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Guest Post: How China Can Cause The Death Of The Dollar And The Entire U.S. Financial System
Submitted by Michael Snyder of The Economic Collapse blog,
The death of the dollar is coming, and it will probably be China that pulls the trigger. What you are about to read is understood by only a very small fraction of all Americans. Right now, the U.S. dollar is the de facto reserve currency of the planet. Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars. More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it. As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world.
Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.
As I mentioned above, nations all over the globe use U.S. dollars to trade with one another. This has created tremendous demand for U.S. dollars and has kept the value of the dollar up. It also means that Americans can import things that they need much more inexpensively than they otherwise would be able to.
The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars...
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary. For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this. This has created tremendous demand for U.S. government debt and has helped keep interest rates super low. So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates...
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system. For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
Our entire way of life in the United States depends upon this game continuing. We must have the rest of the world use our currency and loan it back to us at ultra low interest rates. At this point we have painted ourselves into a corner by accumulating so much debt. We simply cannot afford to have rates rise significantly.
For example, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has been much higher than that at various times in the past), we would be paying more than a trillion dollars a year just in interest on the national debt.
But it wouldn't be just the federal government that would suffer. Just consider what higher rates would do to the real estate market.
About a year ago, the rate on 30 year mortgages was sitting at 3.31 percent. The monthly payment on a 30 year, $300,000 mortgage at that rate is $1315.52.
If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage would be $2201.29.
Does 8 percent sound crazy to you?
It shouldn't. 8 percent was considered to be normal back in the year 2000.
Are you starting to get the picture?
We need other countries to use our dollars and buy our debt so that we can have super low interest rates and so that we can afford to buy lots of cheap stuff from them.
Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency. In particular, China is leading the call for a "de-Americanized" world. The following is from a recent article posted on the website of France 24...
For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback's role as the default global reserve unit.
But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China's official Xinhua news agency called for a "de-Americanised" world.
It also urged the creation of a "new international reserve currency... to replace the dominant US dollar".
So why should the rest of the planet listen to China?
Well, China now accounts for more global trade than anyone else does, including the United States.
China is also now the number one importer of oil in the world.
At this point, China is even importing more oil from Saudi Arabia than the United States is.
China now has an enormous amount of economic power globally, and the Chinese want the rest of the planet to start using less U.S. dollars and to start using more of their own currency. The following is from a recent article in the Vancouver Sun...
Three years after China allowed the yuan to start trading in Hong Kong’s offshore market, banks and investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.
And over the past few years we have seen the global use of the yuan rise dramatically...
International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.
Of course the U.S. dollar is still king for now, but thanks to a whole host of recent international currency agreements this status is slipping. For example, China just recently signed a major currency agreement with the European Central Bank...
The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.
"It's a way of promoting European and Chinese trade, but not doing it with the U.S. dollar," said Brooks. "It's a bit like cutting out the middleman, all of a sudden there's potentially no U.S. dollar risk."
And as I have written about previously, we have seen a bunch of other similar agreements being signed all over the planet in recent years...
1. China and Germany (See Here)
2. China and Russia (See Here)
3. China and Brazil (See Here)
4. China and Australia (See Here)
5. China and Japan (See Here)
6. India and Japan (See Here)
7. Iran and Russia (See Here)
8. China and Chile (See Here)
9. China and the United Arab Emirates (See Here)
10. China, Brazil, Russia, India and South Africa (See Here)
But do you hear about any of this on the mainstream news?
Of course not.
They would rather focus on the latest celebrity scandal.
Right now, the global move away from the U.S. dollar is slow but steady.
At some point, some trigger event will likely cause it to become a stampede.
When that happens, demand for U.S. dollars and U.S. debt will disintegrate and interest rates will absolutely skyrocket.
And if interest rates skyrocket that will throw the entire U.S. financial system into chaos. At the moment, there are about 441 trillion dollars worth of interest rate derivatives sitting out there. It is a financial time bomb unlike anything the world has ever seen before.
There are four "too big to fail" banks in the United States that each have more than 40 trillion dollars worth of total exposure to derivatives. The largest chunk of those derivatives is made up of interest rate derivatives. In case you were wondering , those four banks are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.
A huge upward surge in interest rates would absolutely devastate those banks and cause a financial crisis that would make 2008 look like a Sunday picnic.
Right now, the leader in global trade seems content to use U.S. dollars for most of their international transactions. China also seems content to hold more than a trillion dollars of U.S. government debt.
