Courtesy of Jesse’s Café Américain
China is proposing a new reserve currency regime less dependent on the dollar, along with other BRIC countries, and the US and its financial allies in the status quo will resist change because it is in their short term interest to do so.
China can take ‘pre-emptive’ action by diversifying its holdings ahead of any change, and there are some indications that it is doing so already. But while the dollar is the prime medium of international trade, China must buy dollars to support its mercantilist industrial policy. Its own alternative is to boost its domestic consumption and ‘grow a middle class’ which in some minds erodes the power of the narrow political elite which rules the country.
The US needs to stand firm in some areas, and acquiesce in others. Standing firm with regard to the yuan being free of a peg and currency controls is one area that ought to have been sine qua non when first Clinton and then Bush gave China its openings as a preferred trading partner even while maintaining de facto industrial subsidies through its currency and markets.
The first line of negotiation will be to agree on a dollar substitute, which will probably be the SDR. The US will resist and delay this as long as is possible.
The fallback position then will be the composition of the SDR, and a long phasing of the change in the primacy of the dollar and a few G7 currencies. China will seek more diversity and the inclusion of gold and silver, which is anathema to the Wall Street banking cartel.
The US must change or face more seismic, involuntary dislocations. As Britain surrendered its far flung colonial Empire, so the US must downsize its financial sector, restore balance to its own economy and its place in the world economy, and relinquish the primary reserve currency status which has become a powerful instrument of manipulation by the Wall Street banking cartel.
The dollar is the last, the mother of bubbles. Few understand this even now.
The epic US credit expansion was enabled by the preferred position of US debt instruments as the reserve currency of the world. The bond and the dollar are the absolute foundation of that debt pyramid.
Those days are undeniably over.
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