This is a
continuation of a series of essays I wrote concerning the global shift away
from the US Dollar as reserve currency. If you missed those essays, a brief recap
of the items listed were:
and Russia dropping the US Dollar for trade
ramping up trade with Brazil
Arabia moving to strengthen trade with China and Russia
Russia, Brazil, India, and now South Africa are moving to trade more in their
own currencies (not the US Dollar)
(major financial center in Asia) starting to trade yuan
All of these
items are real and documented. And the pace of the move away from the Dollar as
reserve currency is not slowing.
was just revealed that ASEAN+3 countries (Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Japan,
and South Korea) are researching the prospect of a “common currency” similar to
significance of this development cannot be overstated. The primary question
those who do not believe the US Dollar could lose its reserve currency status
ask is: what will be the replacement?
there is no one currency that could fit the bill. The Chinese yuan could not do
it as China is not ready and in fact ready to suffer a housing and banking
collapse. Russia’s economy is a disaster aside from a few key areas (Moscow, St
Petersburg, etc), the Euro in its current form won’t even exist in a few years,
and Japan is both an ecological and financial disaster (they’ve just announced
a 1 QUADRILLION stimulus plan.
idea that any one of these currencies could replace the US Dollar as reserve
currency of the world at this time is absurd.
common currency comprised of most Asian countries (the primary creditor nations
and manufacturing base of the world) is a completely different story.
I am aware that common currencies in general are flawed (especially when you’re
uniting a bunch of bankrupt aging countries like Europe). However, a common
currency comprised of Asian countries would
overcome be a much more viable alternative to the US Dollar as reserve currency
of the world.
for this is that a common currency in Asia would get past the individual risks
of any one Asian nation’s currency (Thailand and Japan in particular are a
mess) at least in the beginning.
ultimately a common currency there would prove as futile as the Euro. However,
it would serve as a “stepping stone” in the process of finding a replacement of
the US Dollar as world reserve currency.
What I mean
is that should a common currency be introduced in Asia, it would probably work
for about 10-15 years. By then we’re well into the 2020s if not the 2030s at
which point it is quite possible China will indeed be in a place to provide a
world reserve currency on its own.
I wish to
stress that even if Asia doesn’t
implement a common currency and the US Dollar remains the world’s reserve
currency (I put the odds of this at 20%), we are still facing a debt default in
the US which will result in the US Dollar dropping dramatically in value and
ushering in serious if not hyper-inflation.
Indeed, most commentators fail to understand the real reason
Weimar Germany suffered hyperinflation. Niall Ferguson’s book, “The Ascent of Money” explains that it was in fact a
political mistake that ushered in hyperinflation:
Yet it would be wrong to see the
hyperinflation of 1923 as a simple consequence of the Versailles Treaty. That was how the Germans liked to see it, of
course…All of this was to overlook the
domestic political roots of the monetary crisis. The Weimar tax system was
feeble, not least because the new regime lacked legitimacy among higher income
groups who declined to pay the taxes imposed on them.
At the same time, public money was spent recklessly, particularly on generous wage
settlements for public sector unions. The combination of insufficient
taxation and excessive spending created enormous deficits in 1919 and 1920 (in
excess of 10 per cent of net national product), before the victors had even
presented their reparations bill… Moreover,
those in charge of Weimar economic policy in the early 1920s felt they had
little incentive to stabilize German fiscal and monetary policy, even when
an opportunity presented itself in the middle of 1920.
calculation among Germany’s financial elites was that runaway currency
depreciation would force the Allied powers into revision the reparations
settlement, since the effect would be to cheapen German exports.
What the Germans overlooked was that the
inflation induced boom of 1920-22, at a time when the US and UK economies were
in the depths of a post-war recession, caused an even bigger surge in imports,
thus negating the economic pressure they had hoped to exert. At the heart of the German hyperinflation
was a miscalculation.
similarities between the US today and Weimar pre-hyperinflation are striking.
As in Weimar, US fiscal authorities are not taking any steps to rein in their
loose money policies. Similarly, the US Fed, like Germany’s financial elites
believes that currency depreciation is a good thing.
Thus we have
a rather frightening set-up for hyperinflation in the US: the largest emerging
market players are moving away from using the US Dollar at the same time that
US monetary authorities are engaging in disastrous policies similar to those
employed by the men who brought hyperinflation to Weimar Germany.
believe the US will see serious (‘70s style inflation) if not hyperinflation
within the next 2-3 years. It could come sooner depending on how the Fed’s
policies play out.
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