If that suddenly changes someday, the consequences for the U.S. economy will be absolutely catastrophic and every single American will feel the pain.
The standard of living that all of us are enjoying today depends largely upon China. They can bring down the hammer at any moment and they know it.
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I think the Chinese can now be as offensive as they are defensive militarily.
the chinese have always been defensive minded from the great wall to martial arts.
Old news, as for the city, older news.
YUP.
http://www.youtube.com/watch?v=s2rMnov4Ae8
Some truth lost in a sea of wrong conclusions. China benefits hugely from the current arangement. They have no interest in rocking the boat just now. The dollar will fall on its own eventually and China is just positioning itself for this event. Nothing less, nothing more.
In any case, these trends take decades to unfold then everything happens suddenly but we're not there yet. The US and Europe will probably enter a new recession in 2014. The problem will be how to get out of it later in the year or early in 2015 as all the powder is now wet. And if we can't exit, then yes, we'll be facing turmoil and a real chance of profound chages in the world order. But that's another two years down the road and China won't be the trigger!
Interesting.
A male Ninja seeks to describe the Chinese mindset.
Say, the Lehman Brothers thingie didn't take 'decades' to fall, did it..."these trends take decades to unfold"...and the resulting CRASH took, what, a matter of DAYS?
How's the Fukushima Prefecture thing going, by the way, Shinobi? Abe is taking care of things, I see. The fuel burning in the reactors is ALSO 'all wet', now.
Yeah, it's interesting, but non-sequitor, your discussion of your opinion regarding 'decades to change things'.
Uh-oh.
http://www.youtube.com/watch?v=HTTAPCUtbc8
'The Twilight Zone' was such a fun distraction, I think.
Lehman was the result of ending Glass Steagall and letting investment bankers loose in the 1990s so yes, decades! (Still it was great fun, then ;-)
Fukushima? Don't worry, if things get worse which is likely, you'll get all the news you need sooner than the radiations can reach you. Keep the duct tape close at hand... and the ammo if you're in the States, you know, the World War Z zombies!
And yes male Ninja (good that you can read kanji) are well positioned to describe the Chinese especially since a few years ago when my US partners fired all the engineers in the US and hired Chinese people instead. (Plenty of trips to China since which I both love and hate. You know this complex relationship between Japan and China.
And thanks for the Twilight Zone music which I enjoyed a lot.
Yes, the Chinese are unlikely to rock the boat until such time as the benefits outweigh the costs (such as loss of the remaining value of their U.S. $ denominated paper assets). But they seem to be preparing for that day, including the purchase of gold. Although I also doubt that a rapid transition is near, some unexpected trigger could cause the world community to head for the exits as far as US treasuries are concerned. Ditto for other sovereign debt. It's really a state of mind. Most folks know none of this is repayable, after all and the wiser ones are warily eying the exit doors for signs of mass exodus. I suspect that the Chinese are in that category. They have too much to lose to be out last.
I completely agree. We have entered a very unstable phase. Everything is still under control but it can change overnight if there is a shock to the system. There won't be another Leaman, central banks won't make the same mistake twice but many other things can happen. The most likely is a cascade of events. Unpredictable by nature.
Top Chinese politicians are extremely bright people. They understand that it is a complex game and that miscalculations can have very negative consequences. The world economy is now woven in such a complex patchwork that you cannot undo it without doing great harm to every body, the weaker you are the larger the wound.
The Chinese are consequently positioning themselves transforming their paper dollars into real assets. It is a slow and difficult process where you must move cautiously and skillfully to avoid making waves. (The opposite of what the Japanese did in the 1990s!) So far so good. But at some stage, soon, they will need to grab some key assets. This will be a very dangerous transition. It can go well as did the transition between the UK and the US or it can go desastrously wrong. I am not very optimistic. Not because I doubt the intelligence of the Chinese but because the culture gap is huge. Even in ideal conditions which is not what we have today, a transition from "Occident" back to "Orient" wouldn't be a small affair.
