There's no doubt that the American dollar remains the most desired major currency on the planet. And, over the past year, the dollar has actually strengthened substantially despite predictions to the contrary. Yet, current strength is no excuse for complacency. In fact, the forces arrayed against the dollar have been increasing as have the tactics being implemented to end dollar dominance.
It is hard to imagine that another currency could upend the Greenback at this moment. As many economic problems as we have, other nations seem to have more. The Euro is struggling and an exit by Greece would only add to the weakness. Russia is in dire straights albeit surviving on grit. China has a serious debt problem and is internally far weaker than most can imagine. The Middle East has to deal with lower oil prices, threatening the social spending that has supported stability. While growth is anemic in America, at least there is growth. So, on the surface, the expectation is for the dollar to remain strong and perhaps strengthen further.
Beneath the surface, however, there is a great deal of activity that is troubling. The reason is that dollar hegemony is built on a few simple foundational supports.
First, the dollar works because the world wants it to work. It has been useful for global stability over the past few decades. The major nations of the world needed a common currency for global trade. At least since World War II and even before, that currency has been the U.S. dollar.
Second, the petrodollar has guaranteed demand for the dollar as long as there was demand for oil. This dates back to an agreement struck in the 1970s between the Nixon administration and Saudi Arabia. We agreed to protect the Kingdom and buy their oil. They agreed to sell only for dollars and to invest excess earnings into U.S. Treasury bonds.
Third, American economic leadership has been seen as a global asset rather than a liability. Our stable growth, dominance of the global financial system, relatively low debt (at least compared to the size of our economy and least until recently) have been a powerful combination.
Fourth, American dollars were deemed important because so many nations held a large percentage of their reserves in dollars. China, for example, has held well over $1 trillion of American dollars, their largest holding in nearly $4 trillion in total reserves. As a result, many believe the Chinese would be loath to do anything that might hurt their largest holding.
One by one, either by our own incompetence or the strategic planning of our adversaries, the props under the dollar have come under attack. This leaves open the serious risk of a sudden collapse.
Here are some examples of efforts to undermine the dollar's status:
1. Putin's plan. We've written extensively about this multiple times. And, recent headlines continue to confirm the fact that Russia's leader wants to see the dollar fail. The most recent move is to tie Russian debt to Chinese Yuan.
Consider this from June 6:
F. William Engdahl June 6, 2015
Russia is about to take another major step towards liberating the Ruble from the Dollar System. Its Finance Ministry just revealed it is considering issuing Russian state debt in Chinese Yuan. That would be an elegant way to decouple from the dependence and blackmail pressures from the US Treasury financial terrorism operations while at the same time strengthening the bonds between China and Russia–Washington's worst geopolitical nightmare.
Russian Deputy Minister of Finance, Sergei Storchak, announced that his ministry is making a careful study of what would be required to issue Russian bonds denominated in Chinese Yuan. The latest news is part of a long-term strategy between Russia and China that goes at the heart of American hegemony—the role of the dollar as the leading world central bank reserve currency….
What all this indicates is that Russia and China are carefully planning a long-term strategy of getting out from dependence on the US currency, something that, as the US sanctions last year revealed, make both countries vulnerable to US currency wars of devastating impact.
2. China's plan. We've also covered China's plans to internationalize their currency in an effort to challenge the dollar. It is important to understand that China is not a monolith. There are serious elements who desire to stay under a dollar-based global financial system. But, powerful elements in the Peoples Liberation Army (PLA) are clearly intent on collapsing the dollar as a means of economic warfare. And, elements in the government are convinced that the only way to relieve the serious domestic debt problems is to globalize the currency and get foreigners to share the debt load. These elements envy America's ability to internationalize debt. When combined with the warrior approach of the PLA and at the prodding of Putin, it appears that China is finally ready to take their currency (known as Yuan or Renminbi/RMB) to a new level at the expense of the U.S. dollar. That attitude is reflected in the billboard ad we included at the top of this post.
A good recap of moves underway by China (and some of the reasons for them) was provided by Sean Brodrick of The Oxford Club (excerpted here):
Sean Brodrick, Resource Strategist, The Oxford Club March 27, 2015 : Issue #2508
Circle September on your calendar. That's when the world you know might change forever. And not in a good way.
September is when China plans to roll out the China International Payment System (CIPS). The new system will make it easier to process international payment transfers in China's currency, the yuan (or renminbi).
As a result, the yuan will officially become a global trading currency. But the real goal here is brutally simple: China wants to dethrone the U.S. dollar as the world's international reserve currency.
It won't happen right away. This is just one of a series of gates China is opening… unleashing forces that will become an irresistible flood of change.
Right now, the system to process cross-border payments in yuan is clunky. But the CIPS will use the same coding system as the other big international payments system, SWIFT. That's short for the Society of Worldwide Interbank Financial Telecommunications…..
