Dollar losing reserve currency status - Engdahl

Anyone with even a watchful (not necessarily expert) eye on the dollar over the past year and a half, could predict its fall as the world reserve currency. At first the idea seemed absurd and impossible: now the prediction is 99% certain.

Update October 8, 2009


I just can't believe that if a lay person like myself can glean this castrophe lying in wait for the US , that experts such as Ben Bernanke, Alan Greenspan, Timothy Geithner and Obama could possibly not have figure it out by now. They MUST know.

And if they do know, they are surely preparing for this bomb to hit.

• At the last G20 conference in Pittsburgh, the US ceded economic control to the IMF.
• Northcom has estabished a disturbing presence acting in the role of the National Guard.
• Swine flu has been declared an epidemic effectively activating Directive 51.

And these are only a few of the indicators inside the US: the international pressures which guarantee thedollar losing reserve currency status in recent months are overwhelming.

I wonder what the economic catastrophe will look like in human cost to Americans? It won't be pretty and may very well resemble the economic collapse in Russia in the early 1990's.

If the Big Dogs do know what is coming, it means they are lying like the devil now in redirecting the focus of media attention to 'heathcare' and 'birthers'. I hear alot of clamour about such things; but no on is discussing the consequences of this monumentous change just around the Main Street corner.

Of course, for many other countries this change will mean increased prosperity and economic growth.

The article below by F. William Engdahl neatly explains why the dollar will fall. Americans truly have no hand in their own destiny now - the are up the creek without a paddle - they just don't know it yet. (Could be all the hyper-control freak-indoctrination that passes as education now in the US.)

The next decade will bring changes to civilisation which we could hardly have imagined. What the human cost will be is a question I am almost afraid to ask.

Will the Dollar get an “Arab oil shock”?

by F. William Engdahl
October 7, 2009
Source
Arab oil producing nations and the some world’s largest oil consumers including China and Japan are reliably reported to be secretly planning a long-term exit from pricing their oil trade in dollars. If true, it would spell the death knell for the dollar as world reserve currency, and for the USA as “the” global economic power.

Ever since Washington tore up the Bretton Woods treaty in August 1971 and went onto a “dollar paper reserve system” instead of a dollar backed by gold, the United States, as the world’s most powerful military power, has been able to dictate financial terms to the world. Nations like Japan and later China, dependent on US export markets, would dutifully invest their trade surplus dollars into US Government debt, in effect financing wars such as Iraq or Afghanistan they opposed. They saw no choice. Arab oil producing countries, under US military pressure, were forced to sell oil only in dollars, a direct prop to the dollar when the US economy was in terminal decline. That may be rapidly about to come to an end.

According to a leaked report from Arab Gulf oil producers, there have been a series of secret meetings in recent months between the major Arab oil producers, including Saudi Arabia, and reportedly also Russia, together with the leading oil consumer countries including two of the three largest oil import countries—China and Japan.

Their project is to quietly create the basis to end a 65-year long “iron rule” of selling oil only in US dollars. Following the 400% oil price shock of 1973, which was deliberately blamed by US media on “greedy Arab Shiekhs,” a senior US Treasury official made a secret trip to Riyadh to tell the Saudis in blunt terms that if they wanted US military defense against potential Israeli attack, that OPEC must privately agree never to sell oil in currencies other than the US dollar. That “petrodollar” system allowed the US to run staggering trade deficits and remain the world reserve currency, the heart of its ability to dominate and control world financial markets, until the crisis of the sub-prime real estate securitization in August 2007.

The participants in the oil pricing project reportedly envision using a basket of currencies reflecting producer-consumer trade relations, one backed by gold as a solid backbone. It would not initially be a new currency as some have surmised, but rather an arrangement that would eliminate the risks of pricing oil sales in fluctuating and likely depreciating dollars.

Iran announced recently that in the future it would sell its oil for euros not dollars. According to these reports, the basket of currencies would include a mix of yen, euros, Chinese yuan, gold. Brazil would reportedly join as both a producer and consumer country.

The secret plan was first reported by Middle East correspondent, Robert Fisk, in the UK Independent.

I have confirmed from very senior and well-informed Gulf sources that the talks are in fact real. The oil producing countries have been fed up for years about having to price their oil in dollars or face US reprisals. They are steadily losing as the dollar depreciates against other currencies and against gold. As most Gulf Arab oil countries depend on imports for much of their economy, dollar pricing de facto introduces serious inflation into their economies as well. Most of their trade is with the EU or other countries outside the US, but now that trade must be mediated through a sinking currency, the dollar.

Following the US declaration of the War on Terror by the Bush Administration after September 11, 2001 most leading Arab oil producing countries privately saw US policy as being aggressively aimed at them. The un-justifiable US invasion and occupation of Iraq in 2003 merely confirmed that as well as subsequent US threats against Iran.

Initially various governments involved in the leaked plan have publicly denied vehemently such a plan. That in no way invalidates that such moves are afoot. The participating countries are well aware that the United States as a wounded tiger can be far more dangerous. The leak of the plans in the world media, whether every detail reported by Fisk is true or not, feeds what is an inevitable decline in the dollar as a reliable reserve currency for world commerce.

What is not clear is what the potential response of Germany and France, the two pivot powers within the EU will be. If they decide to cast their lot with oil producing and consuming countries, they open their doors to vast new trade and investment potentials from the countries of Eurasia. If they cringe from that and decide to remain with the British Pound and US dollar, they will inevitably sink along as the dollar Titanic sinks.

With that decline of the US dollar goes the lessening of the political power of the United States as sole economic and financial superpower. We face very turbulent waters ahead and gold not surprisingly is gaining in this uncertainty.

Copyright © 2009 F. William Engdahl
Editorial Archive

*F. William Engdahl is author of Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). He also authored A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press). His newest book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millennium Press) is now in print and will be available by mid-June. He may be contacted over his website, www.engdahl.oilgeopolitics.net.

OOPS...there goes the dollar

Many have been predicting this for many months. The warnings fall mainly on deaf ears attached to heads that have no idea of the human suffering involved in the collapse of a currency. Fasten your seat belts: it's going to be a bumpy night.

UN Says New Currency Is Needed to Fix
Broken ‘Confidence Game’

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By Jonathan Tirone

Sept. 7 (Bloomberg)

The dollar’s role in international trade should be reduced by establishing a new currency to protect emerging markets from the “confidence game” of financial speculation, the United Nations said.

UN countries should agree on the creation of a global reserve bank to issue the currency and to monitor the national exchange rates of its members, the Geneva-based UN Conference on Trade and Development said today in a report.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.

“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva. “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

The 1944 Bretton Woods agreement created the modern global economic system and institutions including the IMF and World Bank.

Enhanced SDRs

While it would be desirable to strengthen SDRs, a unit of account based on a basket of currencies, it wouldn’t be enough to aid emerging markets most in need of liquidity, said Flassbeck, a former German deputy finance minister who worked in 1997-1998 with then U.S. Deputy Treasury Secretary Lawrence Summers to contain the Asian financial crisis.

