Global Response to USD

June 6, 2015

By: Kelly Diamond, Publisher

The U.S. dollar has been in more near-death situations than most toddlers. I’m rather amazed at its ability to stick around. I am reluctant to attribute it to sound monetary policy as much as dumb luck considering US success is somewhat based upon the failures of others. At one point, for example, Japan was poised to dominate the global economy in the 1980’s. Then it plummeted into its dark decade.

The Euro was supposed to take the world by storm. But the only ones that got rained on were the member nations of the EU, with a series of bailouts that are continuing to this day.

And now there’s China. It is certainly the most aggressive player out there. But China’s market is unstable. It’s undergone a considerable drop (10.6% to be exact) in its equity market. Some of it has to do with the novice level of fund managers handling these accounts, but while what is happening in Greece is relevant, this is what happened in China in that same month of June:

“A dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value — equivalent to about 10 times Greece’s gross domestic product last year,” reports Bloomberg.

The implications of this aren’t yet fully known, but certainly will adversely affect much of the middle and working class of China.

There are a few things that need clarification:

1. Currency manipulation: It’s not something only “them commies” do in China. It’s the default of any and every country that has fiat currency. It is government or centrally controlled currency, which means that they inflate or deflate on the political whims of whomever is in charge of the central banks. Holding out on raising or dropping interest rates, printing money or not is all manipulation, and all central banks do it.
2. There doesn’t have to be just ONE reserve currency in the world, and perhaps diversification would do the world some good! Having the Euro, Japanese Yen, US Dollar, British Pound, and the Chinese Yuan all as various reserve currencies offers more choices for parking wealth, and with choices comes a more stable economy.
3. It’s worth mentioning that the status of reserve currency isn’t tied to GDP, nor necessarily value. It’s tied to practice. Is the currency used in international trade, and to what extent? And, where are people and countries storing their money? When one country’s currency becomes so unstable they turn to other currencies, that alternative currency becomes their reserve. Much like the blue dollar in Argentina.
4. Lastly, the reserves aren’t what you think. They are debts. They aren’t supposed to be, but that’s what they are. I mean, right now every dollar in circulation is backed by a political promise, and the threat of violence against those that won’t take us at our word.

Countries Are Backing Away from the USD

Two things are at play here: 1. The US and her foreign policies are a point of contention and resentment around the world. FATCA alone is enough to trigger many banks to just reject American customers; and 2. The US monetary, economic, and fiscal policies are sketchy at best. While the US remains a large basket that is probably capable of holding a significant amount of eggs, that she insists upon being so damn reckless and antagonistic with that basket is an issue for many counties.

Who better than Egypt to know what adverse effects of holding US reserves and watching their commodity prices go haywire because the US couldn’t get its own monetary ducks in a row? This is the problem with one reserve currency in very simple terms. The vulnerability economies have around the world is understood, and the leverage the US has with that has grown tiresome.

So, as I wrote last September in “Working Around the US”, Russia and China already entered agreements on ways to base their trade in Yuan rather than the USD. Australia, Brazil, India, and South Africa are also countries that are looking to work around not just the US dollar but the IMF and Euro. Germany, France and the UK are also entertaining ways in which to circumvent the US dollar.

And it’s not all just talk either. They are putting their money where their proverbial mouths are:

“Since November 2013, when China held its largest holdings of U.S. debt, they have shed about $53.3 billion worth of U.S. Treasuries – about 4% – to $1.26 trillion. Russia has dumped $109.2 billion in U.S. debt to cut back its holdings to $66.5 billion – more than 60% – since that number peaked in July 2010.” (Source: ETF Daily News)

BRICS Development Bank, Now New Development Bank (NDB)

The acronymic countries – Brazil, Russia, India, China, and South Africa – aligned themselves to create a financial institution that could serve as a cooperative alternative to the US dollar when trading internationally.

This is a direct result of marginalizing – or better put, not recognizing – the growth amongst these key developing countries. To put it into perspective these 5 countries comprise ONE-FIFTH of the global economy, yet only carry 11% of the votes in the International Monetary Fund.

So they created this bank to fulfill two purposes:

1. Each of the five countries put in $10 billion dollars, to create a $50 billion account meant to fund various infrastructure and sustainable development projects amongst the 5 countries. Smaller countries will be allowed to buy in and borrow too later down the line.
2. There is a separate account called the Contingency Reserve Arrangement (CRA), to which China contributed 41% of the $100 billion amount, 18% from Brazil, India, and Russia, and 5% from South Africa. This account is “meant to provide additional liquidity protection to member countries during balance of payments problems,” as the Washington Post puts it.

This certainly does mean a huge change for the West, especially the IMF and World Banks, and even more specifically the US. But is this change just a normalization of sorts? The Bretton Woods Agreement seems a bit outdated given its stated purpose. What’s more that entire purpose was predicated on a gold backed dollar… something we don’t have anymore.

The NDB is an alternative, but whether it will remain a solvent or functional one remains to be seen. As is the case with many international cooperatives, such as the EU, when the goals and ethics of member countries differ enough, that will inevitably chip away at any potential success they could’ve had together.

These efforts to get away from the US dollar isn’t why the US dollar is precariously suffering. You don’t need to be a reserve currency to have sound money. It is an indication that more of the world disapproves of US fiscal and monetary policies, as well as her overall foreign policies. But it is those policies combined that explain why the US dollar is, as I’ve said before going from worthless to imaginary.