Although receiving relatively little attention from the mainstream media, the Bank of China (BOC) just signed a non-dollar settlement deal with VTB, one of Russia’s largest commercial banks. The agreement will allow VTB and BOC to pay each in their domestic currency, removing the need for the US Dollar to settle the trade. This might not sound like much; but in terms of international trade and finance, it is huge. Since the Bretton-Woods agreement after WWII, nations have used the USD in international business dealings. But reserve currency status does not last forever. The Dollar is losing this position, and it will have serious ramifications for the United States and everyone invested in the dollar.
As an ex bond/FX trader, I understand the benefits the United States receives as a result of the USD enjoying reserve status. There is a natural bid, or demand, for entities to own Dollars. Countries want to store their wealth in an instrument that will retain its value. For almost eighty years, this has been the United States Dollar. But we have squandered this position through our financial irresponsibility. As our sovereign debt approaches twenty trillion Dollars, nations and corporations can be forgiven for wondering if we will ever have the will or the means to pay back this astounding sum of money. They believe we will have to devalue our currency, i.e. print money, to settle what we owe as a country. Therefore, they are starting to look for other vehicles to store their wealth and settle their transactions in.
Even before signing this bilateral deal, China in particular has been one nation that has started to move its assets elsewhere to protect its interests. Vince Miller, senior market strategist at Birch Gold Group, believes that the Chinese are putting a staggering sum of their wealth into gold: “When China last reported their gold holdings in 2008, they had 1,054 tons. Since then, they’ve gone absolutely silent on how much they have, but if you start to add up the numbers – the reported imports flowing into the country each month, the estimated NON-reported imports on top of that, plus what the Chinese can mine in gold from within their borders – we wouldn’t be surprised if some recent reports that put the nation’s current holdings in the 3,000 to 5,000 ton range were accurate.”
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As more nations make moves similar to the Chinese, the demand for Dollars will start to slide as this process unfolds. As there is less reserve currency demand, the value of the Dollar will fall. This will have a negative impact on the American consumer, as import prices will rise. The United States will be much more susceptible to economic crises; and the value of our currency will swing much more freely, making it much harder for businesses and individuals to manage their finances. Our standard of living will shrink further than it already has. No country has ever devalued its way to prosperity. Only banana republics try to do this. Americans also will have to pay much more when they travel overseas.
Perhaps the scariest aspect of this entire situation is that we have handed our economic (and possibly militaristic) adversaries a potent weapon. The United States no longer has an economic cushion. We can’t deficit-spend our way to winning another conflict. Countries that don’t like us very much have realized this truth and have started to take advantage of it. Our military used to train and equip to fight two wars simultaneously around the globe. We can no longer effectively fight one.
Machiavelli said, “It is better to be feared than loved.” I fear the United States is now neither. If you look around the globe, you can see adversaries acting against U.S. interests because they are just not scared of our reaction anymore. We are too weak. This has all come from our debt load (not to mention our lack of leadership–but that’s another column).
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Vince Miller of Birch Gold Group offered some illumination on what Russia in particular has already been doing to act against the interests of the United States: “We can debate whether Russia has the right to so closely interfere with the latest events in Ukraine, but Vladimir Putin strongly believes it’s their prerogative. So he’s not taking President Obama’s latest series of sanctions lying down. In fact, he has declared what I have called ‘all out financial war’ against the United States. One way we’re seeing Russia do this in particular is by selling off their holdings of U.S. Treasuries, which now stand at the lowest level since 2011.”
The United States will continue to see other nations try and remove the USD from their international business transactions. The Dollar’s historical place on the global pedestal will continue to be eroded. The only way for this process to be reversed is for our government to stop spending money it doesn’t have. They say if you want to get out of a hole, then you have to stop digging. We also have to get the government out of the way of our economy. Only economic growth will help restore the Dollar’s credibility. Our current administration does not understand the concept of making the pie bigger. They only want to get as much as they can get before the lights go out on America.
These attacks on the dollar as the global reserve currency are not taking place in secret, or behind closed doors, but rather out in the open. We’re watching, and so is the rest of the world. If you care about the future value of your personal savings, it’s imperative that you do too.
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Birch Gold Group helps Americans protect their hard-earned savings from the dollar’s ongoing loss in value with investments in physical gold and silver. To learn how precious metals can help to safeguard your future from inflation and geopolitical instability, visit www.birchgold.com.
Photo credit: ohkyle (flickr )
The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by the owners of this website.
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