I don't think so. As long as they do have that many "assets" in US-$, they won't pull anything. I would expect them to get rif of the US-$ first, buy something of worth instead and then let the US down. I can not see that they have even start getting rid of the Dollars. The last I read is that they do hold well above a trillion of debts from the US. So I doubt they will like seeing the dollar worthless now and immediatly
YIKES!!! See Hilarious Music Video Below "WORLD OF DEBT" -- MUST SEE!!
https://www.youtube.com/watch?v=99xsqxzJnXs
Vomit
The fact that such a huge percentage of wealthy and powerful Chinese people have bug-out plans, and overseas property, and foreign currency, makes me think differently about "China's plans" than I would if it were a country where the elite planned to stay. In the past in China, huge disruptions have caused huge kill/die offs of huge numbers of people, including the elites. The elites were not spared; in fact sometimes they were targeted.
If I were a rational (and thus horrible) rich elite Chinese person, I would not be making any of the clever currency/trade plans for China that are being described. I would be looting the system, and planning an out. And that is what I think is happening. The ruling class is not making long term plans for the country, but instead is planning for the survival for their own close relatives. Perhaps we are blinded by how we would act, since most of us are attached to the U.S. and wouldn't leave and wouldn't strip the place bare. It's not that we're necessarily more noble: we have not seen mass deaths, that we would be terrified would be repeated.
So really, what Chinese people who have power and money, plan to stay if things get even a little dicey? And if they don't plan to stay, why should they work out some complex economic plan? What percentage of the people there with power, give a damn about the long-term condition of their country? Even if they wanted to care, they have historical reason to not allow themselves to.
For rich Chinese, the easiest way to move money is BitCoin.
For the Chinese lust for momo, BC may be just the ticket.
The BC angle on this is shaping up to be very interesting.My moniker shows that I like the shiney stuff too.
Historically, BC has had 30x moves off of each consolidation period, followed by a correction to the next consolidation level about 75 percent below the peak.
The cycle time seems to be decreasing.
From the base around 60 since the peak in April, we could see a new peak at 1800 with a correction back to 450.
In terms of Yuan , BC vroke 2000 in the last day or so and hasn't looked back.
With a market cap of just 4billion dollars, it's still quite ripe for speculation.
JMHO
I think we are stripping the place bare. The middle class is in decline and the top 1% rule by a bigger margin every day. Production of real things continues to fall and a greater and greater fraction of so-called GNP is fictitious, consisting of financial transactions and services.
If American hubris could be packaged and sold abroad the USA would have no debt.
duplicate
And next to the USD, the Euro is the second most used currency.
http://bullandbearmash.com/about/usd/
The reserve currency isn't a currency, it's a club.
I'm not sold on the "China Rules the World" thing at all. All China has, is a lot of people. And a lot of cash. They can buy a lot of stuff. So what. A lot of wealthy Chinese will migrate to places like Shangcouver, LA, NY, Paris, London... and then what? Buy Gucci. LV, Ferrari, send their kids to brand name schools to be the envy of Chinese high society... and so fucking what. Maybe in 60 years or so every prime minister and president in the world will be a 4th generation Chinese... and so fucking what?
American ascendency in the early 19 century changed the face of the world. American culture was embraced, American ideas, American values. It's not by accident English has become a global language for trade and commerce and business. Sure, we're a shallow husk of our former selves, that's not the point. This is China's "moment," their ascendancy to the throne if you will... and what the fuck do they bring to the table for the sake of humanity? Not one goddamned thing. You think Chinese is going to become some lingua franca? Not fucking likely. Written Chinese is a nightmare. Chinese political system is basic a cronyist mafia organization. Good luck writing an historically enduring political legacy based on that. Chinese culture.... lmfao. Don't even get me started. China's vision for the world is consume all the resources today, right now, at this instant. Their plan for Africa is straight from the 18th century European playbook, Latin America much the same; any technological advances they carve out come from painstakingly stealing the shit from other people. And Chinese music, literature, film..... ideas... are supposed to become the mainstay of global culture in the next 100 years?
China's enduring legacy to humanity will be outbreeding everyone wearing expensive wrist watches and designer handbags, drinking brown toilet water and breathing carbon dioxide rich dust boasting about their greatness.. Im in awe.
Not.
americas values were built on the british values which were built on the roman values, which were to instill the sense of moral and fear of God in the population, apparently so that the elite can take share and with time every asset on the earth.
Your illiteracy speaks volumes.
you mean Johny without guitar.
No, I mean johny the Chinese critic cop who roams the forums looking to downvote anyone with a bad word to say about China.
Please give me an example of an "American value".
The US has the whole trade works set up world wide and it is rapidly being destroyed by FED/DC. China could not. at present step into our shoes but they will be able to start soon. Someone will have to.
