US Dollar losing Reserve Currency Status?

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I didn't know that. Jeez, the USA sounds kind of fucked.

 

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No surprise to me. Back on 11/11/09 I noted that others also think China wants the advantages of paying for its imports with printed paper. China´s trade with others is increasingly less in Dollars. (Japan & China agreed to drop the dollar about two months ago. India & China more than a year ago. Brazil and at least 15 others have also agreed to not use dollars - but swapped currencies for balancing trade instead.) China is much closer to reserve status than many realize, but does not want RMB traded in FX as then they cannot hold its value artificially low. See:

http://www.sciforums.com/showpost.php?p=2410918&postcount=925

In many posts* I have noted China´s progress towards that. Getting UAE to accept RMB for oil is just another step. As important and probably done within a year** is the RMB becomes part of the SDR, so it will have some appreciation in its calculation base indirectly making the RMB part of reserves nations hold as they try to "get out of dollars." With Eruo future uncertain, SDR and gold are the main alternative, until China is ready for RMB appreciation (to fight inflation) with FX trading of it.

Currently many are more interested in getting out of Euros so more dollars in reserves are the main, if not the only, alternative to hold. When China is ready to "Kill the Dollar" as THE reserve currency, they can back RMB bonds with gold as they are largest producer and buyer of gold, which they do not need to have the RMB (Yuan) appreciate.

* For example, from 23 Oct 09 post: "Russia may add a new reserve currency- RMB to its foreign exchange reserves, Russian vice-premier concurrently Minister Alexei Kudrin said. ... " read full post at: http://www.sciforums.com/showpost.php?p=2394434&postcount=192 where more details on China´s probably gold back bonds and their effect is given.

** the IMF has too little funds to save Greece so has gone to China begging (and to Brazil also where reserves are now $350 billion) but China will want the base of the IMF´s SDR changed to include the RMB (and probably more in return for its aid)

 

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"... In 2011, China's demand for gold bullion increased by 20 percent to reach 769.8 metric tons...In the second half of the year, the demand for gold increased faster in China than any other place in the world, according to the World Gold Council, a market-development organization for the gold industry.

Chinese investors bought 258.9 tons of gold bars and coins in 2011, 38 percent more than a year earlier, the council said. The demand for gold jewelry increased by 13 percent to reach 510.9 tons this past year, it added.

{Billy T insert: 258.9+510.9 does equal 769.8 so 2/3 of China gold buying is going into jewelry – effectively re moved from the gold market. The jewelry fraction in India, I think, is even higher. But central banks are becoming big buyers now:}

The increase in investment demand was largely attributed to gold purchases made by central banks. Such institutions bought 439.7 tons of gold in 2011, more than at any time since the end of the gold standard in 1971. In 2010, they had bought 77 tons.* Central banks of developing countries in Latin America, Asia and the Far East continuing to bolster their gold holdings to diversify their reserves and protect their reserves against reliance on one or two currencies," Cheng added. ..."

From: http://usa.chinadaily.com.cn/business/2012-02/17/content_14630998.htm

Billy T comment * Going from 77 to 439.7 tons in 10 years is almost doubling central bank gold buying evey two years in that decade (and rate is now rapidly increasing)! - I suggestion several years ago, why China, the world´s largest producer of gold for last five years and now the world´s largest buyer of gold, and world´s richest central bank might be doing this:

I.e. China is getting into a position where it can realistic back RMB bonds (for central banks only) with gold, but it is just one of several ways, China can use, when ready, to displace the dollar as main reserve currency.

Others include the rapidly growing Dim Sung bonds, which are now more attractive to rich Chinese than real estate investments. (Western companies, McDonalds being the first, (less than 1 month after that became legal) to borrow RMB and promises to repay in RMB, with interest a few years later - They need RMB to most economically fund their expansion in Asia, especially China.

Another way, probably part of the price China will demand for lending to the IMF, is the inclusion of the RMB in the IMF´s SDR, which with then have at least one currency in the SDR base, which is appreciating faster than inflation, so SDRs will become more popular for central banks to hold than dollar bonds, which now pay very little interest and are depreciating thus giving net negative yield. Gold, SDRs, & Dim Sung bonds all have net positive yields.

There are huge advantages to China in getting the RMB be the world´s main reserve currency - Pay for your imports with printed paper, as US has been doing for decades. Only rarely would a central bank ask China to make good on gold backing of RMB bonds as they pay interest and gold does not. Second very large advantage for China, is if they US can no longer pay for oil etc. with printed paper, then amount it can afford to import will be greatly reduced. With greatly educed demand for oil, etc that China needs, the price China must pay is lower - the old supply / demand law.

China is not yet ready to see US & EU collapse. They must (and are) expand their trade with other Asian nations and energy & raw material suppliers, like Brazil, Canada, Australia, etc. and become more of a domestic market economy than an export one. -They are doing all this with amazing speed. (Real salaries increasing by double digits annual, more than half the population now living in urban areas, out of pocket health care cost cut in half, higher value added production, (cars, cameras, vaccines, & computers, etc. not “shirts and shoes” as in the old “sweet shop” days) is rapidly building the domestic buying power.)

