What China's Devaluation Means For The Future Of The Dollar

Tyler Durden's picture

Submitted by Simon Black via SovereignMan.com,

As the saying goes, “Fool me once, shame on you. Fool me twice, shame on me.”

(… to which George W. Bush famously added after flubbing the aphorism on live TV, “can’t fool me again!”)

For months, despite every shred of data pointing to a weaker economy, China’s currency has been strengthening.

This was really counterintuitive. When an economy is weak, its currency tends to suffer.

But that didn’t happen in China.

Even when China’s stock market suffered one of the biggest crashes in history a few weeks ago, the currency barely moved.

None of this made any sense.

Just look at Greece– problems in that single nation, one of the smallest economies in Europe, dragged down the currency used by 18 other nations in Europe to its lowest level in more than a decade.

But when problems broke in China, the renminbi actually got stronger. And party bosses insisted that they would not devalue their currency.

Fool me once.

Yesterday they showed the world what their promises really mean: nothing. And in a surprise announcement, they devalued the renminbi by roughly 2%.

2% might not sound like very much. But in currency markets, especially for a major one like China’s, 2% is a huge move.

Curiously, in the very same announcement, Chinese officials stated that they would not devalue the currency again, and that Tuesday’s move was a one-time thing.

Fool me twice.

Less than 24-hours later they did it again — a second devaluation that saw the renminbi tumble to as low as 6.57 per US dollar, a 6% decline in roughly 36 hours.

Again, this is a steep drop for a currency, and I expect that there’s more to come.

All of this raises an interesting question about the future of the US dollar.

Because if an economy as large and powerful as China’s has had to concede defeat, does this mean that “King Dollar” will rule forever?

No chance.

Remember that the dollar’s strength is derived from its status as the primary global reserve currency.

Nearly every government, commercial bank, and central bank in the world holds US dollars in reserve, and the dollar is used as the primary currency in global trade.

Whether in Saudi Arabia or South Africa, a barrel of oil is priced in US dollars. Even jets manufactured in France and sold to European airlines are priced in US dollars.

But this status is by no means written in stone. The US dollar is not the first global reserve currency, and it won’t be the last.

We can go back in time to the Byzantine solidus, or the Venetian gold ducat, or the Spanish dollar, or the British pound, and see that no reserve currency lasts forever.

Especially when its fundamentals are so poor.

The US government is insolvent. Its major institutions and pension funds are insolvent. The central bank is borderline insolvent.

These are not any wild assertions; their own financial statements admit their insolvency.

Which means that there’s nothing underpinning the dollar’s reserve status except confidence.

And confidence is very fickle. Like a high school popularity contest, it wanes and it booms.

Right now that confidence is on an upswing, primarily because every other major option looks really bad.

The euro is acting out its Oedipal complex. Japan is a complete fiscal disaster spending over 25% of tax revenue just to pay interest. And China is rapidly deteriorating.

Sure there are some outliers like the Swiss franc that are in better shape. But the market for Switzerland’s currency is far too small to absorb trillions of dollars in global capital flows.

In the beauty pageant of major currencies, the US dollar is clearly the least ugly at the moment.

And I think anyone owning dollars should look at this as a gift.

Right now we have a tremendous opportunity to sell what’s expensive and buy what’s cheap.

The dollar hasn’t been this expensive in years. And many non-dollar assets haven’t been this cheap… ever.

Here in Turkey, the lira is at its lowest level in history. The South African rand is at its lowest level in history. We wrote about Indonesia’s rupiah on Monday.

I’m looking at real estate in Colombia at the moment where US dollar buyers can pick up high quality property for less than the cost of construction.

In Chile, the cheap exchange rate and slowing economy helped our fund to recently close on a farm at $4.3 million that cost $10 million less than two years ago.

In Australia there are a number of junior mining stocks that are trading for less than the amount of cash that they have in the bank.

