Guest Post: Chinese Chaos Is The Immediate Threat To The Dollar

Tyler Durden's picture

Submitted by John Aziz of Azizonomics

Chinese Chaos Is The Immediate Threat To The Dollar

In twenty or thrity years, I expect future monetary historians looking back on this period of history to frequently misquote Ernest Hemingway:

How did the dollar die? First it died slowly — then all at once.

The slow death began with the dollar’s birth as a global reserve currency. America was creditor and manufacturer to the world, and the capitalist superpower. People around the globe transacted overwhelmingly in dollars. Above all else, people needed dollars to conduct trade, and they were willing to pay richly for them, and for dollar-denominated debt.

By the ’90s America began enjoying a tremendous free lunch — the world provided America with goods, resources and services, and Americans provided the global reserve currency, as well as acting as world military policing global shipping. Why manufacture at home, or produce resources at home when the world wants your currency? To get what you want, all you have to do is run your printing press — which was much easier after 1971, when Nixon ended the gold exchange standard. In a flat free-trade world, supply chains and technology agglomerated wherever the labour was cheapest, which was predominantly Asia. So America let her industrial base and her domestic supply webs degenerate, to enjoy the free lunch that the dollar brought:

The next leg of the story is that foreigners realised that actually maybe the necessity of the dollar was an illusion. With America no longer the world’s manufacturer or creditor, who needs America? If you need a consumer, there are billions of people and trillions of dollars, and trillions of dollars worth of resources in Asia, and South America, and Europe. America’s government is deeply-indebted, and its military is bogged-down in difficult conflicts around the world.

As Ron Paul noted:

We are like a man who used to be rich and is in the habit of paying for everybody’s meals and announces at a lavish dinner that he will pay the bill, only to then turn to the fellow sitting nearby and say, “Can I use your credit card? I will pay you back!”

While fund managers continue to refer to the dollar and the US treasury as a safe haven, America’s sovereign creditors seem to feel quite differently.

As Zhang Jianhua of the People’s Bank of China put it:

No asset is safe now. The only choice to hedge risks is to hold hard currency — gold.

The shift away from the dollar has quickly manifested itself in bilateral and multilateral agreements between nations to ditch the dollar for bilateral and multilateral trade, beginning with the chief antagonists China and Russia, and continuing through Iran, India, Japan, Brazil, and Saudi Arabia.

So the ground seems to have fallen out from beneath the petrodollar world order.

Yet at the same time, the powers moving away from the dollar have a lot invested in the system. The two biggest sovereign holders of US treasuries are Japan and China. China alone holds $3 trillion of US currency, and $1 trillion of debt. They have no reason to crash the value of their own assets. Their planned endgame appears to be a slow, phased and managed transition to a new global reserve currency. China wants to gradually reduce their exposure to America, transferring to harder assets.

Yet history rarely turns out how nations have planned, and China itself seems increasingly beset with domestic problems.

From Bloomberg:

China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said.


A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than an estimated government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small and mid-sized companies for loan growth after demand from the biggest state- owned borrowers dropped, the people said. 


The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes.

China may be a manufacturing powerhouse, and the spider at the heart of global trade, but its domestic and social order looks in a state of disarray, pock-marked with ghost citiesindustrial accidents and ecological disasters. And throwing stimulus money into an economy already recording screeching inflation will be like throwing fuel onto a fire.

As the Chinese (and wider Asian) economic picture becomes bleaker, pressure will grow on politicians to take more drastic and rash measures. They may try to rally the disaffected behind them with an increasingly confrontational nationalistic attitude to America. And unable to match America militarily, their major outlet would be economic warfare — competitive devaluation, threats, tariffs, export controls, and an all-out assault on the dollar reserve standard. Additionally, American policymakers also encumbered with huge economic problems may look to economic warfare as policy — the standout example is Mitt Romney’s desire to brand China as a currency manipulator for accumulating US treasuries and impose tariffs, even while the Treasury upgrades the PBOC to primary dealer status.

This brewing firestorm suggests that rather than the gradual transition that all parties claim to desire we are likely to see a much faster and more volatile one. I don’t know which straw will break the camel’s back, but it is likely to come sooner, rather than later. First slowly — now all at once.

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Joe The Plumber's picture

That was originally a Mark Twain quote.

When asked how he went bankrupt he said " at first very slowly, then very rapidly."

