Sunday, October 27, 2013

How the Dollar Could Collapse

From the American Spectator:

That challenge [i.e., a challenge to the dollar as the world's reserve currency] will almost certainly come from China. 
As holders of $1.1 trillion in American debt, the Chinese are the principal victims of our inflationary policies. So far, however, there’s not much they can do about it. In 2009, as the American economy was collapsing, Chinese Prime Minister Wen Jiabao warned “We have lent a huge mount of money to the US. Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” The Chinese can’t rock the boat too hard, however, without endangering their own assets. As the great swindler Billie Sol Estes once said, “When you owe someone $1000, you’re in debt. When you owe them $1 million, you’ve got yourself a partner.” 
What the Chinese have been doing, however, is quietly building a financial infrastructure that would allow them and the rest of the world to free themselves from dependency on the dollar. They have suggested substituting promissory notes from the International Monetary Fund in world trade and struck deals with Russia and the OPEC nations to trade outside the dollar. They have established direct exchange of the yuan with Hong Kong, Taiwan and Singapore. Last spring Australia agreed to make its currencies directly convertible with the yuan and has since shifted 5 percent of its reserve holdings into yuan instead of dollars. The Chinese are negotiating a similar arrangement with New Zealand. And now they will be moving into London and the European market as well. 
All this may seem very distant but it represents an historical shift that could come about very quickly. “We hear arguments that China has a long was to go before they could become a major international reserve currency but let’s not kid ourselves. The process is already underway and a lot further down the road than most people think,” says Stuart Oakley, head of foreign exchange trading at Nomura, a global investment bank in Singapore. Michael Pento, president of Pento Portfolio Strategies, who writes frequently for Huffington Post, adds: “The No. 1 security issue we have as a nation is the preservation of the U.S. dollar as the world’s reserve currency. It’s a thousand times more important than a nuclear bomb being tested by North Korea. Yet we are doing everything to abuse that status.” 
At any one time, up to 35 percent of the dollar’s value comes from its role in international trade. This is what differentiates us from Japan, which may have twice our national debt but does not have the same exposure in international markets. If the dollar were to be toppled from its role as the world’s reserve currency, it would set off a run on the dollar in which every American could lose up to a third of his net worth. 
At that point, people might start paying attention to what the Tea Party is saying. 

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