Most Americans will view China’s effort to dethrone the U.S. dollar as the world’s main reserve currency as one of the biggest economic threats that this country will have to face.
But the reality is that this tectonic shift in global finance – and the economic shockwaves that will result – could provide investors with some of the greatest profit plays they’ll see in their lifetimes.
No matter which camp you’re in, the China-spawned changes are headed our way.
In 1990, the U.S. banking system was 2.3 to 2.7 times the size of its counterpart in China. Today, however, the situation has been reversed, and there is much more of an imbalance. In fact, China’s banking system has 25 times the reserves of the U.S. Federal Reserve.
At some point, the United States will no longer be able to dictate international monetary policy. Unfortunately, as our monetary policy aptly demonstrates, Washington seems to be the only player involved in this game of high-stakes global finance to not understand just how this is destined to play out.
U.S. leaders continue to employ monetary policy as a weapon – despite the fact that most of the rest of the world views the U.S. dollar as a liability.
At the end of World War II, virtually the entire world functioned on dollars. By some accounts, 100% of the world’s money supply was the dollar. Today that figure has dropped all the way down to 19%, says Rochdale Securities LLC analyst Richard Bove, a noted expert on the U.S. banking system and Federal Reserve.
Now that the federal government has deployed a few trillion dollars more as bailout bucks, it’s clear that the greenback has lost its mojo and the U.S. government has lost its international monetary leverage.
Why is this worrisome? History tells us that the countries with the strongest economies tend to also have the strongest currencies. It may take awhile for the latter to catch up with the former, but the relationship is highly correlated relationship – suggesting that China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at full throttle.
So if the U.S. dollar gets derailed as the world’s chief reserve currency – as we’ve repeatedly predicted is destined to take place – the world’s next reserve currency is likely to be China’s yuan, known officially as the renminbi.
Washington says that won’t happen, since Beijing takes steps to keep the yuan from being fully tradable. That’s true enough. But Beijing also understands that the dollar is a liability – which is why China’s leaders are going to great lengths to establish the yuan as a viable currency all its own, while simultaneously minimizing the Red Dragon’s dollar-based exposure.
In the last six months, for example, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. The countries that sign these deals are getting huge discounts from China in exchange for their participation – and for buying goods from China. And the deals enable China to do an end run around the entire dollar-based currency trading system.
When it comes to this long-term plan to boost the yuan’s importance, China is waging a campaign on multiple fronts. This past spring, for instance, China organized a meeting in Moscow – attended by representatives from Brazil, India and Russia – where the main goal was to supplant the U.S. dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies, one that is simply backed by China’s renminbi, or perhaps even one based on the International Monetary Fund’s so-called Special Drawing Right (SDR).
Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today, the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.
My guess is that this gathering in Moscow was merely the first of many such meetings that we’ll see take place around the world in the years to come. Expect the list of attendees to grow, as well.
Given all that we now know, the real question becomes: What happens if China succeeds and the yuan displaces the greenback as the world’s top transactional currency?
The list of potential implications is very long, and includes several scenarios that are almost apocalyptic. But most of the outcomes raise as many questions as they answer.
Let’s consider the Top Five:
- Global Gloom Leads to U.S. Doom: The U.S. dollar goes into freefall for the simple reason that if no country has to hold dollars any longer, they won’t. Instead – thanks to the ragged state of the U.S. government’s finances – many countries will dump greenbacks fast as they can, which will only put additional pressure on an already-strained U.S. financial system, which in turn will further damage our economy.
- Inflation Inflates: Inflation will strike here with a vengeance, as anything bought, sold or priced in dollars will instantly rise in price to offset this fall.
- Repatriation Risk: With the dollar serving as the world’s de facto currency, U.S. companies bear very little exchange rate risk when the time comes to repatriate assets or make currency-related adjustments. That would change overnight and prices throughout the value chains would rise sharply to compensate.
- Money Costs More: The cost of money itself would rise. If the dollar falls, not only will there be massive selling pressure against it, but the cost of borrowing it will rise dramatically as lenders raise rates to cope with the increased risk of dollar-based transactions.
- Death By Debt: And finally, if there is another reserve currency, other countries will no longer have to buy our debt, and you can guess where that will leave us – especially given the fact that we’ve taken on trillions in new debt to help finance our way out of our current mess.
My best guess is that we won’t see any one of these things in isolation, but will instead experience a blending of several or all of them. To the extent that China continues to absorb our inflationary influences, buy our debt in measured doses and maintain its reserves, we’ll probably have a measured decline in the value of the dollar – but not the catastrophic fall many in the doom, gloom and boom crowd are predicting. At the same time, I also see the IMF change course in the next few years to reflect China’s increasingly substantial influence and monetary power.
On the individual investor level, this clearly provides a new set of influences that most investors have yet to grasp. Most will perceive what I have said as a threat, but I believe the correct way to view this is that there will be a whole new set of opportunities coming our way.