Thanks for this. I'm in the same kind of manuf. business up north - and am seeing exactly the same thing. We're busy, reinvesting in equipment, and making profit. We ain't JPM, but we're alive and making money.
Even have early 20th century equipment still going and always looking for life-time experienced tool & die, machinists, to come work - tell us where we're making things more complicated than they have to be - and pass on their considerable knowledge to a much younger generation.
This article is logically impaired.
China is to the US as Raptors were to Enron. The currency for Enron/Raptor was Enron stock used as collateral for a borrowed something of value. Enron/Raptor was never allowed to trade - only collateral for a borrowing. When called, nobody was allowed out of the trade.
China won't be allowed out of the trade. Why? ...because the US has the only card a sovereign needs - a premier military.
While the scheme may collapse, China will not be allowed to game the system. Therefore, China is all in.
"China won't be allowed out of the trade. Why? ...because the US has the only card a sovereign needs - a premier military."
LOL..."premier" isn't exactly the first thing that comes to my mind when I think of the U.S. military...
China, Turkey, Thailand are buying record amount of Gold this year - What do they know the others don't?
Peter Schiff: With ECB Rate Cut FED Has More Room To Increase QE Now
Peter Schiff warns everybody: do not be fooled by all this Taper talk, the moment FED removes the QE we are going in recession. ECB Rate Cut gives more room for FED to increase QE now. The action in Gold and Gold miners will be the very good indicator of the real state of the financial markets. Any discussions will stay only the words without money flowing into the sector. China is buying record amount of Gold this year and now you can add countries like Thailand and Turkey into the mix as well. Thailand's biggest domestic gold importer expects to more than double purchases this year to 200 t from 92 t last year. Turkey's gold imports have doubled this year and purchases have reached already 251.4 t from January - the biggest tonnage increase since at least 1995, according to ZeroHedge.
What do they know the others don't? The real situation with Gold at the Central Banks being leased out or Record Low COMEX inventories? http://sufiy.blogspot.co.uk/2013/11/peter-schiff-with-ecb-rate-cut-fed-has.html#
Just watched "Death by China" on NetFlix last night.
China only has the power that was given to them by treasonous fucks like Clinton.
And GWB; he gave them full WTO compatibility in 2001; that really started the outsourcing gravy train.
They need to put up two statues in Tiananmen square to those TWO great helmsmen of NWO outsourced Model.
Nixon & Kissinger were the pioneers to China. Tricky Dicky gave us that and took us off the gold standard!
Now don't be so judgmental. Every creature has a role to play on God's green earth. [ROTFLMAO]
Treason is the only option for two grifters like Bill and Hilary to take America for a hundred million dollars annually. They don't have the talent to make that kind of money any other way. Hell, Hilary couldn't even make money at insider trading. Their unique skills of lying, deception and betrayal makes them ideal politicians, appealing to the "free stuff", "money for nothing" crowd, and hoodwinking sheep.
Its interesting to analyse mindsets.
Lets use as an example one of America's most innovative and prescient sons : Orson Welles.
When he made Citizen Kane and Splendor of the Ambersons it was all about hubris and consequence.
Superb recital of two tales with a moral twist that had the added spice of genius.
Ten years later, Welles after the war, was a more despondent soul : He made Lady from Shanghai and Touch of Evil. In the first he studied the decay of corruption with himself as protagonist at receiving end, not as Citizen Kane.
In the second he plays evil incarnate, like he had in The Stranger and the Third Man, other portrayals of amorality and genius. But these films had a lower moral threshold and were more pure entertainment of film noir type, as consumerist America wanted to forget and live.
The gravy train of US hubris was already on its way; unlike in 1940 when the US was still in depression.
It takes pain and being humbled to learn the lessons of life. His career said that so eloquently; it went down the chute; people couldn't relate to his Shakespearean tragedies, Othello and Hamlet, as American hubris was ramped up.
He was a true contrarian and such an awesome innovative story teller.
He would be in his element today like a raging bull of moral consequence.
"Ten years later, Welles after the war, was a more despondent soul : He made Lady from Shanghai and Touch of Evil."
And even later--and more despondently--frozen peas!
Michael, no list? Are you changing your ways?
