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Page added on January 11, 2018
Will The Dollar Survive The Rise Of The Yuan And The End Of The Petrodollar?
This might seem a frivolous question, while the dollar still retains its might, and is universally accepted in preference to other, less stable fiat currencies. However, it is becoming clear, at least to independent monetary observers, that in 2018 the dollar’s primacy will be challenged by the yuan as the pricing medium for energy and other key industrial commodities. After all, the dollar’s role as the legacy trade medium is no longer appropriate, given that China’s trade is now driving the global economy, not America’s.
At the very least, if the dollar’s future role diminishes, then there will be surplus dollars, which unless they are withdrawn from circulation entirely, will result in a lower dollar on the foreign exchanges. While it is possible for the Fed to contract the quantity of base money (indeed this is the implication of its desire to reduce its balance sheet anyway), it would also have to discourage and even reverse the expansion of bank credit, which would be judged by central bankers to be economic suicide. For that to occur, the US Government itself would also have to move firmly and rapidly towards eliminating its budget deficit. But that is being deliberately increased by the Trump administration instead.
Explaining the consequences of these monetary dynamics was the purpose of an essay written by Ludwig von Mises almost a century ago. At that time, the German hyperinflation was entering its final phase ahead of the mark’s eventual collapse in November 1923. Von Mises had already helped to stabilize the Austrian crown, whose own collapse was stabilized at about the time he wrote his essay, so he wrote with both practical knowledge and authority.
The dollar, of course, is nowhere near the circumstances faced by the German mark at that time. However, the conditions that led to the mark’s collapse are beginning to resonate with a familiarity that should serve as an early warning. The situation, was of course, different. Germany had lost the First World War and financed herself by printing money. In fact, she started down that route before the war, seizing upon the new Chartalist doctrine that money should rightfully be issued by the state, in preference to the established knowledge that money’s validity was determined by markets. Without abandoning gold for her own state-issued currency, Germany would never have managed to build and finance her war machine, which she did by printing currency. The ultimate collapse of the mark was not mainly due to the Allies’ reparations set at the treaty of Versailles, as commonly thought today, because the inflation had started long before.
The dollar has enjoyed a considerably longer life as an unbacked state-issued currency than the mark did, but do not think the monetary factors have been much different. The Bretton Woods agreement, designed to make the dollar appear “as good as gold”, was cover for the US Government to fund Korea, Vietnam and other foreign ventures by monetary inflation, which it did without restraint. That deceit ended in 1971, and today the ratio of an ounce of gold to the dollar has moved to about 1:1310 from the post-war rate of 1:35, giving a loss of the dollar’s purchasing power, measured in the money of the market, of 97.3%.
True, this is not on the hyperinflationary scale of the mark — yet. Since the Nixon shock in 1971, the Americans have been adept at perpetuating the myth of King Dollar, insisting gold now has no monetary role at all. By cutting a deal with the Saudis in 1974, Nixon and Kissinger ensured that all energy, and in consequence all other commodities, would continue to be priced in dollars. Global demand for dollars was assured, and the banking system of correspondent nostro accounts meant that all the world’s trade was settled in New York through the mighty American banks. And having printed dollars to ensure higher energy prices would be paid, they would then be recycled as loan capital to America and her friends. The world had been bought, and anyone not prepared to accept US monetary and military domination would pay the price.
That was until now. The dollar’s hegemony is being directly challenged by China, which is not shy about promoting her own currency as her preferred settlement medium. Later this month an oil futures contract priced in yuan is expected to start trading in Shanghai.1 Only last week, the Governor of China’s central bank met the Saudi finance minister, presumably to agree, amongst other topics, the date when Saudi Arabia will start to accept yuan for oil sales to China. The proximity of these two developments certainly suggest they are closely related, and that the end of the Nixon/Saudi deal of 1974, which created the petrodollar, is in sight.
