For the last few years, increasing numbers of commentators, including Max Keiser, have
been predicting the collapse of the US dollar, a collapse that could be closer than you think.
America currently faces a very real, impending threat -- China.
China accounts for more global trade than anyone else on the planet, and most of that
trade happens in US dollars keeping demand for the dollar high and overseas trade at
low costs.
Not only this, but China holds around 1.3 trillion dollars of US debt.
A debt accumulated by China's stockpile of dollars from international trade which they
lend back to the US at ridiculously low interest rates.
But what happens if China decide to stop playing the game?
Well, in some respects they already have.
In November 2013, The People's Bank of China announced the country's new plan.
Yi Gang, deputy governor of the Central Bank explained that, "It's no longer in China's
favour to accumulate foreign-exchange reserves."
This means they won't be buying anymore US debt.
Bad news America.
And this isn't the only move China is making.
China has plans to have about a third of its foreign trade settled in yuan, the country's
currency in 2015.
The US dollar is the world's reserve currency meaning it is held in significant quantities
by governments and institutions for foreign exchange and is most importantly used for
the majority of oil trades coined the petrodollar system which has been enforced since the 1970s
and the US has a track record of toppling any country that tries to act against it.
BUT over the past year China has been teaming up with countries around the world to dispel
trading in US dollars.
It's a game changer.
In February 2013, the US imposed sanctions restricting Iran's ability to trade with international
entities and with China being Iran's top trade partner the country has been able to flood
Iran with cheap consumer goods in exchange for oil.
China is able to take advantage of the US's sanctions with some 70 Chinese businesses
currently active in Iran which cover not only the oil sector but key trades such construction,
transportation and manufacturing.
Next up in March China and Brazil agreed to cut out the US dollar for approximately half
of their trade followed by Australia in April announcing they would be abandoning the US
dollar for trade with China, using Chinese yuan instead.
These subtle moves of course make no immediate significant change but in the long-run could
have severe consequences for the US government.
One big move has surfaced with the collaboration of BRICS - the five big emerging economies
of the world; Brazil, Russia, India, China and South Africa.
The countries have come together to work on a new $50bn development bank to rival the
World Bank and IMF.
The project aims to represent part of a "new paradigm" reflecting a shift in economic power
away from the west and provide initial funding for infrastructure projects worth $4.5tn.
Questions on the funding and location of this new bank are still pending.
Analysts have predicted that China will hold dominance over the other developing countries
but why should this be the case?
Well, simply they make more global trade and import more oil across the world than anyone
else, PLUS there economy is currently about 20 times the size of South Africa's and four
times Russia or India.
They are big players when it comes to global economic power.
The most recent move comes from Russia's annual economic meet in St Petersburg at the beginning
of May 2014 where they announced that Gazprom, the Russian state-backed gas giant has signed
a $400 billion, 30 year deal to supply gas to China.
Trade is predicted to be carried out directly between the countries respective currencies,
bypassing the US dollar entirely.
All this goes back as far as 2011 when China and Japan agreed to start directing trading
of their currencies and similar agreements involving Germany, Chile and the United Arab
Emirates have all emerged since.
China has spent years accumulating US dollars to keep the value of it up and keep the yuan
down enabling cheap international trade.
It seems they've changed their mind.
China is chipping away at the dollar's role as the world's reserve currency but what will
they stockpile instead?
The signs point towards gold.
How much gold China has is unknown but Bloomberg reported that Switzerland sent more than 80
percent of its gold and silver bullion and coin exports to Asia back in January 2014.
According to a column on TheGoldStandardNow.org, China surpassed the US five years ago in gold
production and five years from now it will own more gold than the US Federal government.
The Chinese government has recently removed all restrictions on personal ownership of
gold; legalized domestic gold exchange traded funds, is currently purchasing 100% of domestic
gold mine production; has imported over 750 tons of gold (27% of global output) in the
last 12 months; publicly states its intention to add 1,000 tons per years to its central
bank gold reserves; and is buying major stakes in foreign gold mining companies.
So could China kill the US dollar?
Well, the low interest rates that the US currently enjoy from being the world's reserve currency
could rise significantly if other countries no longer take part in trading with US dollars.
Or, alternatively, if China no longer seems content to hold onto the 1.3 trillion dollars
of US debt it holds.
With interest rates currently standing at a unfathomable low 2.477% due to being lent
money from other countries on the cheap, a rise to just 6% would mean the federal government
would be paying out around 3 trillion dollars a year just in national debt.
But the biggest issue lies in the 441 trillion dollars sitting in interest rate derivatives,
an amount of money bet on the movement of interest rates, which if it continues to soar
from moves like this from China big trouble will brew for the US.
The four big banks of America; JP Morgan Chase, Citibank, Bank of America and Goldman Sachs
hold around 40 trillion in derivatives each exposing them to devastation should a shift
happen.
The future depends largely on China and China's agreement to hold US debt and trade in US
dollars worldwide.
If the world moves away from trading in US dollars, the demand will disappear and the
interest rates will explode the entire US financial system into chaos.