Emerging-market countries are underrepresented at the IMF, hindering the effectiveness of enhanced SDR allocations, the UN said. An organization should be created to manage real exchange rates between countries measured by purchasing power and adjusted to inflation differentials and development levels, it said.

“The most important lesson of the global crisis is that financial markets don’t get prices right,” Flassbeck said. “Governments are being tempted by the resulting confidence game catering to financial-market participants who have shown they’re inept at assessing risk.”

The 45-year-old UN group, run by former World Trade Organization chief Supachai Panitchpakdi, “promotes integration of developing countries in the world economy,” according to its Web site. Emerging-market nations should consider restricting capital mobility until a new system is in place, the group said.

The world body began issuing warnings in 2006 about financial imbalances leading to a global recession.

The UN Trade and Development report is being held for release via print media until 6 p.m. London time.

To contact the reporters on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

Last Updated: September 7, 2009 09:52 EDT

It ain't over til it's over: and it ain't over.

For more than a year, many critics following the dollar have been warning of an eventual meltdown of the currency. Mostly, these predictions have been ignored and labelled as doomsday conspiratorial mumbo jumbo.

Most people in the US are still yapping about health care and Obama's birth certificate while the rest of the world tries to cope with austere fiscal constraints and unemployment. Yet there is a bigger picture which dampens the hope of all for a near recovery, more than most people want to be aware of.

I have posted numerous articles on this blog following the impending decline of the dollar as world reserve currency.

In the article below, this fear is expressed from a highly credible source. I would say the time is right to batten down the hatches for a currency storm that will rock the world.

‘The World Is in Trouble’:
Deutsche Bank Chief Economist

12 Aug 2009
By: CNBC.com
Source
The global economy still faces turmoil as governments try to figure out how to move out of fiscal rescue packages, which could lead to another two downturns, Deutsche Bank Chief Economist Norbert Walter said Thursday.

In addition, nervousness on the part of major dollar holders could pressure the greenback and lead to a very worrying 2010, Walter said.

Norbert said recently in research notes “the world is in trouble.”

“I believe that the rescue packages brought on have been so costly for so many governments that the exit from this fiscal policy will be very painful, very painful indeed,” he said. “Some of us are already talking about a W-shaped recovery. I’d probably talk about a triple-U-shaped recovery because there are so many stumbling blocks here to get out of this.”

“There are a few countries that have not dismissed people, they had a dramatic drop in their sales but they kept on people because they believed the recession would be very shallow,” Walter said. “They now have to fire people. That will increase unemployment and they therefore, of course, may be endangering retail sales in some countries.”

If Australia hikes rates in September or October, markets “will certainly shiver” and cause zig-zagging at the bottom of the recession, Walter said.

And while the White House struggles with issues like health care and puts a fiscal policy exit strategy on the back burner, there are big concerns of about the direction of the U.S. dollar.

“I’m deeply worried about the worries of those investors who have invested a lot, really a lot into the dollar” like the Chinese, Japanese, Arabs and Russians, he said.

“If they have second thoughts about the quality of this currency then the dollar is bound to weaken” which means higher long-term interest rates for a country where government debt is approaching 100 percent of gross domestic product, he said.

If that happens, “2010 could be a worrisome year for all of us,” he said.

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Why China will rule: trading instead of invading

Figuring out why China is the new superpower is not rocket science. You get more flies with honey than with vinegar. Harmony is preferable to perpetual warfare.

China seeks to add to its development and power through a win-win strategy; it identifies the advantages of those countries it does business with, makes promises it keeps and strives for a harmonious relationship. Compare this to the US and Great Britain's strategy of bombs, bullets, invasion, proxy wars and lies to maintain their hegemonic goals alienating the entire world.

Another reason why China will rule the world is its policy of keeping multinational corporations on a short lease with the government maintaining 51% of any corporation operating in China. This short circuits the type of fascist corporate strategy that turns governments into big business puppets, as in the US and UK.

More reasons why China will emerge as top dog in world development:
1) It has the economic resources to provide loans to developing countries without the strangulation of regulations the World Bank and IMF imposes on its clients.

2) It strives for a multipolar world governance to the benefit of all countries and,

3) It has within its power to change the reserve currency, along with its allies in BRIC and SCO, from the dollar to a more acceptable unit for all nations.

Those who delude themselves that those dirty Chinese are the bad guys probably need to pull their heads out of the propaganda sandbox, and at the very least, look in a mirror.

China puts people before banks

China is one economy where there is no disconnect
between the financial and normal world [GETTY]

Source
Samah El-Shahat, Al Jazeera's resident economist, writes a regular column analysing key elements that have contributed to the global financial downturn and its impact across the world.

China hasn't allowed its banking sector to become so powerful

The one question that isn't going away this global recession, is whether China can save the world.

But before we go running to Beijing, hat in hand, demanding assistance or else, there are some home truths that need to be considered first.

China is a developing country, with a per capita income of $4,000, which is much closer to those of African economies than to the US per capita income at $39,000, and $33,000 in Europe.

China has 130 million people who still live in absolute poverty, and even electricity hasn't made it every household yet.

So why should China be asked to save anyone but itself right now?

In fact, as Michael Pettis, a professor at Peking University's Guanghua School of Management says, China's consumption was about the equivalent of France's last year, but no one is calling on Paris to save the world.

The crisis, though, has exposed and clearly magnified the fault lines in China's emerging economy of 1.3 billion people.

The Asian giant needs to nurture its own domestic demand, so that when the export market goes sick, like it has in this Great Recession, it doesn't drag China down with it.

But making her people spend more than they save is harder said than done. After all, less than a generation ago the Chinese were so poor that hunger was the accepted norm in their daily lives.

Tiger has risen

Speak to Chinese officials in their late 40s onward and they will tell you that thinking about food was a major preoccupation as they were growing up - it was so scarce and many had to collect food coupons.

Yes, this Asian tiger has risen despite a recent past of malnutrition. So getting the Chinese to move away from the "survivors'" mentality of savers to one of spenders will not be easy.

Economists believe it takes a whole generation before people can change their ways and habits. But such a change can be overwhelmingly helped by the establishment of social welfare and safety nets such as health care provision, and other forms of social security.

This might encourage the Chinese to loosen their purse strings.

So why do we assume China can save the global economy?

Is this not a warped sense of economic prioritising to ask a developing country with pressing economic and social problems of its own to come in and sacrifice herself for the rest of the world?

Lending the US

This could have something to do with China's $2tn in denominated securities, and bonds it has acquired from the US. It is after all the US's biggest lender.

Yet, take that two trillion-dollar sum and divide it by 1.3 billion - the Chinese population - and I assure you not much would be left for your average Chinese citizen.

However, I feel this basic misunderstanding of China and her position in the world, has to do with our negative bias toward that country - we are much tougher and harder when it comes to the way we report our economic stories on China.

We are not telling enough stories of how we can in fact learn from China, particularly in the way its keeps the power of its banks in check.