Ahmeexnal's picture

It could very well have been Daniel Dafoe too.

From wikipedia:

Daniel Defoe ( /?dænj?l d??fo?/; ca. 1659–1661 to 24 April 1731),[1] born Daniel Foe, was an English trader, writer, journalist, and pamphleteer, who gained fame for his novel Robinson Crusoe.

Although Defoe was a Christian, he decided not to become a dissenting minister and entered the world of business as a general merchant, dealing at different times in hosiery, general woollen goods and wine. Though his ambitions were great and he bought both a country estate and a ship (as well as civet cats to make perfume), he was rarely out of debt. In 1684, Defoe married Mary Tuffley, the daughter of a London merchant, and received a dowry of £3,700. With his debts and political trouble, their marriage was most likely a difficult one. It lasted 50 years, however, and together they had eight children, six of whom survived.[4]

Daniel Defoe died on 24 April 1731, probably while in hiding from his creditors.

RafterManFMJ's picture

Daniel Defoe died on 24 April 1731, probably while in hiding from his creditors.

Daniel Defoe, the first real American.

Michael's picture

There is nothing in the known universe that can stop the mega gigantic Chinese housing bubble from bursting.

RiverRoad's picture

It was always about the mess getting around to them finally.  Hang on for the ride.






Colombian Gringo's picture

The dollar died because of the horrible abuse of reserve status.

Sudden Debt's picture

The dollar died because of a hart attack caused by A ignored diabetic condition.

lasvegaspersona's picture


exorbitant (abused) privilege 

BUT as long as the world can buy gold for a mere 1560 per ounce....the dollar will be fact if gold can be had at any price it will be fine...just not as fine as it was at 300/oz

the dollar as good as (some) gold...

cranky-old-geezer's picture



the standout example is Mitt Romney’s desire to brand China as a currency manipulator for accumulating US treasuries


Currency manipulator?  For buying treasuries because we begged them to ...and still do?

Obomney's just fucking insane.

That shit right there is why asian nations are saying fuck this US dollar bullshit, we're gona fire up our own pan-asian gold-backed currency ...and spin up every nuclear warhead we have in case those American bastards wana do something about it.


Arthur Borges's picture

China has a total of 16 to 20 single-megaton single-warhead DF-5A missiles capable of reaching any target in the Continental USA plus up to another 30 single-warhead DF-21 missiles of somewhat shorter range. The rest of the deterrent covers only regional targets.

A single SSBN has 24 Trident missiles, each theoretically mirved with only eight warheads each (out of a potential 12). Which equals 192 warheads per submarines (out of a potential of 288). 

There are five to eight SSBNs on station in the Pacific 24/7, with two on hard alert.

This is without counting anthing Brit or French that might reckon into the equation.

China is not suicidal.

Zeilschip's picture

So 10 nukes on one city is better than 'just' 1 nuke? Numbers 2 to 10 are there to kill off anything that survived the first nuke??

RafterManFMJ's picture

Yea saw that episode - they got into the grain and multiplied everywhere! Kirk was going crazy!

bank guy in Brussels's picture

It was Star Trek animal cruelty - In the end they beamed them on to the Klingon ship to get rid of them.

WmMcK's picture

He did say:
"Action speaks louder than words but not nearly as often."

Tsukato's picture

 Online I found a list of "bad words" which red flag emails, texts, etc. by the authorities. I thought to myself " most people are too afraid to ever rise up against the man, but perhaps there is some passive-aggressive action that most people could be bothered to do, and could keep the g-men busy/overloaded". This list of words should be spread to everyone, and attached at the end of every message we all write online, during chat, emails, etc. Please take this list, and pass it along to everyone you know. Thanks and vaya con Dios. Here is where to find the list:

VonManstein's picture

This is a managed retreat by the western powers.. They know the game is up.. Question is will it be a stalinesque scorched earth policy of a retreat (probably)

either way China will come out of this on top.. They gonna suffer of course, but they are well positioned to inherit whats left.

I think Schiff’s analysis on china is the most accurate and logical

eclectic syncretist's picture

China's known domestic production of gold has been steadily increasing for over a decade

China's known holdings have also been steadily rising

How much have non-disclosed holdings changed? 

sitenine's picture

Homer: "The word unblowupable is thrown around a lot lately."

Dead Canary's picture

Q: Is "unblowupable" a real word?

