xiaohua

USD out. RMB in. September 28, 2014

It’s happening now. The pace will pick up. It’s a matter of when, not if. When it’s finally here, Americans will find them poorer and the U.S. federal government will run out of place to borrow.

Have you heard of ‘NCO1: as in New Currency Order #1.

I bet you haven’t. It is okay. About 99.9999% of Americans do not know what it is. So, don’t get too antsy about it. Nothing is imminent just yet.

So, if you want to skip the rest of what I have to say, be my guest. Go play with your video games or update your Facebook pages on your iPhone and waste your life away.

But, if you are curious, you might want to stay around, check it out and see for yourself.

Of course, I am talking about U.S. dollar losing its reserve currency status of the world.

As of now, about 61% of the foreign currency reserves on the balance sheets of central banks in the world are in U.S. dollar; mostly in the forms of US Treasury notes and bonds. Since US economy used to account for 25% of the world economy, 61% says a lot about the importance of the greenbacks.

Well, that ratio was about 71% at the turn of the century; about 14 years ago and the pace of decline is accelerating.

The reasons are very simple:

1. Foreign countries are sick of listening to U.S. government and Wall Street bankers telling them what to do.

2.   Diminishing purchasing power of the U.S. dollar because U.S. Federal Reserve has cranked up the printing press and significantly increased the supply of the U.S. dollar in the world.

3.  The Fed has no plausible exit strategy to deal with this unprecedent monetary experiment. When economy starts to pick up in America, the excessive liquidity in the financial system will push the economy into overdrive. Inflation will come. Interest rate will rise and the potential damage to the world will be unmeasurable.

According to the latest data, as many as twenty three countries have started accumulating Chinese renminbi in their central banks. There are probably seventeen more countries which have some renminbi on their books but decide to keep the matter to themselves for various reasons that I don’t know of. Maybe they are afraid of America. Maybe they want to wait and make sure China won’t implode from within. They may think that America will wise up and reverse course of being the jerk around the world in many aspects of people’s life.

Well, the  U.S. dollar is still the reserve currency in the world and many countries, including China, still depend on U.S. dollars for international trades; particularly when it comes to oil because America told Saudi Arabia and other Arabic countries many decades ago that U.S. government will keep the royal families in power, silence on their human rights recordsand supply them with the most advanced weaponsin the world in exchange for settling crude oil trades in the U.S. dollars.

Some economists believe that the Chinese yuan or Renminbi is destined to take over U.S. dollar as the reserve currency of the world particularly after the executive order NCO1 was announced by China. But, I don’t think China wants that headache and all China wants is to weaken the  U.S. dollar and provide an alternative reserve currency to minimize the danger of currency hegemony.

Well, bilateral trades of many countries with China has been settled in Renminbi without having to resort to U.S. dollars.

One thing I don’t expect to happen is for certain countries to abandon the U.S. dollar any time soon. This will for sure keep the U.S. dollar in high demand. When Saudi is tired of the U.S. or Saudi’s royal family is chased away from power, then the demise of the U.S. dollar will be near and the day of the redbacks will be upon us.

Time will tell if the world abandons the U.S. dollar. But things seem to be heading that way.