Something we have been unable to do.

China is the one leading economy where the divide - the disconnect between its financial sector and the world normal Chinese people and their businesses inhabit - doesn't exist.

Both worlds are booming again and this is due to the way the government handled its banks.

China hasn't allowed its banking sector to become so powerful, so influential, and so big that it can call the shots or highjack the bailout.

In simple terms, the government preferred to answer to its people and put their interests first before that of any vested interest or group.

And that is why Chinese banks are lending to the people and their businesses in record numbers. Why don't we hear more about that in the media?

Different planets

In the UK and US, the financial sector is booming, while the world of normal people seems to be going from bad to worse, unemployment is high, businesses are folding and house foreclosures are still taking place.

Wall Street and Main Street might as well be existing on different planets.

And this is in large part because banks are still not lending money to the people.

In the UK and US, banks have captured all the money from the taxpayers and the cheap money from quantitative easing from central banks.

They are using it to shore up, and clean up their balance sheets rather than lend it to the people.

The money has been hijacked by the banks, and our governments are doing absolutely nothing about that. In fact, they have been complicit in allowing this to happen.

I asked Costas Lapavitas from the School of Oriental and African Studies (SOAS) whether governments had put the interests of banks before the interests of their wider populations.

"Yes I think you can say that. I think governments will probably come out and say that we helped rescue the banks, and we prevented generalised collapse. And to a certain extent that is true of course," he said.

"However there were so many ways in which banks could have been rescued and this particular way has been done in such a way that the banks have no incentive to change the ways they operate ... It is as if the banks have written the policies that the state adopted."

Interests of shareholders

The US and British governments have allowed banks to solve their own crises in the interests of their own mangers, and shareholders – they are after all private business.

Governments should have made it conditional for banks to lend to us, before they are given access to so much of our money and the Federal Reserve's cheap credit.

So the Western hemisphere is suffering the consequences of government failure, while the Asian Giant is celebrating government getting it right.

Funny, how our seemingly democratic governments have been taken over by vested interests.

So, lay off China. It is the one country that is putting the interests of its people above that of the banks.

And in these pressing times I say Hallelujah to that.

Chavez's 'historic' China strategy

At a land base in Venezuela, Chavez and Morales
cheer the satellite's successful launch [EPA]

By Dima Khatib in Caracas
Source
As the rocket carrying the Simon Bolivar Venesat-1 satellite lifted into space from south-western China, Hugo Chavez, the Venezuelan president, could not help but show his excitement.

Watching the launch live from Bolivar State, in south-eastern Venezuela, with Evo Morales, the Bolivian president, Chavez described the October 2008 launch of the country's first satellite "of strategic and historical importance for Venezuela and China".

The satellite is now used by Venezuela to meet some of its telecommunication needs and is one of the main achievements of Caracas' strategic partnership with Beijing.

Venezuela's interest in such a partnership provided China an excellent opportunity as it searched for a reliable partner that could guarantee energy, particularly oil, supplies in the long run.

Their relationship now stretches from the depths of space to Venezuelan soil.

Developing oil fields


In central Venezuela's Faja del Orinoco, believed to be the world's largest oil reserve, China is helping Caracas explore an area that is believed to hold about 40 billion barrels of crude oil, twice the volume of oil reserves in the US.

As Venezuela seeks to diversify and expand the reach of its energy exports in the world instead of largely depending on US markets, it has started exporting oil for the first time in recent years to far-away China.

It currently exports to China almost 400,000 barrels a day and hopes to reach 1mn barrels by 2010. It is also planning to build refineries in China.

In the meantime, China is also helping Venezuela develop its telecommunications and hi-tech infrastructure.

In the Paraguana Peninsula in western Venezuela, China has helped Venezuela manufacture its first mobile phone and computer.

"Best" mobile phone

Chavez wants to use Venezuela's oil to break what he believes is US hegemony [EPA]
Baptised the Vergatario, or in colloquial Spanish "the very best", the new mobile phone is assembled in a joint Chinese and Venezuelan company called VTELCA.

Chinese engineers have contributed the technology and parts while Venezuela provides the manual labour, infrastructure and financing.

The Vergatario costs a mere $14, the cheapest by far in the market, and is intended to cater to low-income Venezuelans.

The phone was released for the first time on Mother's Day in May earlier this year. Within hours all units were sold out and many Venezuelans are waiting for the next batch to come out.

Technological sovereignty

VTELCA is one of 209 new socialist companies that have been established to help Venezuela reach what Chavez has termed 'national technological sovereignty'.

Most of its 170 workers were hired through local "communal councils" in the area's towns and villages. Comprised of housewives and labourers, the workforce was trained by the Chinese who now only supervise the work in the factory.

In one such factory, which began operating in December 2006, Chinese engineers are helping Venezuelans develop the first homemade computer.

Venezuelans hope Chinese technology and know-how will be transferred to them in the future so they can design their own computers and locally manufacture the parts in future socialist companies.

Joint investments

In 2007, China and Venezuela established a joint investment fund in which China initially pledged to inject $4bn over a period of three years. Venezuela provided $2bn into the fund.

The idea behind the fund is that the Chinese contribution would be a down payment for future oil supplies, while Venezuela would use the money in development projects.

The two would agree on a fixed oil price in a way that protects both from constant fluctuations in the energy market.

Less than two years later, China had already provided its share. In early 2009, at the height of the current global financial crisis, Chavez managed to convince Beijing to add an extra $4bn to the fund; Caracas also injected a further $2bn raising the total value to $12bn.

This is one of the Chavez government's many alternatives to conventional financing by the IMF and World Bank. These funds are designed to finance development projects without the burden of high interest rates and without dictating economic policies by the lender.

It is also a mechanism to break the circle of speculation in the energy market which Chavez believes is based on "capitalist principles" and he calls as "unfair and greedy".

The fund has been used to finance many projects in Venezuela so far. In one project in the state of Monagas in eastern Venezuela, the fund is financing a pilot project to increase chicken production in the country using Argentinian know-how.

It has also been used to finance a nationwide railway network that is being built in a partnership with other countries.

Ideology and strategy

When Chavez came to power 10 years ago, trade with China had peaked under $200mn but since then it has jumped to nearly $10bn.

It is no surprise then that Chinese officials say that Venezuela has now become the biggest recipient of its investments in Latin America.

While the Chinese community has existed here for decades, the presence of Chinese companies is increasing and being felt in several sectors of the economy: housing, agriculture, industry. The relationship serves China's commercial interests.

But for Venezuela, it serves ideological and strategic purposes.

Since becoming president, Chavez has travelled to China six times, making him its most frequent visitor among Latin American leaders.

He says the growing ties with Beijing are part of his stated aim to build a new multi-polar model of international relations "to break" US hegemony.

He has also embarked on a programme of cultural and scientific exchange with China.

By having Venezuelans study and benefit from Chinese technological expertise, Chavez is hoping to create a strategic partnership which merges China's socio-economic experiment with Latin American socialism.