 

Here is an interesting problem if you use something else than the petro dollars. Since the oil markets still use dollar to measure the price of oil, how do they know just how many rubles is one barrel oil? And if they use the dollar-ruble exchange rate, than really, what is the difference???

I guess a more stable currency means less fluctuation in the price of oil, and also the US government can not mess around with the price level...

 

To "first order" there is not much difference, but if you have rubles and oil seller wants dollars that brings in some "middle men" who get paid a few percent at least for their services and expense of holding dollars, until you or someone wants to buy them.

Of course the US does not need to hold an inventory of dollars - if there are none in the vault, so to speak, just print up a fresh batch. Also over the years world commerce grows so the number of dollars being held in vaults grows, just to have the same probablity that there will be adequate dollars available for the growing needs of commerce. Both these factors give an advantage to the US. It can print, at tiny expense comapred to the face value, more money with zero inflation pressure if it is only printing in proportion to the needs of growing commerce. Unfortuantely, the US prints much more than that and "run-a-way" inflation (or collapsed dollar - same thing) is now almost inevitable.

China wants a piece of this "free pie" and is taking steps to get it but being careful not to send the US & EU into "debtor depression" before it has built up new buyers of its production, mainly the Chinese population and its supplies of needed imports. For example, China now sells more cars to Brazil than the US does (and many other import items, which once mainly came from the US) I see new Cherys on Sao Paulo streets nearly every day I walk 10 or so blocks.

And it is not just nations that China is selling to (replacing former US & EU sources). For example, Bill Gates´s very large vacination programs in poor parts of the world gets it vaccines maily from China now as they are both cheaper and more effective. China lead the world in development of vaccines for both swine flue and bird flue - one was done in only 45 days!

Most Americans have a very out of date image of what China, can and does do. For example they are building their own GPS, their own space station* their own manned mission to the moon and have more internet user than there are Americans. More than half of the Chinese now live in towns and cities. Soon they will have more cities with greater than one million population than all the rest of the world does not to mention world´s fastest trains, now being sold globially.

* First two modules joined under fully auromatic contoll a few months ago and third will lift off in a few months, but it will be manned. They have twice orbited the moon for many months with each space craft, collecting data for when they send a manned mission there (and back). China can afford to do what the US no longer can. They have a much better economic system. Their leaders advance thru the ranks, well selected by their proven successes for a few decades,** not by public popularity contest financed by the very rich.

** Here is brief bio of Xi Jinping:
1975-1979: Student of basic organic synthesis at the Chemical Engineering Department of Tsinghua University.
1979-1982: Secretary at the General Office of the State Council and the General Office of the Central Military Commission (as an officer in active service).
1982-1983: Deputy secretary of the CPC Zhengding County Committee, Hebei Province.
1983-1985: Secretary of the CPC Zhengding County Committee, Hebei Province.
1985-1988: Member of the Standing Committee of the Municipal Party Committee and vice mayor of Xiamen, Fujian Province.
1988-1990: Secretary of the CPC Ningde Prefectural Committee, Fujian Province.
1990-1993: Secretary of the CPC Fuzhou Municipal Committee and chairman of the Standing Committee of the Fuzhou Municipal People's Congress, Fujian Province.
1993-1995: Member of the Standing Committee of the CPC Fujian Provincial Committee, secretary of the CPC Fuzhou Municipal Committee and chairman of the Standing Committee of the Fuzhou Municipal People's Congress.
1995-1996: Deputy secretary of the CPC Fujian Provincial Committee, secretary of the CPC Fuzhou Municipal Committee and chairman of the Standing Committee of the Fuzhou Municipal People's Congress.
1996-1999: Deputy secretary of the CPC Fujian Provincial Committee.
1999-2000: Deputy secretary of the CPC Fujian Provincial Committee and acting governor of Fujian Province.
2000-2002: Deputy secretary of the CPC Fujian Provincial Committee and governor of Fujian Province (1998-2002 Studied Marxist theory and ideological education in an on-the-job postgraduate program at the School of Humanities and Social Sciences of Tsinghua University and graduated with an LLD degree).
2002-2002: Deputy secretary of the CPC Zhejiang Provincial Committee and acting governor of Zhejiang Province.
2002-2003: Secretary of the CPC Zhejiang Provincial Committee and acting governor of Zhejiang Province.
2003-2007: Secretary of the CPC Zhejiang Provincial Committee and chairman of the Standing Committee of the Zhejiang Provincial People's Congress.
2007-2007: Secretary of the CPC Shanghai Municipal Committee.
2007-2008: Member of the Standing Committee of the Political Bureau of the CPC Central Committee, member of the Secretariat of the CPC Central Committee, and president of Party School of the CPC Central Committee.
2008-2010: Member of the Standing Committee of the Political Bureau of the CPC Central Committee, member of the Secretariat of the CPC Central Committee, vice president of PRC and president of Party School of the CPC Central Committee.
2010- : Vice chairman of the CPC Central Military Commission Alternate member of the Fifteenth CPC Central Committee, and member of the Sixteenth CPC Central Committee. Member of the Seventeenth CPC Central Committee, member of the Political Bureau and its Standing Committee, and member of the Secretariat of the Seventeenth CPC Central Committee.

China´s next president is well tested, not just a popularity contest winner with campaigns paid for by the very wealthy and corporations.