
Now the U.S., which has been practicing Keynesian economics for the past 20-30 years, and printing money like it's going out of style, will actually live to see the money go out of style! The “quantitative easing” chickens will come home to roost, and the U.S. will see a flood of dollars from around the world, a tsunami of depreciating currency.
This, by definition, is called “hyperinflation” or when the base currency supply of a nation increases dramatically. When you have too much of something, it naturally loses value.
What would dollar devaluation look like in the West?
Now do I think the U.S. Dollar is going to collapse next month? No. The dollar has 2-3 more years left, in my opinion. As I mentioned before, China, with the help of Russia, is working on their own global economic infrastructure, and have given up on getting a fair shake from the western-run IMF and World Bank. Their new system will take another 2-5 years to become fully vested and ready for the world. Any decision made in favor of the Chinese Yuan by the IMF would increase interest and investment in the Yuan, and hurt the dollar. It is a giant