Stiglitz on Russia, WTO and NWO

Many people disdain the term New World Order - but like it or not - one is coming: a world order which is not dictated by the hegemons of the USA banking/corporate moguls. See What does the NWO really mean?

Yes, there will be a new world in which the 'profit before people' dogma is not the 'invisible hand' that rules the world. Russia, China and the developing world has had enough of USA militarism for profit, and calling the shots for the rest of the world.

Whether or not one understands the earth shaking importance of the dollar being replaced as reserve currency, this change will rock the world. Perhaps not as fast as the bombs the US showers on its unfortunate imperialistic resource targets. But things are going to change big time. It may take a few years but the change cannot be stopped now.

If there is going to be hope for all, global governance must not be in the hands of the superlatively greedy. A balance of powers which must cooperate for the mutual benefit of all is much preferable. This battle will be fought not with bombs and high tech weapons; but with global trade. The new world order will have to do with how to divide the remaining resources of the planet among nations and their peoples in a fairer way for all. And the World Trade Organization (WTO)is center stage.

Members of WTO

I recall attending an upper division business class in which my fellow students had to give a presentation and overview of the WTO. At the end, I asked a question: If the WTO is so wonderful, why are so many nations protesting its meetings? My bizhead classmates stood frozen like deer in the headlights. They apparently had no answer because they had no real understanding of the topic they were assigned to discuss.

The World Trade Organisation is the power broker in today’s global economy of international trade which is the driver of world economic growth. Although WTO rules assure all countries will get a fair deal regardless of their size or bargaining position, this is sometimes forgotten when superpowers begin feuding in the global arena about cotton and corn. And as in the boxing ring, there are heavyweights and lightweights. Big fish eat little fish. Being the world's economic superpower for decades, the US has eaten a lot of little fish and intends to consume all it can. But the little fish are fighting back now, supporting the plans of China and Russia for a fairer distribution of earth's resources.

The critical drivers of this change are 1) a change in the reserve currency and 2) a fairer shake for all nations in the WTO. When China and Russia are both members of the WTO, the USA will no longer be able to dominate its mechanisms with the hubris of its hegemonic world domination plan.

Joseph Stiglitz is a world renowned maverick economist whose advice has largely been ignored by the governments who represent the interest of multi-national banking/corporate moguls. The article below concerns the entrance requirements of Russia to the WTO imposed by USUK (United States and United Kingdom). Of course USUK does not want Russia to join the WTO as it would dilute their power (and perhaps bring about a new world order not envisioned by the current Masters of the Universe).

Make no mistake: the future depends on a fairer system of international trade, whether or not one finds this boring.

Joseph Stiglitz calls Russia's WTO
entry terms 'outrageous'

02/07/2009
Source
MOSCOW
Prominent U.S. economist Joseph Stiglitz on Thursday called the terms demanded of Russia to join the World Trade Organization "outrageous" and praised Russia for standing up to the global trade body. "The WTO should be an international agreement where, if you agree to go along with the provisions, any country can join," said Stiglitz, winner of the Nobel Memorial Prize in Economic Sciences (2001) and former senior vice president and chief economist of the World Bank.

"That's not the way it's done. The way it is done is what one group called 'extortion at the gate,'" he said during a Moscow-Manchester video conference. "The United States and some other countries have tried to say, 'if you want to join our club, you just don't have to agree with the terms everybody else does, but you have to pay us something extra, you have to go beyond the terms of the agreement and give concessions that other countries don't have to agree to,'" he said. "I think this is outrageous.

And I think it was important for Russia to say 'we won't do that, we will go along with the agreement signed by other countries but we won't be subjected to this kind of extortion,'" Stiglitz said. "Unfortunately poor countries, developing countries, often aren't in that position of strength to say that to the WTO.

And I think it was actually a positive contribution for the sake of the whole global community that Russia did that," the professor at Britain's University of Manchester said. He also said Russia had much less to gain from joining than other countries because its export base depends so much on natural resources and raw materials, which are not subject to trade restrictions. "Meanwhile your market could be flooded with imported goods from other countries that would make it more difficult for you to recreate the industrial base that would be necessary for a strong economy," he said.

Russia has been involved in talks to join the WTO for 16 years, Kazakhstan for 13 years. Belarus recently has shown no desire to join the global trade body. Russia, Belarus and Kazakhstan plan to join the global trade body in the form of a united customs territory. They made the decision on June 9 after talks between the three countries' prime ministers.

Related
Why the dollar is dying
When China awakes, it will shake the world. - Napoleon Bonaparte
NWO = New reserve currency
Patrick Bond: Will economists Stiglitz and Yunus add to debate on crisis?
Stiglitz slams inflation-targeting
Stiglitz: The UN Takes Charge (Update: and The Economic Lessons of the Iraq War)

Calls grow to supplant dollar as global currency

Maybe America can pay its bills with 'freedom fries'?

Source
July 6, 2009
The call to find an alternative to the U.S dollar as the global reserve currency is gaining momentum as France joined calls by China, India and Russia for a review of the world's currency practices.

French Finance Minister Christine Lagarde challenged the dollar's supremacy “in a world that has changed because of the crisis and the growing role of emerging countries.”

The questioning of the U.S. dollar as the key currency for central banks by a leader of a major European economy gives renewed life to the issue at this week's Group of Eight summit meeting in L'Aquila, Italy. The U.S. dollar has long served as the dominant medium of exchange, and tends to dominate the official money reserves that countries hold through their governments and at their central banks.

In the first quarter of 2009, 65 per cent of the world's allocated foreign exchange holdings were held in U.S. dollars, according to the International Monetary Fund. That's the highest in seven quarters.

The push for an alternative is being driven in large part by concern over the weakened state of the U.S. economy.

The country is forecasting fiscal deficits for the next decade.

That's leading large holders of U.S. debt such as China to worry that the U.S. dollar may not be as safe as it once was. In addition, the dollar has been volatile on international currency markets, and the U.S. is running ongoing trade deficits.

Diversification would likely take years, because unwinding large reserve positions of U.S. dollars too quickly would devalue them. And despite concerns about the greenback, it has maintained its international appeal, in part because investors need the value of their U.S. dollar holdings to stay high.

With the U.S. continuing to require willing lenders to fund deficits, the situation has become what top Barack Obama economic adviser Lawrence Summers once dubbed “a kind of balance of financial terror.”

That U.S. Treasury bills appreciated in the immediate wake of the financial crisis was proof of the dollar's strength, as “people fled to a stable place,” said Paul Wachtel, a professor at New York University.

Still, the risk of a move away from the greenback is not without precedent, said Shaun Osborne, chief currency strategist of TD Securities. “The U.S. is a bit complacent about this. Most U.S. officials appear confident there will be no quick switch away from the dollar. But we have seen before, with the decline of the pound, that these things can happen quickly, in the space of years.”

Recent comments may be as much about politics as economics.

