China officials call for displacing dollar, in time

Tired from 4th of July activity, readers are looking over this article

http://www.reuters.com/article/ousiv/idUSTRE5650WO20090706?virtualBrandChannel=11569&pageNumber=1

Here are the relevant parts, with comments below:

BEIJING (Reuters) - The financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday...

The Special Drawing Right (SDR), a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank.

"It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," Li was cited as saying in Financial News, a newspaper published by the central bank.

...

"The financial crisis caused the global economy to suffer heavy losses and it also let us clearly see how unreasonable the current international monetary system is," Li, a former central bank vice governor, said.

...

INTERNAL TENSION

The tension between China's vision for a radical overhaul of the global financial system and its big stake in the existing order has been on display in the run-up to the G8 summit, which starts on Wednesday in Italy.

China holds an estimated 70 percent of its $1.95 trillion in official foreign exchange reserves in the dollar and is wary of saying anything that would undermine the value of its investments.

...

Officials from other countries who will attend this week's G8 summit have said that Beijing has asked for discussion there about the future of reserve currencies. He Yafei has said that he was unaware of China making such a request.

...

"When a country that issues a reserve currency has a long-term trade deficit, then that currency is no longer suitable to be a reserve currency and the process to replace it should start," he was quoted as saying by local media.

...

Sources involved in preparation of the meetings said Brazil and India backed Beijing's call for debate but there was consensus among the G8 countries, at least, that nothing of significance could or should materialize at this stage.

What we have here is a dilemma: A situation with two or more outcomes. One bad, but the other(s) worse.

If China were to announce that they were no longer going to buy US Treasuries, then that would have an immediate and negative impact on their dollar holdings. But if China were to continue down the road that they have been on (buying US debt so to finance US Deficit spending), then they know that they (eventually) would be in deeper when it all collapses.

So what does China do? Keep buying US debt while at the same time moving behind the scenes to move away from the US dollar as the reserve currency. They aren't ready for that to happen yet, but they see where everything is headed and want to limit the damage to themselves as much as possible.

Also keep in mind the fact that China is reeling from the US consumer's decision (some voluntarily, others not) to stop spending as evidenced by the 7% savings rate. Millions of Chinese peasants have been thrown out of work (with no safety net, I might add) and are having to decide to go back to the farm or wait for another job to open up somewhere. That is why the Chinese stimulus package was passed. It has nothing to do with the world economy. It has everything to do with keeping 50 million people employed and not wanting to change things.

Super Soverign Currency

Pissed off Readers (POS) are taking a look at this:

http://www.reuters.com/article/usDollarRpt/idUSPEK26164620090626

"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.

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 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."

China and the other BRICS (not to mention all export driven economies) realize (as DeGaulle did back in the 60's-70's) that to rely on the US to not print their FIAT currency like mad is insane. Printing money is the easiest solution to governments that want both guns and butter.

A little history....

Beginning with LBJ the US tried to have it all (and it worked for the most part) by fighting wars against Vietnam and "social injustices" at the same time. Nixon and the Fed continued the some monetary and fiscal policies, but the French (De Gaulle) called him on it by demanding French held US credits be redeemed in gold. On Aug 15th 1971 Nixon slammed the gold window shut. That was the defining moment of the Nixon presidency, not Watergate. But like everything else, the MSM screwed that up too.

So what is happening today? The BRICS are realizing that the US's position as the reserve currency threatens their regimes more than the US's Nukes (at least for the time being). They realize that they have made a Faustian bargain with the US and they are trying to exit their positions in the most financially prudent manner.

That is why you will continuously see stories out of China, Russia, India and Brazil that seem to contradict themselves. They don't. Understand that that BRICS are in a dilemma. And dilemmas don't have good and bad answers. They have bad and less bad. The trick is to manage the situation with as little fall out as possible. Thus the call for SDR's while at the same time buying more dollars.

The thing to watch is what do the BRICS do with those dollars in terms of acquiring hard assets.

Solutions brought to you by the people who didn't see the problem?

If you have trouble understanding how America will surrender her sovereignty to the BRICS, then read this article:

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/16/AR2009061601887.html?hpid%3Dtopnews

President Obama, JUST LIKE PRESIDENT BUSH did, is seeking to expand Federal Government power in order to "punish" those firms found guilty of financial malfeasance. As long as we keep looking in the wrong places for the answer to what happened in the Crash of '08, then we will never find them.

The America credit system did not become unglued due to lack of regulation in 2008. It came unglued because we have reached a breaking point of trying to pass off debt based consumption as wealth. It is not.

Everyone talks about the fact that the BRICS don't have the domestic consumption that America has.

WAKE UP!!!

America doesn't have it either. It was all a mirage. What do you think is going to happen with increasing levels of debt (that will never be paid off in nomial terms) that America went under to buy all this stuff? We were buying things that we couldn't afford on credit that we should not have had. The party is over and all Washington can do (BOTH PARTIES) is try and come up with a "better regulated" way to have us go deeper into debt.

It is not going to work. And that is why the US dollar is doomed to fail. The Federal Reserve and the US Treasury are going to try and inflate their way out of this (they really don't have any choice in the matter). The BRICS (and other holders of US Debt and US Dollars) are going to quietly exit their positions, or use their dollar holding to acquire *REAL* assets. It will be a gradual process punctuated with bouts of extreme confusion and uncertainty as the world economic systems adjust to the new realities.