There are countless deals like this all over the world… especially if you’re buying in US dollars.

It’s foolish to expect that any reserve currency will last forever.

And it’s even crazier to expect a reserve currency with such pitiful fundamentals as the US dollar to last forever.

But markets are not orderly and efficient. They are chaotic.

Which means that, on rare occasions, enormous opportunities present themselves to buy high quality assets on the cheap.

That opportunity is now.

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Publicus's picture

Yes, King dollar will rule forever until China learns to print money to fund jobs and startups directly, thereby creating a consumer base.

 

This should not take long as the Chinese are out of the box thinkers.

Captain Debtcrash's picture
Captain Debtcrash (not verified) Publicus Aug 13, 2015 5:26 PM

Anyone who doesn't question the theory that China is going to take over during the upcoming monetary shift is fooling themselves.   There will be pain for everyone but I don't see a huge shakeup nation wise at the top of the economic food chain.  Japan is probably going to drop more pegs than anyone. 

Now to address the first points of the article; if a financialised country has a crisis that doesn't directly relate to the currency, generally the currency goes up while people sell risk assets.  I can't believe I actually have to type this but the selling pressure from those risk assets is demand for the currency.  This may be temporary, like the dollar going up during the financial crisis, but the yuan going up during a stock market crash makes perfect sense. 

I agree the dollar as it currently exists will fail before too long. Unfortunately that doesn't mean that what replaces it won't be controlled by the US. 

Hyjinx's picture

Yup.  Nothing screams confidence and transparency like the Chinese - clearly better than us! /sarc

BigJim's picture

 Which means that there’s nothing underpinning the dollar’s reserve status except confidence.

Er, no, what underpins the USD is the fact that any (non-nuke) oil exporting country that stops demanding it in exchange for oil will face regime change.

All those carrier groups aren't for making the world "safe", you know.

runningman18's picture

The U.S. military is on the decline and numerous other countries have similar technologies.  Foreign nations are not worried about the U.S. militarily.  Also, the central banks and globalists will crash the dollar whenever they see fit to do so in order to make way for their one world currency.  The whole idea that the dollar will retain world reserve status because of our big guns is nonsense.  Our big guns cannot stop a dollar collapse. 

fx's picture

'Mighty' germany behaves like a vasall of the U.S., allowing US troops and intelligence to use german territory for whatever they want to carry out there, including spying on german govt, on german corporations and  of course the German people. It succumbs to any sanctions requests y uncle sam whenever they come. But yeah, nobody fears the Us military, obviously... LOL

lasvegaspersona's picture

I don't think the next global reserve currency...will be a currency.

When the dollar finally gives it up I suspect the world will return to gold; not to a gold standard wherein countries promise a price at which to buy and sell gold, but as a reserve held at market value.

The Euro already does this.

The one big country that has zippo real gold in their CB is the USA. Other countries can just add gold, the dollar will have to go away and the USA will need a new currency. If the US tries to defend the current dollar with gold it will all be used up the first day.

Vlad the Inhaler's picture

No, the new reserve currency will be the Big D, which stands for pure unadultered DEBT.

CPL's picture

It can be done but it would require everyone to take the leap at the same time though.  All the tools are here today to do it.  Only thing missing is will and the plan.  So we all wait longer until people are sick of it and want to change it, or they are just gone.  Free will and all that jazz.

CPL's picture

Yeah, you'll all be using nice agnostic BitCoins with no religious symbols or nonsense stamped on them since gold and silver haven't got a hope in hell at helping manage or sustain a supply chain as complex as earth.  Eventually you'll all understand how to share by using it.  Think of it like training wheels on how a real global economy works wtihout influence and 'gasp' money operating as currency and not a weapon.  Unfortunately everyone is so fucked up and ass backwards on the matter of how to act in governance of a planet and it's resources, this is the medicine to fix fiat junkies and correct issues without too much pain.  Depending on how things are moved into proper prioritiization, might even be able to save the pensions if everyone gets their thumbs out of their asses while they catch their breath instead of being stuck in a reactive mode of herd behavior.