Large developing countries are seeking a greater role at the International Monetary Fund. China controls only 3.66 per cent of the votes at the body, despite being the world's third-largest economy.

“A little bit of nationalism, a little bit of searching for someone to blame for the economic crisis,” Prof. Wachtel said. “Plus, it's a changing world: diversification of reserves might make sense.”

Canada and Japan both reaffirmed their support for the greenback this week.

“It's an issue that we have not addressed, other than to say that in the midst of what is still a significant global recession, it's important that we aim for stability,” Finance Minister Jim Flaherty said on Friday. “The stability has been based on the U.S. dollar as the global currency.”

Whether and how this will actually come up at the G8 summit remains unclear. Russia is a G8 member, and China and India are set to join the discussions on the second day of the three-day meeting, but all are playing down the prospect of formal talks just yet.

Chinese Vice-Foreign Minister He Yafei said yesterday: “You may have heard comments, opinions from academic circles about the idea of establishing a super sovereign currency. This is all, I believe, now a discussion among academics. It is not the position of the Chinese government.”

The Chinese central bank, the world's largest external holder of U.S. debt, reiterated its call for a new international reserve currency in a policy review published last week. It has proposed an International Monetary Fund-created unit called Special Drawing Rights as an alternative reserve currency.

Regardless of what happens at the G8 summit, some analysts expect a diversification in large countries' currency practices.

Alternatives like the euro, yen, Chinese yuan, and Special Drawing Rights all have drawbacks, said Benjamin Cohen of the University of California-Santa Barbara. “A more fragmented currency system seems in the offing, with much competition and no money clearly dominant,” Prof. Cohen said.

With files from Bloomberg News and Reuters

NWO = New reserve currency

I have tried in vain to convince Americans that the dollar will fall - and with it the standard of living to which the consumer zombie has been accustomed. Once again, I am presenting an article which should set off red alarm bells for anyone holding dollars. Those who do not take heed may live to regret it.

Wary of Dollar, China Wants Super-sovereign Currency

China's central bank calls for super-sovereign currency
Dollar's dominance has intensified risk, worsened crisis
IMF should manage part of its members' FX reserves

By Zhou Xin and Chris Buckley
Source
June 26, 2009
BEIJING
China's central bank renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination, which it said had worsened the financial crisis.

In its annual financial stability report, the central bank did not mention the dollar by name but said it was a serious defect that one currency should tower over all others.

"An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis," the People's Bank of China said.

In thinly-veiled criticism of loose U.S. monetary and fiscal policies, the PBOC urged the International Monetary Fund to exercise closer supervision of the economic and financial policies of major reserve-issuing countries.

The 170-page report dusted off a call by the bank's governor, Zhou Xiaochuan, for the creation of a super-sovereign currency.

In an essay in late March, Zhou caused a stir by suggesting that the Special Drawing Right, the IMF's unit of account, could eventually displace the dollar as the principal reserve currency. [ID:nPEK184558]

Friday's report not only advocated a full role for the SDR but said the IMF should be entrusted with managing a portion of its member countries' foreign currency reserves.

"To avoid intrinsic shortcomings in using a sovereign currency as a reserve currency, we need to create an international reserve currency that is divorced from sovereign states and can maintain a stable value over the long term," the report said.

DOLLAR DILEMMA

Chinese officials have expressed growing concern in recent months that massive U.S. fiscal and monetary stimulus will generate inflation and drive down the dollar, handing Beijing big losses on its vast portfolio of U.S. bonds.

Bankers say China holds perhaps 70 percent of its $1.95 trillion in official currency reserves in dollars.

"When a national currency becomes the global price-setting currency for primary products, the trade settlement currency and the reserve currency, that national currency has great difficulty attending to both domestic monetary policy goals and the reserve currency needs of various countries.

"And the economic development model of debt-based consumption is most difficult to sustain," the report said.

The PBOC also levelled criticism at international banking rules, drawn up by the Basel Committee on Banking Supervision, which it said had paid inadequate attention to the risks inherent in complex credit securities.

Oversight of derivatives had also been lax, the report said.

Turning to the domestic economy, the PBOC said the slump in global trade caused by the international financial crisis would spawn risks for China's banks as exporters ran into difficulties.

By weighing on incomes, the crisis might also slow China's drive to develop a consumption-led economy, the PBOC said.

The central bank also said China could face inflationary pressure in the medium- to long-term as a result of liquidity now being pumped into the global financial system, coupled with extensive deficit spending by many governments.

(Reporting by Zhou Xin, Aileen Wang and Chris Buckley; Writing by Alan Wheatley; editing by Patrick Graham)

Copyright 2009 Reuters

End of the Dollar

Will the 'Dollar Wars' Kill
What's Left of the American Dream?

Countries yoked to America's currency, and therefore its cratering empire, want to kick the dollar to the curb. And that's bad news for the U.S.

By Scott Thill
Source
June 26, 2009

Here's a terrible joke: An elderly man walks into a bar and says, "I got good news and I got bad news."

"What's the good news?" the bartender asks.

"I stayed out of the stock market, so my retirement dollars are safe."

"What's the bad news?"

"They're dollars."

OK, I said it was a terrible joke. But that may be what the dollar is becoming, now that the critical mass of wartime spending, rampant consumption, hyper-real finance and environmental collapse has hit the fan.

The hangover from the last three presidential terms, but especially the last two, has taken the American economy down the rabbit hole, with the international monetary system begging for mercy while hitched to its off-the-ralls crazy train. But the ride has stopped, and some countries yoked to America's currency, and therefore its cratering empire, don't want to get back on.

Namely, Brazil, Russia, India and China, loosely termed BRIC by Goldman Sachs economist Jim O'Neill, who is not alone in predicting the four countries' ascendant power, as the United States and the Eurozone fade into the 20th century.

With Brazil and Russia lording over a large share of what's left of the planet's natural gas and oil, and China and India providing a titanic labor force that rivals the intelligence, productivity and regimentation of workers anywhere outside their borders, BRIC is in the house, big time. And it wants a say in what's going on, as Marvin Gaye sang.

What's going on is that the dollar, to which the majority of the planet's economies and currencies are now reliant, has us all by the proverbial balls, and BRIC is screaming about it in the press. Something has to give, it's saying, and that thing is the dollar.

"There is a lot of political and economic posturing involved," Rachel Zimeba, lead analyst at economist Nouriel Roubini's RGE Monitor, explained to AlterNet. "But I think there is substance to it. China has been trying, relatively unsuccessfully, to diversify for a couple of years, which has conflicted with its desire to have undervalued exports. Same thing has happened to countries in the Middle East, which are pegged to the dollar. And we're going to see even more pressure to diversify from these countries to reduce the share of their [dollar] assets.

"They see that the U.S. has a rising debt burden and record financing needs. Over time, they are worried that inflation and a weaker dollar will reduce the value of those assets."