Do not underestimate the importance of this development, because it marks the beginning of a new monetary era, which will be increasingly understood to be post-dollar. The commencement of the new yuan for oil futures contract may seem a small crack in the dollar’s edifice, but it is almost certainly the beginning of its shattering.
America’s response to China’s monetary maneuvring has always been that of a nation on the back foot. For the last year, the yuan has been rising against the dollar, following President Trump’s inauguration. Instead of responding to China’s hegemonic threat by increasing America’s role in foreign trade, President Trump has threatened all and sundry with trade restrictions and punitive tariffs. It is a policy which could not be more designed to undermine America’s global economic status, and with it the role of the dollar.
In monetary terms, this leads us to a further important parallel with Germany nearly a century ago, and that is the contraction of the territory and population over which the mark was legal tender then, and the acceptance of the dollar today. The loss of Germany’s colonies in Asia and Africa, Alsace-Lorraine to France, and large parts of Prussia to Poland, reduced the population that used the mark without a compensating reduction of the quantity of marks in circulation. Until very recently, most of the world was America’s monetary colony, and in that context, she is losing Asia, the Middle East and some countries in Africa as well. The territory that offers fealty to the dollar is definitely contracting, just as it did for the German mark after 1918, and as it did for the Austro-Hungarians, whose Austrian crown suffered a similar fate.
The relative slowness of the dollar’s decline so far should not fool us. The factors that led to the collapse of the German mark in 1923 are with us in our fiat currencies today. As Mises put it,
If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely.
Updated for today’s monetary system, this is precisely how the American government finances itself. Instead of printing notes, it is the expansion of bank credit, issued by banks licensed by the government with this purpose in mind, that ends up being subscribed for government bonds. The same methods are employed by all advanced nations, giving us a worrying global dimension to the ultimate failure of fiat currencies, whose only backing is confidence in the issuers.
Now that America is being forced back from the post-war, post-Nixon-shock strategy of making the dollar indispensable for global trade, the underlying monetary inflation of decades will almost certainly begin to be reflected in the foreign and commodity exchanges. There is little to stand in the way of the global fiat monetary system, led by the dollar, to begin a breakdown in its purchasing power, as prophesied by Mises nearly a century ago. Whether other currencies follow the dollar down the rabbit hole of diminishing purchasing power will to a large extent depend on the management of the currencies concerned
How a Fiat Currency Dies
The last thing anyone owning units of a state-issued currency will admit to is that they may be valueless. Only long after it has become clear to an educated impartial monetary observer that this is the case, will they abandon the currency and get rid of it for anything while someone else will still take it in exchange for goods. In the case of the German hyperinflation, it was probably only in the last six months or so that the general public finally abandoned the mark, despite its legal status as money.
Mises reported that throughout the monetary collapse, until only the final months, there persists a general belief that the collapse in the currency would soon end, there always being a shortage of it. The change in this attitude was marked by the moment people no longer just bought what they needed ahead of actually needing it. Instead, they began to buy anything, just to get rid of the currency. This final phase is what Mises called the crack-up boom, though some far-sighted individuals had already acted well ahead of the crowd. Both these phases are still ahead for the American citizen. However, we can now anticipate how the first is likely to start, and that will be through dollars in foreign hands being replaced for trade purposes with the yuan, and then sold into the foreign exchanges.
Once the process starts, triggered perhaps by the petrodollar’s loss of its trade settlement monopoly, it is not beyond the bounds of possibility for the dollar to initially lose between a third and a half of its purchasing power against a basket of commodities, and a similar amount against the yuan, which is likely to be managed by the Chinese to retain its purchasing power. It will be in the interests of the Chinese authorities to promote the yuan as a sounder currency than the dollar to further encourage foreign traders to abandon the dollar. From China’s point of view, a stronger yuan would also help ensure price stability in her domestic markets, at a time when countries choosing to remain on a dollar-linked monetary policy will be struggling with rising price inflation.