Gold and silver isn't going to help anyone here at all.  The issue is scale, not money.  Scale has rendered both worthless on a planet with a bafflingly complex supply chain.  Money is just a distraction to the work.  Only thing that really matters at the end of the day to keep food on plates, lights on and clothes on backs is energy.  Now how to manage that.  Depends how fast GE pulls the thumb out of their ass on that Intellectual property they've been buying and hiding for a century because one way or another that vault is going to be opened.

In that vault btw is energy independence.

Pickleton's picture

So if I understand you correctly, gold and silver are bullshit because of scale and the world's complex supply chain, but bitcoin is the answer and it's not fiat.  And somehow bitcoin has scale that gold and silver don't?

 

 

 

 

 

 

TheEndIsNear's picture

"Depends how fast GE pulls the thumb out of their ass on that Intellectual property they've been buying and hiding for a century because one way or another that vault is going to be opened. In that vault btw is energy independence."

 

So what sort of "Free Energy" pseudo-device do you think GE has that violates the first and second laws of thermodynamics?

Hugh_Jorgan's picture

Keep working on it. You almost understand some of this.

It seems like you've missed the fact that Gold and Silver have intrinsic value, they are REAL MONEY. Something that Bitcoin can never have. Bitcoin becomes worthless when the electricity goes away. Take my word for it, in the near future you will want to have your riches and resources in hand. Start with silver and get some steel jacketed lead so you can at least try to keep what is yours.

Max Steel's picture

Just stoo peddling your crap here. There wont going to be any global currency which again usa will control. THE WRITER of your article is a sheee lunatic . A wannab thinks american xceptiinalism is indelible. Oh! Btw China has come up at par with usa in most of economic indicators. So keep believing in your delusional crappy articles.

SuperVinci's picture

quit pimpin yourself you cog dis wannabe.

Pickleton's picture

Good grief dude, if you're gonna whine about others, at least try to be literate while you do it.  Your writing makes you sound like an utter cretin.

 

SuperVinci's picture

quit pimpin yourself you cog dis wannabe.

malek's picture

 There will be pain for everyone but I don't see a huge shakeup nation wise at the top of the economic food chain.

I'm sure there were a lot of "educated" people saying similar things inside the UK in the 1920's.

thesonandheir's picture

I for one welcome our new Chinese overlords.

LawsofPhysics's picture

The Chinese invented paper money for fucks sake.

Hugh_Jorgan's picture

"This should not take long as the Chinese are out of the box thinkers"

Seriously? Which Chinese are those? The ones that invented gunpowder 2000 years ago? The Chinese today are great at rapid copying and theft of intellectual property and little else. They have been stealing moves from the corrupt Western world's playbook for several decades now.

So, I guess I agree with your original thought, just not the reason why...

alexcojones's picture

I wish dollars came in other pretty colors than green.

Brazil had so many different colors and they made new different ones all the time.

Damn Greenbacks

Pickleton's picture

Have you seen the new hundreds?  They're blue.

Peter Pan's picture

The way the world is blowing up its cash to make ends meet or to bail itself out, i somehow suspect that we will see reserves keep on shrinling to the point that very little will be kept as paper.

beaker's picture

Well reading that was a waste of 5 minutes of my life.  WTF

Tall Tom's picture

That took you five minutes to read that?

 

Wow.

Clever Name's picture

All I needed to see was 'Simon Black' to know where it was going...

greyghost's picture

SIMON SAYS.........i are bullshit. posted from the plains of tibet, simon says dali llama knows his shit

romario's picture

I'm not so sure, what if this the century of the dollar? Since 2000 it's crash after crash, each time the dollar got stronger if you think about it, and now we are at this gridlock, with the S&P500 at record highs and the dollar really "trumping" other currencies... 