They should be worried. Since the Bush administration took office, the dollar has lost 33 percent of its value. And since the Bushies left office, the dollar has been on autopilot, hovering beneath the pound and euro and jockeying for position with the Canadian dollar for the bronze medal in underperforming currencies, losing or gaining altitude every time a politician from Russia or China slams or praises it in the press. Like the American economy itself, the Humpty Dumpty dollar is wobbling on the fence, hoping reality doesn't hop along and give it a shove.

The good news? It could land softly.

"This is not an overnight thing," Ziemba added. "Same thing goes for these countries' attempts to turn their own currencies into transactional and reserve currencies."

That's reassuring, especially to what's left of those who still have a lot of dollars, as the American unemployment rate rises to levels nearly unseen since World War II. But once you wormhole a bit further into the future, the dollar's fate is much more murky.

"The debate between the inflationists and deflationists is red-hot these days, as the U.S. financial system continues to wobble and the 'real' economy of goods and services staggers," explained Jim Kunstler, author of The Long Emergency, World Made By Hand and the riotously acerbic column "Clusterfuck Nation." "The fate of the dollar in the short-term depends on which way this really goes. But in the long term, both sides say the dollar is toast."

Helping push America off the debt-soaked cliff it built for itself by hitching its future to hyper-real derivatives and unsustainable deregulation and development is beginning to look less like sacrilege and more like prudent international monetary policy. Whereas in the past, China and Russia's public protestations about the hegemonic corruption of the American empire would have been shooed away like jealous flies, now more countries are joining in the anti-American chorus, even as they shake President Barack Obama's hand and hope openly for a kindler, gentler global village.

What's going on behind the scenes is anybody's guess. But it's probably a good guess that more than a few long knives have been unsheathed.

"Geopolitically, I suspect there is whispered consensus between our various partners and rivals that the American situation is pretty hopeless," Kunstler cracked, "and that they would now all more or less benefit from the diminishment of U.S. power across the board. The Chinese, for instance, must know that we will never again ramp up the orgy of credit spending. Why keep throwing away their wealth to keep us consuming?"

It's a good question. One of the BRIC members' solutions to the conundrum is to spend more time on their own currencies, as well as those of the beleaguered International Monetary Fund, which has its own currency, called special drawing rights. The SDRs are pegged to a currency basket, containing the U.S dollar, the euro, the yen and the U.K. pound sterling. In other words, the currencies of the 20th century's superpowers.

BRIC, the purported superpowers of the 21st century, have been buying SDRs like mad lately. When BRIC met in mid-June in the Siberian city of Yekaterinberg, it committed to giving $80 billion to the IMF, with China carrying the lion's share at $50 billion. Add that to the $250 billion that the G20 coughed up in April, and the IMF is quickly becoming the planet's reserve bank of choice.

“There is a need to make the IMF a true representative of the world’s leading economies," Russian Finance Minister Alexei Kudrin asserted in June. "It’s not there right now,” he said, adding that it would be a decade before what People’s Bank of China Governor Zhou Xiaochuan recently called a super-sovereign reserve currency mounted enough of a challenge to displace the dollar.

In the meantime, Russia, China and the other BRIC members are putting their money where they want their mouths to be, which is in the International Monetary Fund's ear. But whether that super-sovereign reserve currency is the SDR is too soon to say.

"The SDR can't handle the load in its current form," Zimeba argued. "You'd need a payment system that accepted the SDR, for one. But where it can grow is in reserve assets, and this upcoming issuance of IMF bonds denominated in SDR will be a significant increase. But SDRs will only be open to governments, not the secondary market where they can be traded, which fails the requirements of convertibility and liquidity.

"Right now, the SDR doesn't have that mechanism. But that can change over time. In the near term, this is a way towards diversification, because the dollar doesn't have a majority share in the SDR."

Kunstler adds: "They're obviously hedging their bets as much as possible. Put yourself in their shoes. They see the U.S. financial system's stupendous swindles, and they know the score. So their interests are strictly tactical and strategic in the interests of their survival. They also surely want to try to insure the continuation of world trade, with or without the U.S. consumer."

Which is why BRIC, and by extension the countries beneath its heel or shaking its hand, are diversifying their dollars and dumping cash into the IMF, where they can attempt to influence the international monetary system in their favor. The United States has so far committed $108 billion, including $5 billion siphoned from the controversial war-funding bill that passed in mid-June.

In addition, it has arranged for the IMF to receive over $500 billion altogether, mostly to prop up zombie European banks that drank too much of the derivatives Kool-Aid. So BRIC has an uphill battle ahead of it. But it's gaining strength, and wants to convert that to IMF say-so.

"They want more significant voting rights in the IMF," Ziemba said. "The money is in exchange for leverage. China has talked in detail about how the over-reliance on the dollar was adding to global instability, creating a situation where the optimal monetary policy for the U.S. is not optimal for countries tacked to the dollar. But it's fairly obvious that, in five to 10 years, the role of these countries in the global economy will only increase. But they also have to figure out how much responsibility they want to take on."

Or can take on. BRIC is ascendant for sure, but it's about to inherit a global economy and environment that is nothing like the respectively stable climates American and European empires have enjoyed over the last few hundred years. From the econopocalypse to climate crisis and beyond, BRIC is quickly going to find its hands full of problems that will doubtlessly dampen its upward surge. Sure, the dollar is toast, but so is Earth's biodiversity and store of natural resources. It's hard to build a superpower on that heap.

"I think all nations are losing the ability to control events at the global level," Kunstler concluded. "It's a symptom of the crack-up of globalization, per se: A set of transient economic relations that only existed because of special conditions, namely, the final blowout of the cheap energy era. With that over, it's now a mad scramble for each player to survive.

"Observers seem to think that China will become the new global hegemon, but I doubt it. They have problems with water, food, overpopulation and environmental degradation that are much worse than ours. The world is comprehensively headed for a reduced standard of living."

Scott Thill runs the online mag Morphizm. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.

Why the dollar is dying

Update: June 24, 2009
A new world is being born, one without the US dollar greasing the wheels of commerce
BRIC & SCO summits: Reinventing the wheel

Updates: June 18, 2009
Fed Buying Treasuries; China Selling Treasuries

Russia, China to Promote Ruble, Yuan Use in Trade


Probably the most important meeting in the world is going on right now in Russia: but, only a few people will notice the article below. Yet, it details the most critical change occurring currently creating a new world order and eradicating the United States financial and military hegemonic plans. And the change will be soooo quiet. Not really quiet; it's just that people's attentions are being focussed elsewhere. The information is here for all who are interested in it.

As the dollar enters its death cycle, Americans are focussed on GM and Sarah Palin's new blooper. The fall of the dollar will be a big surprise for many....but don't worry, it will happen gradually (for the near future).

I highly recommend this long but lucid article on why the US Empire is being superceded by the power of Shanghai Cooperation Organisation SCO; and BRIC (Brazil, Russia, Inda and China). See When China awakes, it will shake the world. - Napoleon Bonaparte

If switching to another reserve currency or basket of currencies disables the American military stranglehold on earth, I say, Bring it on!