A: Yes, unblowupable is perfectly corrumulant.

debtor of last resort's picture

Renminbi chaos is a threat to euro/dollar chaos.

Chaos theorie bitchez.

davood's picture

The correct technical term for U.S. "Treasuries" is U.S. "Toiletries."

Aziz's picture

I prefer "doesn't contain any treasure".

resurger's picture

If wallstreet knows that am short on the 30Y, ill get short squeezed on NIR of -10% ON

JPM, MS, & GS must buy US Toilet paper ....i have an 20 EMP nades (Made in USA), can you send me the physical location of their servers and remote backup servers.

blow the servers, Free The Entire Financial System



The Monkey's picture

That's a gutsy call with a lot of risk.  Even though I sold my long treasury positions last week, I would look for a panic spike (aka 2008) before going short.

Might work though - Bill Gross seems woried about his holdings, otherwise he wouldn't be pumping them on CNBC.

BorisTheBlade's picture

Treasurless treasuries, sounds like combination of treachery and forgery.

davood's picture

Benjamin Shalom Bernanke is the Greatest Threat to the Dollar.

Vendetta's picture

I thought he was just following the plan.

malikai's picture

How do you make these toiletries when they're all binary?

RafterManFMJ's picture

I wipe with the 0's as the 1's are just too sharp.

Vendetta's picture

If you wipe with the  grain of the 1's instead of against the grain, the 1's aren't so bad.

sethstorm's picture

Toiletries is the term for the RMB, not the USD.

sitenine's picture

FYI -paying attention is free.  So is the advice.

FranSix's picture

For a moment there, I thought you might have said that America's government is deeply inbred.

resurger's picture

In twenty or thrity years, I expect future monetary historians looking back on this period of history and say:


q99x2's picture

Forgot to mention the impact of computers and digital currency as regards reserve currency. The only value reserve currency status has is added value which is a cost to everyone. Reserve Currency is a trick played on sheeple. And so is a world currency. But a bitcoin type currency will transform the world to survivalble. Sooner or later either large populations or extremely small populations will utilize an open source form of currency.

Ahmeexnal's picture

I'll stick to heavy metal open source currency.

lasvegaspersona's picture


bet you NEVER once in the remainder of time your PMs for anything other that fiat...

the PMs as currency is a place I hope we never get would be dire...better to save in them and let the fiat of the moment be your currency...they are after all, ideal for those of us who borrow...they have a wonderful way of becoming easier to get over time...I personally love them...seriously

the saver in me however despises them...they are unreliable and have a way of shrinking when kept in a safe over long periods of time...

I'll cheer for long as I have a choice to use fiat for daily payments and to borrow

I'll cheer for them as long as gold is available for saving...I have a gold coin that is nearly 200 years old and it still weighs what it did when it was minted...delightful eh?  

Confused's picture

Bitcoin is being gamed as I write this. Make no mistake, guys on the street have noticed. If you think they aren't using resources to take advantage of it you are mistaken. 

mjk0259's picture

Makes sense but I been hearing this story for 50 years. If you made that chart as % of GDP it would not look so dramatic. Admittedly GDP has a large component of financial engineering and military outlays that are actually negative but even so..

And who would have said 20 years ago that the US govt could borrow at negative real interest rates as much as it wanted with both a trade deficit and a budget deficit that were 10 times higher than the 'crisis' levels of 20 years ago.


Rubbish's picture

40 yrs. ago I got my first part time job pumping gas, washing windows, checking oil and tire pressure at a chevron for $1.35 an hour. Today I fix stuff, pick up trash and clean crap for $60 an hour part time. What's the problem?


There is none, only the sheep pay in the end.....bhaaaaaah

Franktastic's picture

History will remember this time as the "deep dark n dumb ages"

falak pema's picture

the catacombs of the Squid womb and the derivatives bubbling cauldrons of the cave of  Morgan la Fée.

falak pema's picture

Ah china, a game of ping pong and they joined the club. Then they changed their grip on the ping pong bat and now they pull the plug on those who threw them the bread crumbs back in the 80s. What a turn around. 


Hemingway in a moveable feast said : a woman dies slowly and then all at once. He was drunk. And thought he was fighting a bull, like in a china shop. After he had broken the china he sobered up and said...i was going broke slowly, now its happened all of a sudden, as I have had to pay up for being a bull. 

Zeilschip's picture

China has been around over 2,000 years, which '80s are you referring to?