There then emerges a secondary problem for the dollar. A fiat currency depends in large measure for its value on the credibility of the issuer. A weakening dollar, and the bear market in bonds that accompanies it, will undermine the US Government’s finances, in turn further eroding the government’s financial credibility. This will be happening after an extended period of the US Government being able to finance its deficits at artificially low interest rates, and is therefore unprepared for this radical change in circumstances.
As the dollar’s purchasing power comes under attack, lenders, whether they be those with surplus funds, or their banks acting as their agents, will increasingly take into account the declining purchasing power of the dollar in setting a loan rate. In other words, time-preference will again begin to dominate forward rates, and not central bank interest rate policy. This will be reflected in a significantly steeper yield curve in the bond market, forcing borrowers into very short-term financing or using other, more stable monetary media to obtain capital for longer-term projects. This, again, plays into the yuan becoming the preferred currency, possibly with a rapidity that will be unexpected.
The US Government is obviously ill-equipped for this drastic change in its circumstances. The correct response is to eliminate its budget deficit entirely, and refuse to bail out failing banks and businesses. Bankruptcies will be required to send surplus dollars to money heaven and therefore stabilise the dollar’s purchasing power. A change in the Fed’s attitude towards its banks and currency is, however, as unlikely as that of the Reichsbank subsequent to the Versailles Treaty.
Therefore, it follows that capital markets in dollars will inevitably be severely disrupted, and market participants will seek alternatives. Remember that the dollar’s strength has been based on its function in trade settlement and its subsequent deployment as the international monetary capital of choice. Both these functions can be expected to go into reverse as the trade settlement function is undermined.
Whether China will be tempted to employ the same methods in future to support the yuan as the Americans have during the last forty-three years for the dollar, remains to be seen. It may not be a trick that can be repeated. There is a great danger that a significant fall in the dollar will lead to global economic stagnation, coupled with escalating price inflation, affecting many of China’s trading partners. China will want to insulate herself from these dangers without adding to them by going for full-blown hegemony.
We are beginning, perhaps, to see this reflected in rising prices for gold and silver.
China has effectively cornered the market for physical gold, the only sound money of the market that over millennia has survived all attempts by governments to replace it. Her central planners appear to have long been aware of the West’s Achilles’ heel in its monetary affairs, and have merely been playing along to China’s own advantage. As the dollar weakens in the coming years, her wisdom in securing for herself and her citizens the one form of money that’s no one else’s liability will ensure her survival in increasingly turbulent times.
Now that’s strategic thinking.
33 Comments on "Will The Dollar Survive The Rise Of The Yuan And The End Of The Petrodollar?"
Makati1 on Thu, 11th Jan 2018 5:57 pm
Change is coming to America and not the good kind. It seems that every week another country starts trading in Yuan instead of USDs. That is a good thing. Eventually, it will hit the tipping point.
MASTERMIND on Thu, 11th Jan 2018 6:08 pm
Madkat
People have been predicting the death of the dollar every since it was pegged to oil. They made a movie even about it in the 1980’s…China manipulates and degrades their own currency to make their exports more adorable.
Makati1 on Thu, 11th Jan 2018 6:19 pm
MM, but now the two countries that can actually cause the end are both working to break the US monopoly on trade and finance. HUGE difference! It is in process.
Soon, the US will be isolated from the rest of the world. Trumpet is forcing it by his tweets and threats to cut a country off form the global financial system if they don’t kiss American ass. Bad move! Other countries see what is happening and are preparing ways to circumvent that pressure.
Russia and China are offering an alternative, probably backed by gold. The one real store of value for thousands of years and accepted everywhere.
davy on Thu, 11th Jan 2018 6:37 pm
These anti-dollar articles are so numerous these days it is hard to keep track of them. It is apparent that many want to see the end of the dollar as a dominant financial power. There are also many who want to profit on this demise. If you read this particular article you will not see any mention of China’s own problems with its currency and economy. That should be your first clue this is not a balanced and honest article. The author has an agenda much like many here.