What if the S&P500 joins in on the global stocks meltdown and the dollar gets even stronger? 

What is more likely, this scenario or that global stocks (like Brazil, Russia, Mexico, Italy) catch up to the S&P500 rally and make multi year highs as well, while the dollar loses value?

This is the million dollar question.

arbwhore's picture

The dollar has been falling wrt other currencies since 1985. This "devaluation" is but a blip on the Yuan's road.

romario's picture

Yes, but since 2000 there were loads of moments when the dollar got really strong. Actually began in 1997 with the asian crisis. Maybe the 21st century is the dollar century. Maybe not.

arbwhore's picture

No. The dollar's days as a reserve currency are soon over, just like all the ones before it.

neuronius's picture

No, the 20th Century was the century of the dollar.

 

Pickleton's picture

Mmm, no.  It's not so much the dollar's strength as it is the weakness in demand for those other currencies.  They're all sliding down the same slide of failure.  The dollar's century is past. 

logicalman's picture

The strength of fiat is determined by the size of the military backing it.

China should do well in that regard, eventually.

Why the hell would anyone use it if not for legal tender laws?

Trouble is too few have a clue.

 

 

Not My Real Name's picture

The strength of fiat is determined by the size of the military backing it

You've got it backwards: The size of any military is determined by the strength of the fiat that is backing it. 

 

Pickleton's picture

Huh?  Unless you're just talking about their ability to throw massive numbers of machine gun bullet catchers at their enemy, China cant even design an aircraft carrier.  Their strength is only in their theft from others.

coast's picture

I dont think people understand the underlying situations especially with the chinese....THey have stacked god only knows how much gold, so when the soon to come global monetary reset comes, backed with an unknown percentage with gold, they will be set to take the lead in the world currency.  In my opinion, this was the plan all along.

Hyjinx's picture

If their currency is too strong their export economy dies.  Why would they do that?

laomei's picture

they buy up all assets of any worth

withglee's picture

...THey have stacked god only knows how much gold,

 

We know it's less than 1oz per person on Earth, so in light of the whole scheme of things, it is irrelevant.

NorthernPike's picture

I hope we start hearing about the soon to come end of the dollar as the reserve currency and how gold will be one million dollars per ounce shortly, how the crafty Orientiels can now while away the next several centuries without worry or care because of all the physical assets they have. I have charts for each of these scenarios in three dimensional graphics using new software called EXHELLHope.

Miggy's picture

Yeah I don't get it. If king dollar looks good right now but with pitiful fundamentals what does that say about everybody else?

 

John 3:16

 

kchrisc's picture

The dollar is up on "exit."

As a result, the Zionist fifth-element and colonizers of the American country are loving it, as it makes it easier for them to buoy the dollar as they exit back to Europe.

Zion and their bankster plunders need to try to control price-inflation a bit longer as they "exit." So a higher dollar, coupled with cheaper goods from overseas, is just what they ordered.

Look for the noiZ-media to soon start focusing on how "cheap" things, not food, are. "One can get a whole dinner set from Walmart or Amazon for 15% less than last year..." "While food prices are up, because of all of the farm disease outbreaks [That seem to only strike the DC -US], outfitting and furnishing your home is so much cheaper from a year ago..."

Watch the FedRes further the dollar's rise, and Zion's exit, with a rate increase this Fall or Winter, as they would rather engineer a collapse that they can profit from, and then later replace the dollar with SDRs.

Liberty is a demand. Tyranny is submission..

coast's picture

Hey kc..I made this video about 5 years ago, but most of it is still relevant...It was banned on youtube so I put it on vimeo...steely dan music and david dees illustrations.  It took me hours to make it.  Hope you like it.

https://vimeo.com/60685715

kchrisc's picture

Awesome.

You should keep at making video like this.

Liberty is a demand. Tyranny is submission.

are we there yet's picture

Every country is their own worst enimy.