Reserve Currency : Russia and China have own reservations
Russia and China started backing out of U.S. bonds as a from of reserve currency shortly after the Great Recession began. This year I predicted that the conflict between the U.S. and Russia over Crimea would lead to Russia taking a much more aggressive role in offloading the dollar as the world’s reserve currency. The Crimean conflict would become significant economic news for the United States because U.S. pressure against Russia would unite Russian and China in an effort to unseat the U.S. dollar as the world’s trade currency once and for all:
China and Russia have been the largest backers of U.S. debt, but it is unlikely either are inclined to buy U.S. bonds right now. Both are more than likely getting out of U.S. bonds, and that will make things shakier for the U.S. Russia will do its best to diminish the U.S. dollar as the world’s international trade currency. (“Strong Headwinds Face Global Economy“)
Reserve currency starting global U-turn
This, I said, would build toward a stormy autumn for the global economy. Now the message is clear beyond the pages of The Great Recession Blog as comes directly out of Russian mainstream news sources:
The US dollar and the US Treasuries are no longer trustworthy forcing Russia and China to look for other financial instruments, other currencies and other ways to safeguard the value of their currency reserves. Needless to say, if China and Russia decide to simultaneously diversify their currency reserve holdings, selling their holdings of dollar-denominated assets, the mere announcement of such decision will lead to a severe depreciation of the dollar and of US Treasury Bonds. Of course, the Fed can monetize (i.e. buy with freshly printed dollars) all excess bonds in order to keep the price up, but such a desperate move will only postpone the inevitable scenario in which Washington will have to chose between an outright default and an accelerated hyperinflation of the US currency. (Read more at: Voice of Russia)
Russia and China have felt unsettled for a long time over the U.S. dollar being the global reserve currency because… 1) It enables the U.S. to sell its debt at more attractive interest than any other nation enjoys because of the demand for U.S. dollars, giving the U.S. more economic power and recovery ability than any other nations have; 2) the U.S. economy triggered the recent global economic collapse, since which the production of U.S. dollars has increased at an historically monumental rate, which raises serious questions about the dollar’s stability as a global currency. The dollar when it was well managed helped make the U.S. the superpower that it became.
You may have noticed that Benjamin Franklin is looking a little blue lately. Others are noticing it, too. The dollar is not the stable greenback standard it once was. The change in the reserve currency’s color casts a certain ironic hue over Franklin’s face. He looks like he’s choking on himself.
Additional reading on the dollar as the global reserve currency:
[amazon_enhanced asin=”1591845564″ /][amazon_enhanced asin=”0071784888″ /][amazon_enhanced asin=”0691158738″ /]
Leave a Reply