The reality is both the US and China are in a very bad systematic economic decline. The rest of the global world is likewise in difficulties. These difficulties are many and varied. They involve more than the economy. They also involve the systematic structures of civilization which today is globalism. It all goes together as is the case with all major powers. All global economic powers are dependent and coupled with other powers.
China has very deep systematic problems with bad debt, over capacity, and malinvestment in general. It has a bubble economy meaning it must have the economic jolt of growth that bubbles create. China is addicted to credit internally. It cannot maintain what it has created without more credit creation. China is a classic bubble.
You read this article and have a prognosis of what is going on with the dollar but no word about China. When you consider China is in deep trouble and the entire world is trapped then the whole equation of this narrative of US decline and Chinese assentation is bogus. The whole dynamics changes when we understand we are all going down. When you understand there is no future like the past then you see this article is playing with a deck that is short of cards.
Kevin Cobley on Thu, 11th Jan 2018 6:58 pm
Hyper inflation is already ocurring in both Stock Markets and Real Estate, people are clearly attempting to shift their “money” into hard assets foreseeing the declining value of US dollars. At some time in the near future the race for “assets” will include “hard goods” especially for those without the resources to accumulate either Stocks or Real Estate.
Makati1 on Thu, 11th Jan 2018 7:36 pm
“How Empires End”
8. Governments issue bonds and otherwise borrow to continue expansion, with no plan as to repayment.
9. Dramatic authoritarian control is instituted to assure that the public continues to comply with demands, even if those demands cannot be met by the public.
10. Economic and social collapse occurs, often marked by unrest and riots, the collapse of the economy, and the exit of those who are productive.
11. In this final period, the empire turns on itself, treating its people as the enemy.
“Once an empire has reached stage eight above, it never reverses. It is a “dead empire walking” and only awaits the painful playing-out of the final three stages. At that point, it is foolhardy in the extreme to remain and “wait it out” in the hope that the decline will somehow reverse. At that point, the wiser choice might be to follow the cue of the Chinese, the Romans, and others, who instead chose to quietly exit for greener pastures elsewhere.”
https://www.theburningplatform.com/2018/01/11/how-empires-end-2/#more-167789
It’s called “Voting with your feet.” Thousands of Americans are “voting” every year.
deadly on Thu, 11th Jan 2018 9:27 pm
If Russia is selling its oil to China, why would there be a need for dollars?
Wait a minute, let’s go to New York City to Goldman Sachs, they’ll loan us plenty of dollars.
What for?
All the Chinese will do is turn the oil into Star Wars toys.
The oil will sell for 5 grand per barrel in Walmart in the form of plastic patio furniture.
Walmart.cn will have the most online sales of all Walmarts worldwide.
http://walmart.cn
TommyWantsHisMommy on Fri, 12th Jan 2018 10:38 am
When does China stop sending the merchandise across the Pacific? What will they demand? They can continue to buy from us for quite some time with their built up treasury horde.
Denial on Fri, 12th Jan 2018 12:48 pm
Every country in the world is now tied together to debt and energy…..The comments above by Makati and others just show their ignorance to the whole mess..The world is screwed and it does not matter what part of the world you are in….
JuanP on Fri, 12th Jan 2018 2:50 pm
This is simply another baby step in a decades long process that has been ongoing for more than a decade already. This is not a revolutionary move.
MASTERMIND on Fri, 12th Jan 2018 3:02 pm
Denial
I know Madkat though has a vested interested since he has spent time and moved all the hell away. So he will never accept that he is just as doomed as anywhere else.
Outcast_Searcher on Fri, 12th Jan 2018 4:19 pm
Kevin Cobley: To have hyperinflation, you first need meaningful inflation. Calm down.
Makati1 on Fri, 12th Jan 2018 4:23 pm
MM, “Just as doomed”.? I am on the same planet. but not in the West. I live in a culture of close ties and self-sufficiency. Not the West with its fractured cultures and dependency on JIT deliveries of necessities. The slow collapse there is already putting families on the street and causing drug use and the suicide rate to go ballistic. Spoiled Americans cannot handle the decline. Even a slow one that can be adapted to.