Some of those opportunities will be obvious – like the need to invest in currencies and commodities that are of interest to China. Others, like direct investments in China’s yuan, will require special insight, a good investment guide, or a leap of faith.
The bottom line – and the most important thing to remember – is this: No matter how this plays out, there will always be an upside for investors who are willing to seek it out.
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Money Morning News Analysis:
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International Monetary Fund:
Special Drawing Right.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
Great article, however was hoping for some suggestions at the end on how to benefit from this rather than just pointing out that
"Some of those opportunities will be obvious – like the need to invest in currencies and commodities that are of interest to China. Others, like direct investments in China’s yuan, will require special insight, a good investment guide, or a leap of faith.
The bottom line – and the most important thing to remember – is this: No matter how this plays out, there will always be an upside for investors who are willing to seek it out."
Kurt
There is no denying that China has become an economic power house,but I would like to believe that the yuan alone can not supplant USD as the global currency. I'm inclined to believe though that Yuan will be a part of a new global financial system/currency where EU, the BRI(C), US and British and its commonwealth countries are also included.
please read about the dollar. please understand this play. i have told people for more than a year that i want to be paid in yuans. i'll take them whether or not they replace the dollar. i can like democrats for alot of things, but not with money.
Out-of-control spending by Congress has already doomed the future of the U.S. dollar.
The U.S. National Debt should be at least $20 trillion in ten years & taxes should be sky-high when the global-warming indirect tax clobbers every citizen's near-empty pocketbook & drives many small & large firms out of business or out of the country. Plus, unfunded Medicare & Social Security now totals about an additional $60 trillion. This country is broke now, but will look like Humpty Dumpty when it falls off the wall in ten years.
Shouldn't investments in gold mining/mineral royalty companies be a way to insulate ourselves from the dollar's collapse at some time in the near future?
It's obvious to me that a basket of non-Euro countries' currency (e.g. Chuna's yuan, Russia's ruble, Iran, Venezuela etc) will probably replace the U.S. dollar for pricing commodities before 2019.
The spendthrifts in the U.S. Congress are not looking out for you. They're looking out only for themselves & the jokers who donate big bucks to their re-election campaigns (e.g. Wall Street firms who got bailouts, Trial lawyers, who get lawyer-friendly laws passed, making it easier to sue, and Unions, who get to own much of GM & get new laws passed in Congress, making it easier for them to organize.
You & newscaster Bill O'Reilly are the only people who can look after you. If you expect politicians to protect your financial future, there's a bridge in Brooklyn you may want to buy. Any New York congressman will probably direct you to someone (on Wall Street) who'll gladly sell you stock in the Brooklyn Bridge.
Unfortunately for us, the folks in congress don't understand history. History tells us that unlimited printing of a fiat (paper) currency, backed by nothing but trust, is doomed. If you don't believe me, ask the folks what happened in 2009 Zimbabwe and the 1923 German Weimar Republic when the bureaucrats printed unlimited amounts of fiat currency.
Remember the words of philosopher George Santayana, "Those who cannot remember the past are condemned to repeat it."
Art
Don't hold your breath because you going turn blue in the face waiting! Justice Litle came out with a series of articles in Outstanding Investments in 2006, three years ago about gold's role in the 21st century and the demise of the dollar. It ain't happened yet. This is another long-term thing. The way to benefit from this Kurt is to hold gold, silver and other precious metals. It's already here! Watch gold breakout from the thousand dollar level. It may shoot up to $2,000 according to some experts.
Just goes to prove (again) what we've always suspected. Those in charge in Washington, D.C., don't know their rear end from a hole in the ground.
It is a fair question that the Chinese would want to shift away from dollar, but in doing so it might hurt its own interest as today it is the largest subscriber of US Treasuries.
2) China's Shifting away from Dollar policy mite also hurt its export based economy already hit by a slowdown worldwide, by weakening the dollar further it would make its own exports more expensive thereby, hurting its export based industries
Not to worry… because the Federal Reserve (& the US Dollar) is owned by the Builderberg Group and you can be sure that they are not gonna let the Yuan replace & diminish their monetary weapon of mass destruction.
It's really simple. The U. S. Government needs to make laws to make the system "responsible and accountable" for our taxpayer dollars. It needs to run as a business, efficiently, on time and within budget. This is what businesses need to do every day or they don't stay in business. Actually, it is very simple that the government needs to do this just like any other organization needs to do every day to operate effeciently. However, I think that realistically the government's best choice is to dramatically downsize by like 50% and subcontract out the tasks to companies that are capable of operating efficiently, on time, & within the budget.
I think the US will try with all its might to prevent this situation from happening. They have some big brains in the think tank and realise the position far better than us. So to allow their currency, economy and their grasp on the gloabal economy slip, i think not. Its like War lets hope they do a better job than they have done with recent tribulations.
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