As I said, China isn't the only one fed up with U.S. dollar hegemony. The Bank of Russia and People's Bank of China have already inked numerous agreements to trade completely outside the U.S. dollar.
China is signing treaty after treaty with other countries around the globe to clear trade deals in yuan.
Use of the currency is already soaring. The yuan became one of the world's top five payment currencies in November, overtaking the Canadian dollar and the Australian dollar.
In 2014, yuan payments jumped by 102%. They increased by 20.3% in December alone.
China is pushing for the International Monetary Fund (IMF) to endorse the yuan as a global reserve currency alongside the dollar and euro.
Yi Gang, vice governor of the People's Bank of China, told reporters that the country is "actively communicating" with the IMF on the possibility of including the yuan in the basket of the Special Drawing Rights (SDRs)…..
Meanwhile, Russia and other countries on our "frenemies" list have to watch the U.S. wield the mighty U.S. dollar like a bludgeon.
By the way, that list just happens to include the oil sheiks of OPEC.
Friendships forged in oil and mutual interest are unraveling. (In fact, my latest research has confirmed that a Saudi-led coalition is currently working on a plan that could devastate our economy… U.S. stocks… and especially the dollar. For that story, click here.)
The point is, if there were a way to make Uncle Sam stumble – AND improve their own international standing – you know many countries would do it. And why stop there? Heck, they'd probably like to kneecap the ol' SOB, that's what they'd like to do…
Which brings us back to China's new international payments system. This, along with the other power plays the country is making in the high-stakes game of global influence, is setting the mighty dollar up for a tremendous fall.
China will start using CIPS in September or October. If that goes well, the full rollout starts early next year.
Now ask yourself…
All those countries that stockpile dollars for international trade… what if they don't need so many dollars anymore? What will they do then?
We might see dollars dumped like there's no tomorrow.
The dollar's global dominion is coming to an end. It's time to stop hoping it won't happen and instead start preparing for it.
3. Economic jihad. Bin Laden understood the need to undermine the American economy. ISIS understands this as well and there is a call for economic jihad to displace the dollar. While the threat seems toothless at the moment, what happens if ISIS captures significant additional Middle Eastern oil fields outside Iraq?
4. Domestic arrogance. Amazingly, despite all of the above, most policymakers in Washington continue to promote policies that seem destined to destroy our economic strength. Ever-expanding deficits and burgeoning debt have, to date, been seemingly ignored in relation to the dollar. Most understand that this is true only because America has "the cleanest dirty shirt in the laundry." In other words, other nations have greater issues at work. In addition, as we've discussed, there are historical fundamentals that underpin dollar strength. But this is no excuse for arrogance. We should count our blessings and look for ways to strengthen rather than flaunt our position. Yet, people like Paul Krugman have built a career stating that deficits don't matter. That may seem true, but only until it isn't. Krugman suggested that the Treasury mint and issue Trillion-Dollar coins in a scheme to massively inflate the money supply. He seems certain that it would work because the whole world loves dollars, I suppose. Even though the idea was shot down a few years ago, it seems to be resurfacing. Perhaps he missed that Zimbabwe attempted such a scheme, in their case printing $35 quadrillion. Only recently did they admit the tremendous failure.
Charles Ortel has looked at American policies and concluded:
"Instead of paring a bloated, and woefully ineffective maze of Federal Government bureaucracies, the Obama administration must be contemplating extraordinary solutions in the event the worst happens and a ‘crisis-in-confidence' results, again threatening the U.S. and global financial systems. The Obama administration seems sure to continue ruinous policies to the very end, we speed towards a day when the U.S. dollar will be dethroned as primary reserve currency for the world. When the Federal Reserve System belatedly raises U.S. dollar interest rates, all unprepared Americans will lose, and some losses will be mammoth." Read more at Washington Times
5. IMF/UN/Globalization. Even the global institutions we funded have turned against the dollar, at least to a certain extent. They see the opportunity to relieve America of the responsibility of controlling the world's currency, substituting their control. Isn't that nice? Sort of like us creating the Internet and then handing control to an international body. Or, building the Panama Cana and then giving up control. The goal of the global elite is globalization, not a preservation of any national sovereignty, even America's. The UN wants to control the world's currency and so does the IMF.
From Zero Hedge:
by Tyler Durden on 12/17/2014
"The Federal Reserve, the U.S. government and the dollar are as expendable to the elites as any other economic or political appendage. And it can be replaced at will with yet another illusory structure if this furthers their goal of total centralization. This has been done for centuries, and I fail to see why anyone would assume that globalists would change their tactics now to preserve the dollar system. They call it the ‘New World Order,' but it is really the same old-world monetary order out of chaos that has always been exploited. Enter the IMF's old/new world vision….