There are degrees of “failure” just like there are degrees of climate or disease or wealth. What is catastrophic for an American is normal for billions around the world. What does JIT deliveries, or cell phones, or internet, or even electric, mean to someone who does not have those luxuries now? Answer: nothing. You cannot miss what you never had.
They are my farm neighbors. We are helping them to get electric in their homes. Road access to their land, etc. THAT is how it works in the Ps. And how you build community. AND why I do not worry about your zombie dreams. I’m a part of their life and they know I am an asset, not a liability. Can you say the same?
Cloggie on Fri, 12th Jan 2018 4:26 pm
Fresh Kunstler:
http://russia-insider.com/en/haiti-has-its-problems-us-failing-terribly-its-own-way/ri22184
Opines that the US itself is becoming a shithole in many respects.
MASTERMIND on Fri, 12th Jan 2018 4:29 pm
Theres clogg posting Russian propaganda! What a dumb idiot! Stop spamming this site with bullshit politics nobody cares about. Go to CNN.com if you want to argue that shit!
Cloggie on Fri, 12th Jan 2018 4:44 pm
Aha, Kunstler is “Russian propaganda” now, is it?
I do hope it is at least pear reviewed.
Why don’t you apply for a job in Washington as some intern.
Davy on Fri, 12th Jan 2018 5:02 pm
Mad Kat, your huge overpopulation situation makes you the least likely to survive of anyone on this board. You are in the worst possible place. You are stew meat aging and ready for the pickings.
Makati1 on Fri, 12th Jan 2018 5:06 pm
America’s isolation continues:
“US Ambassador To Panama Resigns ‘Before’ Trump “Shithole” Comments”
“Trump Denies “Shithole” Comment: “Never Said Anything Derogatory About Haitians””
“Haiti Summons US Official To Explain Trump “Shithole” Comment”
“”Why Would We Come?” Norwegians Respond To Trump’s Immigration Offer”
“UN Human Rights Office Says ‘Shitholes’ Comment Could “Disrupt The Lives Of Many””
And on and on to the 3rd world.
Davy on Fri, 12th Jan 2018 5:21 pm
Mad Kat, do you have links? You are getting intellectually sloppy again.
Makati1 on Fri, 12th Jan 2018 5:28 pm
Davy, keep beating that broken drum. Numbers are not the most important indicator of the future. Climate, culture and survival skills are. Those are positive in the Ps. Negative in the US. Not to mention that the Ps is not in “YUGE” debt like Number One World Debtor America.
Asia has thousands of years of survival under worse conditions than the lack of oil or even electricity. (40%+ of the Ps electric is “renewable” hydro, geo, wind and solar.). It will continue without the US. Even thrive.
But you cannot see that. You want to believe that there are no better places to live and survive the US collapse. There are. Many. And I live in one of them. You live in the “shithole” called The USofA.
Yes, climate change will eventually get all of us, but that too will not be equal all over the world. Ocean temperature dictate the Ps climate and that will mediate temperature increases on small islands like the Ps. Not so on the bigger continents like Australia and the US which will become deserts.
Perhaps you should be more concerned about your own welfare and not mine? After all, I don’t care if you make all bad decisions and die early. Why should you care if I do?
Makati1 on Fri, 12th Jan 2018 5:30 pm
Davy, do you have a search engine? Do you know how to use it? Are you too fat and lazy? LOL
Makati1 on Fri, 12th Jan 2018 5:38 pm
“U.S. life expectancy will soon be on par with Mexico’s and the Czech Republic’s”
“Not so in the United States. “Notable among poor-performing countries is the USA,” the researchers wrote, “whose life expectancy at birth is already lower than most other high-income countries, and is projected to fall further behind, such that its 2030 life expectancy at birth might be similar to the Czech Republic for men, and Croatia and Mexico for women.”…
The reasons for the United States’ lag are well known. It has the highest infant and maternal mortality rates of any of the countries in the study, and the highest obesity rate. It is the only one without universal health insurance coverage and has the “largest share of unmet health-care needs due to financial costs,” the researchers wrote. …
“It’s very worrisome,” said Preston, who was not involved in the new research. “The U.S. is at the bottom of the barrel among [Organization for Economic Cooperation and Development] countries, and its relative position is worsening, not improving.””