For those of you who prefer the Americanised version of news with its 'happy ending' see Dollar poses dilemma for Bric countries , the BBC version of the SCO summit.

De-Dollarization: Dismantling America’s
Financial-Military Empire
The Yekaterinburg Turning Point

by Michael Hudson
Global Research, June 13, 2009
Source
The city of Yakaterinburg, Russia’s largest east of the Urals, may become known not only as the death place of the tsars but of American hegemony too – and not only where US U-2 pilot Gary Powers was shot down in 1960, but where the US-centered international financial order was brought to ground.

Challenging America will be the prime focus of extended meetings in Yekaterinburg, Russia (formerly Sverdlovsk) today and tomorrow (June 15-16) for Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation Shanghai Cooperation Organization (SCO). The alliance is comprised of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan, with observer status for Iran, India, Pakistan and Mongolia. It will be joined on Tuesday by Brazil for trade discussions among the BRIC nations (Brazil, Russia, India and China).

The attendees have assured American diplomats that dismantling the US financial and military empire is not their aim. They simply want to discuss mutual aid – but in a way that has no role for the United States, NATO or the US dollar as a vehicle for trade. US diplomats may well ask what this really means, if not a move to make US hegemony obsolete. That is what a multipolar world means, after all. For starters, in 2005 the SCO asked Washington to set a timeline to withdraw from its military bases in Central Asia. Two years later the SCO countries formally aligned themselves with the former CIS republics belonging to the Collective Security Treaty Organization (CSTO), established in 2002 as a counterweight to NATO.


Yet the meeting has elicited only a collective yawn from the US and even European press despite its agenda is to replace the global dollar standard with a new financial and military defense system. A Council on Foreign Relations spokesman has said he hardly can imagine that Russia and China can overcome their geopolitical rivalry,1 suggesting that America can use the divide-and-conquer that Britain used so deftly for many centuries in fragmenting foreign opposition to its own empire. But George W. Bush (“I’m a uniter, not a divider”) built on the Clinton administration’s legacy in driving Russia, China and their neighbors to find a common ground when it comes to finding an alternative to the dollar and hence to the US ability to run balance-of-payments deficits ad infinitum.

What may prove to be the last rites of American hegemony began already in April at the G-20 conference, and became even more explicit at the St. Petersburg International Economic Forum on June 5, when Mr. Medvedev called for China, Russia and India to “build an increasingly multipolar world order.” What this means in plain English is: We have reached our limit in subsidizing the United States’ military encirclement of Eurasia while also allowing the US to appropriate our exports, companies, stocks and real estate in exchange for paper money of questionable worth.

Members of Shanghai Cooperation Organisation

"The artificially maintained unipolar system,” Mr. Medvedev spelled out, is based on “one big centre of consumption, financed by a growing deficit, and thus growing debts, one formerly strong reserve currency, and one dominant system of assessing assets and risks.”2 At the root of the global financial crisis, he concluded, is that the United States makes too little and spends too much. Especially upsetting is its military spending, such as the stepped-up US military aid to Georgia announced just last week, the NATO missile shield in Eastern Europe and the US buildup in the oil-rich Middle East and Central Asia.

The sticking point with all these countries is the US ability to print unlimited amounts of dollars. Overspending by US consumers on imports in excess of exports, US buy-outs of foreign companies and real estate, and the dollars that the Pentagon spends abroad all end up in foreign central banks. These agencies then face a hard choice: either to recycle these dollars back to the United States by purchasing US Treasury bills, or to let the “free market” force up their currency relative to the dollar – thereby pricing their exports out of world markets and hence creating domestic unemployment and business insolvency.

When China and other countries recycle their dollar inflows by buying US Treasury bills to “invest” in the United States, this buildup is not really voluntary. It does not reflect faith in the U.S. economy enriching foreign central banks for their savings, or any calculated investment preference, but simply a lack of alternatives. “Free markets” US-style hook countries into a system that forces them to accept dollars without limit. Now they want out.

This means creating a new alternative. Rather than making merely “cosmetic changes as some countries and perhaps the international financial organisations themselves might want,” Mr. Medvedev ended his St. Petersburg speech, “what we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries will not dominate.”

When foreign military spending forced the US balance of payments into deficit and drove the United States off gold in 1971, central banks were left without the traditional asset used to settle payments imbalances. The alternative by default was to invest their subsequent payments inflows in US Treasury bonds, as if these still were “as good as gold.” Central banks now hold $4 trillion of these bonds in their international reserves – and these loans have financed most of the US Government’s domestic budget deficits for over three decades now! Given the fact that about half of US Government discretionary spending is for military operations – including more than 750 foreign military bases and increasingly expensive operations in the oil-producing and transporting countries – the international financial system is organized in a way that finances the Pentagon, along with US buyouts of foreign assets expected to yield much more than the Treasury bonds that foreign central banks hold.

The main political issue confronting the world’s central banks is therefore how to avoid adding yet more dollars to their reserves and thereby financing yet further US deficit spending – including military spending on their borders?

For starters, the six SCO countries and BRIC countries intend to trade in their own currencies so as to get the benefit of mutual credit that the United States until now has monopolized for itself. Toward this end, China has struck bilateral deals with Argentina and Brazil to denominate their trade in renminbi rather than the dollar, sterling or euros,3 and two weeks ago China reached an agreement with Malaysia to denominate trade between the two countries in renminbi.[4] Former Prime Minister Tun Dr. Mahathir Mohamad explained to me in January that as a Muslim country, Malaysia wants to avoid doing anything that would facilitate US military action against Islamic countries, including Palestine. The nation has too many dollar assets as it is, his colleagues explained. Central bank governor Zhou Xiaochuan of the People's Bank of China wrote an official statement on its website that the goal is now to create a reserve currency “that is disconnected from individual nations.”5 This is the aim of the discussions in Yekaterinburg.

In addition to avoiding financing the US buyout of their own industry and the US military encirclement of the globe, China, Russia and other countries no doubt would like to get the same kind of free ride that America has been getting. As matters stand, they see the United States as a lawless nation, financially as well as militarily. How else to characterize a nation that holds out a set of laws for others – on war, debt repayment and treatment of prisoners – but ignores them itself? The United States is now the world’s largest debtor yet has avoided the pain of “structural adjustments” imposed on other debtor economies. US interest-rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programs that Washington forces on other countries via the IMF and other Washington vehicles.

The United States tells debtor economies to sell off their public utilities and natural resources, raise their interest rates and increase taxes while gutting their social safety nets to squeeze out money to pay creditors. And at home, Congress blocked China’s CNOOK from buying Unocal on grounds of national security, much as it blocked Dubai from buying US ports and other sovereign wealth funds from buying into key infrastructure. Foreigners are invited to emulate the Japanese purchase of white elephant trophies such as Rockefeller Center, on which investors quickly lost a billion dollars and ended up walking away.