Ultimately, the death of the dollar will be hailed in the mainstream as a ‘good and necessary thing.' They will call it ‘karma.' They will call it ‘progress.' They will even call it ‘decentralization"'and a success for the free market. But it will not feel like a positive development for the American public, who will suffer greatly as the dollar crumbles. Only those educated in the underpinnings of shadow banking will understand the whole thing is a charade designed to hide the complete centralization of sovereign economic governance into the hands of the globalists, using the IMF and BIS as ‘fiscal heroes,' saving the world from a state of economic destruction the elites themselves secretly created."
6. A move to gold. While many Americans tend to downplay the importance of gold, Central Banks around the world have been stockpiling it. Russia has rushed to gold. China secretly has been accumulating huge quantities. And, those governments that own gold held in the United States have been demanding we send it back to them. The best question is WHY? The answer is that other nations recognize that paper dollars may not be permanent money. Gold has been money for millennia.
When you consider all of this, you need to ask, "What would happen in a sudden dollar attack or collapse?" We've discussed this before. Rather than reprint it all here, take a look at our previous post on this subject. Basically, Americans are at risk of having their savings placed in the middle of a global economic war.
It is important to recognize that there are multiple cross currents and a few paradoxes at work. The very nations who might most want to see the dollar undermined may also want to have a weaker currency to strengthen exports and domestic growth potential. So, we can't be certain of the timing or whether or not any plot might prove effective. But we can be certain of the intention.
We do have good news. The State of Texas has established a bullion depository and this has great potential to not only protect Americans but also serve as a deterrent against an attack.
Even Russia Today (RT) has taken notice. Here are excerpts:
June 17, 2015 20:28
Texas is planning to build its own state-controlled depository and wants its gold back from New York State. The Lone Star state will repatriate its $1 billion in gold bullion. Texas Governor Greg Abbott signed House Bill 483 into law last Friday.
"With the passage of this bill, the Texas Bullion Depository will become the first state-level facility of its kind in the nation, increasing the security and stability of our gold reserves and keeping taxpayer funds from leaving Texas to pay for fees to store gold in facilities outside our state," Greg Abbott said on Friday. The location of the future depository is still unknown.
According to the new legislation, neither the federal government nor any other entity would be able to demand the gold back once it arrives in Texas.
"The depository in the case of receiving notice of a purported confiscation, requisition, seizure, or other attempt to control the ownership, disposition, or proceeds of a withdrawal, transfer, liquidation, or settlement of a depository account … may not recognize the governmental or quasi-governmental authority, financial institution, or other person acting as the lawful successor of the registered holder of a depository account in question," the law states.
The bill was suggested by two Republican members of Texas House of Representatives: Giovanni Capriglione and Lois W. Kolkhorst. Texas thus prevents an executive order in the style of Executive Order 6102 of April 5, 1933, which obliged people to give their gold bullions and coins to the Federal Reserve System.
Capriglione told the Texas Newspaper Star-Telegram that "…when I first announced this, I got so many emails and phone calls from people literally all over the world who said they want to store their gold … in a Texas depository."
"People have this image of Texas as big and powerful … so for a lot of people, this is exactly where they would want to go with their gold," he added. …
A second Texan Republic?
That is the second attempt of Giovanni Capriglione to establish the depositary in Texas. The first one was made in 2013 but it was not successful.
"The lack of faith in central bank trustworthiness is spreading," the financial blog ZeroHedge wrote Sunday on the reasoning behind the move.
"There are precisely two important reasons. One involves distrust in the current storage system. The second threatens the paper money system as a whole."…
"When people in multiple states actually start using gold and silver instead of Federal Reserve Notes, it would effectively nullify the Federal Reserve and end the federal government's monopoly on money," the free market think tank Mises Institute wrote on Monday.
Texas is not the first depositor of the Federal Reserve System that wants its gold back. For instance, in 2013 Germany wanted to take away its gold from the Federal Reserve System but the answer was negative. The Federal Reserve System explained that it will take seven years – until 2020 – to fulfil the transaction.
It is unclear at the moment how the actual transportation of the gold will be executed. There hasn't yet been reaction from the Wall Street.
We supported this gold bill strongly as it would put Texas (and really all Americans) in a position to fight back in the case of a dollar attack. Americans will have an alternative if ever needed. We do not advocate abandoning the U.S. dollar, but do encourage alternatives and a thoughtful approach. We hope that the United States will get our fiscal house in order.
Gio sent me a special note of thanks for that support shortly after the gold bill was signed into law. We pushed the bill from inception in 2012, in many speeches across the country, and also in our book Game Plan (page 223). Way to go Gio! Now let's see what Texas does with this powerful opportunity.