We need to check our operating assumptions. China's goal is not to win our game. It is to change / undermine the current financial system. Why ? The current system does not align with their way of life / beliefs. The current financial system enables economic freedom and thus freedom period. They don't care about how their U.S. Investments are doing ultimately. It's not a Zero Sum game for them, it's a Zero Hedge. A. They win, B. We lose. When the system finally collapses a new deal (new system) formed at the G20 layer or if necessary the G8 layer. If Russia doesn't play ball, then some new group. Any way you slice it the U.S. loses it's hedgemony. However, the good news is the U.S. will have the largest seat at the table. Is gold the fall back position and only viable alternative ? China is modelling for this and ramping reserves. I think this makes it less likely to be gold. The reset button will be set and some new standard currency will arise that has intrinsic value because the G8/G20/G* says it does.
All China has to do is sit back and watch we will destroy ourselves.
I think China has pledged most of the US treasury (& agency) securities they hold as collateral for loans to purchase other assets.
If the value of the securities takes a major dump - China can walk away - and not be as hurt as many think.
IMHO - At the very start of the crisis - the value of US treasury debt will actually go up - giving anyone that holds them a few days to sell and give anyone with brass balls the shorting opportunity of a lifetime.
Haven't really heard anyone address what happens to the USD if the Saudi's decide to accept other currencies for oil, ending the defacto petrodollar.
What then?
Where this article needs to be is in every local newspaper across the US, and on yahoo flashing across the screen along with the latest hollywood tripe. It does give a clear picture of the situation. Some sheeple might even get it.
But, as the article says, you don't find that kind of news in the MSM.
China has as many problems as the US and is in no position to abandon the US dollar. To abandon the USD is to lower the standard of living for the people of most countries as commerce sharply contracts. The standard of living can't go much lower for China and they have horrendous problems with pollution, acute water shortages, inadequate food supply, civil unrest, enemies at every border, and many more issues. Ask anyone who has lived there for a few years about the real China. China and other countries will make aggressive statements to calm the domestic waters but ROCK the international boat - no, no, no!
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary. For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this. This has created tremendous demand for U.S. government debt and has helped keep interest rates super low. So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates...
Now, having read this put on your knowledge of what money really is ... " a promise to complete a trade". Use your knowledge that a properly managed Medium of Exchange (MOE) "guarantees" zero inflation all the times everywhere. A properly managed MOE keeps money in free supply all the time everwhere and supply perfectly matches demand. A properly managed MOE can always be identified by transparently revealing DEFAULT experience and INTEREST collections, showing them to virtually equal at all times everywhere.
Knowing that the relation INFLATION = DEFAULT - INTEREST holds true for all MOEs, properly managed or not, why would anyone talk about "investing cash" if that cash was a properly managed MOE? What is a "bond", but a less effective and less efficient store of value than a properly managed MOE? Why would there be any demand for a U.S. Treasury financial instrument of any kind when you have a properly managed MOE? And why would there be a need for a reserve with a properly managed MOE?
Todd Marshall
Plantersville, TX
"Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency. "
But is not the past several years. The bizzarre behavior has been going on for decades. The debt tripled under Reagan. For debt triple under Obama it would have to be 30 billion when he leaves office.
That is all nice and everything but China still holds a lot of US debt that would vaporize before their eyes. They can afford that because as a communist country they can afford to starve their own people. Futhermore, who is going to buy their crappy Wall Mart stuff? China does not have a middle class sufficient enough to carry their economy. That is the problem with communist economy: everybody (except the happy few at the top) is "equal" and therefore equally poor. Again, they can starve a bunch of their own people because they don't care about them but China's dictatorship does fear its hungry masses. They might march on Being.
China now has the manufacturing base and can retool it to give their own folk, or whoever, whatever. It would cause some disruptions but they can do it.
And China has a growing middle class.
What the hell do WE do? Much of our manufacturing has gone missing.
Perhaps you are right but then they would need to do what the US and most of the Western world has done: give their middle classes access to credits and loans. For that their currency needs to become the new world's currency. That is what got the West in troubles in the first place.
DEAD WRONG. The world used the U.S. dollar (because it was a reserve currency), to create new money & credit. It is called the E-D banking system (not ECB system). The E-D commercial banking system is many times that of our domestic money stock. If the dollar's status changes from being a transactions currency,then the E-D market will contract & the U.S. dollar's exchange rate will rise.
Dont think Yuan is the one.. that is smoke.. Only one will remain, and the dollar will not be..
Yuan? they are being waited to the level...once it happens the Euro will be.