https://web.archive.org/web/20170305224034/https://www.washingtonpost.com/news/to-your-health/wp/2017/02/21/us-life-expectancy-will-soon-be-on-par-with-mexicos-and-croatias/
Slip slidin’ away…
Boat on Fri, 12th Jan 2018 6:04 pm
Mak,
If you had been born in the P’s odds are your already dead. The average P died 10 years before the average American. Probably from the stress of being so short.
MASTERMIND on Fri, 12th Jan 2018 6:20 pm
Walmart is reportedly planning to cut over 1,000 corporate jobs
https://www.cnbc.com/2018/01/12/walmart-is-reportedly-planning-to-cut-over-1000-corporate-jobs.html
Davy on Fri, 12th Jan 2018 6:31 pm
Numbers don’t lie Mad Kat. You can manufacture false hope and security all day long but numbers say you are screwed, blued, and tattooed. Might not matter anyway since your are sold old.
Davy on Fri, 12th Jan 2018 6:35 pm
Mad Kat, there is a proper way to reference information. Even your puke needs to be properly presented. Please make an effort to show intelligence.
Makati1 on Fri, 12th Jan 2018 7:01 pm
Numbers can say anything you want them to say, Davy. I live here, You NEVER have been closer to Asia then the junk in Walmart.
As for your comet about posting refs….
Too fucking bad! You better look at a few others here and then in the mirror. You are nothing more than an immature, arrogant bully, to be ignored. A zero. LMAO!
creedoninmo on Sat, 13th Jan 2018 7:05 am
The war that China and Russia are preparing for would most likely be America’s attack on Russia. When the dollar truly begins to fail as is becoming more and more certain, America will want lash out. America can’t realistically attack China, but Russia has oil and is a more realistic geopolitical target.
twocats on Sat, 13th Jan 2018 7:29 am
creed – war is definitely the appropriate language to be using.
although it has changed forms the basic sources of conflict haven’t changed much since the late 1800s colonial expansion of the Western powers.
but i’d argue that this latest round is really rooted in the fall of the soviet empire, the rise of US as the world’s only superpower, and the battle to maintain that status (PNAC 1997)
the currency battles are extensions of that war, and they have definitely spilled over into hot battles (Iraq moving to form Euro bourse was a threat that partially led to invasion of Iraq).
all that being said, I think we are looking at more of a WW1 style beginning to hot war between China/Russia and US than a WW2 style.
what do I mean? WWII began because it was clear Hitler was actively invading countries and clearly wasn’t going to stop (an empire rising). WWI began because some liberal got shot (an empire failing). One firefight in Syria between US and Russian troops has the potential to set the thing off.
Mad Kat on Sat, 13th Jan 2018 8:28 am
twocats/creed, the empire is in the proverbial corner and getting desperate. It has finally noticed that there is now strong resistance to it’s attempt at world dominance from nations it cannot dominate. It has also noticed that there is little time before the debt bubble blows the whole country apart.
Will WW3 start with two bullets (missiles into a US plane over Syria?) like WW1, or will it start with a US/NATO attempt to attack Russia, like Hitler, for its resources? Or will the US push Russia to strike first with bright flashes at 3AM over American cities? We shall see.
I hope none of the above, but I would not bet against it happening, and soon.
davy on Sat, 13th Jan 2018 8:30 am
“I hope none of the above” LIAR
Dredd on Sun, 14th Jan 2018 10:30 pm
Is the Pope Catholic?
bobinget on Mon, 15th Jan 2018 11:44 am
http://www.livecharts.co.uk/ForexCharts/dollarindex.php
(US Dollar index)
ON Topic