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Russia and China Join Forces to Kill the U.S. Dollar

Putin's Plan to Crush America

Written by Geoffrey Pike
Posted March 28, 2014

While there's still a lot of focus on Russia and Ukraine, the so-called mainstream media is taking little notice of the possible economic consequences of this conflict.

I have previously suggested that Russia may seek revenge on the U.S. government by selling off its holdings of U.S. Treasuries.

But a related topic is also getting some attention, and that is the status of the U.S. dollar as the world’s reserve currency.

After China refused to vote in favor of sanctions against Russia, it is reported that the chief economist of Russia’s largest bank said the Chinese yuan could become a third world reserve currency (assuming the U.S. dollar and the euro are first and second).

While I’m not sure this assessment will be correct, it is interesting that this subject is getting so much attention. It is also interesting that a Russian figure would be paying high compliments to China.

I think the people and politicians of countries around the world, particularly in Russia and China, are getting tired of the U.S. government. In the case of Russian and Chinese politicians, they may just want power for themselves. They also don’t like getting embarrassed.

In this regard, it would not surprise me to see some of these bigger countries team up in seeking some revenge against the U.S. They know they have to be careful in how far they play their hand, but they would like to see the U.S., or the U.S. government more specifically, taken down a notch or two.

One of the best ways to accomplish this is economically. Nobody is going to benefit from a major military conflict, so hurting the dollar may be the only way to get revenge.

The Chinese Yuan

While there are a lot of suggestions that the yuan could become the world’s next reserve currency, it isn’t going to happen anytime soon.

China has certainly come a long way in the last three decades, but there are still major problems there. For one, there is a great disparity of income levels between those living in the cities and those in rural areas. And there also seems to be a major real estate bubble ready to pop in a really bad way.

In terms of the currency, the consumer price inflation rate is high. While the Chinese would probably like to take some power away from the U.S. dollar, the mercantilist mindset of Chinese politicians continues. They try to keep the value of the yuan down against the dollar in order to subsidize their export sector, but unfortunately, this is at the expense of all of the consumers living in China.

The only way to keep the value of the yuan down is to buy U.S. Treasuries and create more yuan out of thin air.

The other major problem with the yuan, unlike the dollar and the other major currencies, is that it is not freely floating. As long as the yuan does not trade openly on a global basis, it will not be a reserve currency.

Why a Reserve Currency?

While I don’t think the yuan or any other fiat currency is going to replace the dollar, I still think the dollar can lose its status.

In our world of computers and global finance, there is really not much of a reason to have a world reserve currency. Anyone from any country should be able to quickly settle up through currency conversion.

If a company from Canada is buying something from Japan, why do the two have to use the U.S. dollar as an intermediary? The Canadian company can pay in Canadian dollars, which can quickly be converted back into yen. Or the Canadian company can exchange its Canadian dollars for yen first and then make the purchase.

As long as the currencies are floating freely and can be bought and sold on exchanges, I don’t see much need for the U.S. dollar. The only time a problem may occur is when a company does business in a country that either doesn’t have a freely floating currency or has an extremely erratic currency.

So while I don’t think another currency is going to replace the dollar as the world’s reserve currency, I’m not sure there will be a need for a reserve currency at all much longer.

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Golden Opportunity

In the U.S., this can only be a good thing for gold in the long run. A weaker dollar will mean a higher dollar value for each ounce of gold.

Of course, since all of the fiat currencies of the world are not exactly giving off great feelings of confidence, it is possible that the world will turn back to gold entirely one day.

If there is going to be a reserve currency of the world, it is hard to think of anything better than the yellow metal.

If China were to back its currency with gold and allow it to trade freely on open exchanges, it really would have a good chance of replacing the dollar. But I highly doubt this would happen anytime soon given the complete lack of economic understanding of the Chinese politicians and politicians in general.

And even if they did understand, I don’t think they would want to relinquish so much power. Managing a fiat currency is a major part of central planning and controlling others. Most politicians will not voluntarily give this up.

Still, I think if China and Russia slowly turn away from using the dollar, it can only help the price of gold for Americans — regardless of whether gold is being used for transactions.

Russia and China Teaming Up?

So while I don’t think any other major currencies are going to really shine, I do think the world will slowly move away from using U.S. dollars in their transactions.

This process may have sped up a bit in the last month. With targeted sanctions against Russian officials, they are almost being forced to not use the U.S. dollar.

In fact, it would be a surprise if business coming out of Russia did not turn away from the U.S. dollar wherever possible.

I think Putin and Russian officials would like nothing more than to get some revenge against the U.S. It won’t be a shock if Russia tries to get China to go along with its plans to slowly abandon the U.S. dollar.

I’m not sure if Chinese officials are ready to go along just yet. They like their mercantilist policies. They like having U.S. consumers buy cheap goods from China.

It will be interesting to see what happens. If a major recession hits China (which I expect it will), attitudes may change. And if Chinese officials feel as if they are getting pushed around, then maybe they will team up with Russia for a little experiment in revenge.

I don’t expect the U.S. dollar to be abandoned in one day or one month. But it is a reasonable expectation to see countries such as Russia, and possibly China, slowly turn away from using U.S. dollars.

Until next time,

Geoffrey Pike for Wealth Daily

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