In this respect the US has not really given China and other payments-surplus nations much alternative but to find a way to avoid further dollar buildups. To date, China’s attempts to diversify its dollar holdings beyond Treasury bonds have not proved very successful. For starters, Hank Paulson of Goldman Sachs steered its central bank into higher-yielding Fannie Mae and Freddie Mac securities, explaining that these were de facto public obligations. They collapsed in 2008, but at least the US Government took these two mortgage-lending agencies over, formally adding their $5.2 trillion in obligations onto the national debt. In fact, it was largely foreign official investment that prompted the bailout. Imposing a loss for foreign official agencies would have broken the Treasury-bill standard then and there, not only by utterly destroying US credibility but because there simply are too few Government bonds to absorb the dollars being flooded into the world economy by the soaring US balance-of-payments deficits.

Seeking more of an equity position to protect the value of their dollar holdings as the Federal Reserve’s credit bubble drove interest rates down China’s sovereign wealth funds sought to diversify in late 2007. China bought stakes in the well-connected Blackstone equity fund and Morgan Stanley on Wall Street, Barclays in Britain South Africa’s Standard Bank (once affiliated with Chase Manhattan back in the apartheid 1960s) and in the soon-to-collapse Belgian financial conglomerate Fortis. But the US financial sector was collapsing under the weight of its debt pyramiding, and prices for shares plunged for banks and investment firms across the globe.

Foreigners see the IMF, World Bank and World Trade Organization as Washington surrogates in a financial system backed by American military bases and aircraft carriers encircling the globe. But this military domination is a vestige of an American empire no longer able to rule by economic strength. US military power is muscle-bound, based more on atomic weaponry and long-distance air strikes than on ground operations, which have become too politically unpopular to mount on any large scale.

Click to enlarge image

On the economic front there is no foreseeable way in which the United States can work off the $4 trillion it owes foreign governments, their central banks and the sovereign wealth funds set up to dispose of the global dollar glut. America has become a deadbeat – and indeed, a militarily aggressive one as it seeks to hold onto the unique power it once earned by economic means. The problem is how to constrain its behavior. Yu Yongding, a former Chinese central bank advisor now with China’s Academy of Sciences, suggested that US Treasury Secretary Tim Geithner be advised that the United States should “save” first and foremost by cutting back its military budget. “U.S. tax revenue is not likely to increase in the short term because of low economic growth, inflexible expenditures and the cost of ‘fighting two wars.’”6

At present it is foreign savings, not those of Americans that are financing the US budget deficit by buying most Treasury bonds. The effect is taxation without representation for foreign voters as to how the US Government uses their forced savings. It therefore is necessary for financial diplomats to broaden the scope of their policy-making beyond the private-sector marketplace. Exchange rates are determined by many factors besides “consumers wielding credit cards,” the usual euphemism that the US media cite for America’s balance-of-payments deficit. Since the 13th century, war has been a dominating factor in the balance of payments of leading nations – and of their national debts. Government bond financing consists mainly of war debts, as normal peacetime budgets tend to be balanced. This links the war budget directly to the balance of payments and exchange rates.

Foreign nations see themselves stuck with unpayable IOUs – under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China’s currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the US Treasury securities losing their AAA rating, they don’t mean that the government cannot simply print the paper dollars to “make good” on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner put on his serious face and told an audience at Peking University in early June that he believed in a “strong dollar” and China’s US investments therefore were safe and sound, he was greeted with derisive laughter.7

Anticipation of a rise in China’s exchange rate provides an incentive for speculators to seek to borrow in dollars to buy renminbi and benefit from the appreciation. For China, the problem is that this speculative inflow would become a self-fulfilling prophecy by forcing up its currency. So the problem of international reserves is inherently linked to that of capital controls. Why should China see its profitable companies sold for yet more freely-created US dollars, which the central bank must use to buy low-yielding US Treasury bills or lose yet further money on Wall Street?

To avoid this quandary it is necessary to reverse the philosophy of open capital markets that the world has held ever since Bretton Woods in 1944. On the occasion of Mr. Geithner’s visit to China, “Zhou Xiaochuan, minister of the Peoples Bank of China, the country’s central bank, said pointedly that this was the first time since the semiannual talks began in 2006 that China needed to learn from American mistakes as well as its successes” when it came to deregulating capital markets and dismantling controls.8

An era therefore is coming to an end. In the face of continued US overspending, de-dollarization threatens to force countries to return to the kind of dual exchange rates common between World Wars I and II: one exchange rate for commodity trade, another for capital movements and investments, at least from dollar-area economies.

Even without capital controls, the nations meeting at Yekaterinburg are taking steps to avoid being the unwilling recipients of yet more dollars. Seeing that US global hegemony cannot continue without spending power that they themselves supply, governments are attempting to hasten what Chalmers Johnson has called “the sorrows of empire” in his book by that name – the bankruptcy of the US financial-military world order. If China, Russia and their non-aligned allies have their way, the United States will no longer live off the savings of others (in the form of its own recycled dollars) nor have the money for unlimited military expenditures and adventures.

US officials wanted to attend the Yekaterinburg meeting as observers. They were told No. It is a word that Americans will hear much more in the future.

Notes

1 Andrew Scheineson, “The Shanghai Cooperation Organization,” Council on Foreign Relations,

Updated: March 24, 2009: “While some experts say the organization has emerged as a powerful anti-U.S. bulwark in Central Asia, others believe frictions between its two largest members, Russia and China, effectively preclude a strong, unified SCO.”

2 Kremlin.ru, June 5, 2009, in Johnson’s Russia List, June 8, 2009, #8.

3 Jamil Anderlini and Javier Blas, “China reveals big rise in gold reserves,” Financial Times, April 24, 2009. See also “Chinese political advisors propose making yuan an int’l currency.” Beijing, March 7, 2009 (Xinhua). “The key to financial reform is to make the yuan an international currency, said [Peter Kwong Ching] Woo [chairman of the Hong Kong-based Wharf (Holdings) Limited] in a speech to the Second Session of the 11th National Committee of the Chinese People’s Political Consultative Conference (CPPCC), the country’s top political advisory body. That means using the Chinese currency to settle international trade payments …”

4 Shai Oster, “Malaysia, China Consider Ending Trade in Dollars,” Wall Street Journal, June 4, 2009.

5 Jonathan Wheatley, “Brazil and China in plan to axe dollar,” Financial Times, May 19, 2009.

6 “Another Dollar Crisis inevitable unless U.S. starts Saving - China central bank adviser. Global Crisis ‘Inevitable’ Unless U.S. Starts Saving, Yu Says,” Bloomberg News, June 1, 2009. http://www.bloomberg.com/apps/news?pid=20601080&sid=aCV0pFcAFyZw&refer=asia

7 Kathrin Hille, “Lesson in friendship draws blushes,” Financial Times, June 2, 2009.

8 Steven R. Weisman, “U.S. Tells China Subprime Woes Are No Reason to Keep Markets Closed,” The New York Times, June 18, 2008.

Related:
BRICs May Buy Each Other’s Bonds in Shift From Dollar
Is the First World Being Turned into the Third World?