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Dollar Going Out With A Whimper, Not A Bang — So Far

by John Rubino on March 1, 2012 · 40 comments

Last year the US ran a $272 billion trade deficit with China, which means we sent the Chinese that many extra dollars in return for the clothes, toys and iPhones they sent us. This lopsided relationship has been in place for a long time, allowing (or requiring) China to accumulate about $1.7 trillion dollars of various kinds of US paper.

From China’s perspective, this is a good deal in the short run but potentially a bad one longer-term. And lately the world has been wondering what they would do with all this low-yielding, rapidly-depreciating currency. The worst case scenario had them reacting to US deficits and debt monetization by converting their dollars into real assets at pretty much any price, sending the value of the dollar through the floor and igniting a currency crisis or hyperinflation.

Optimists dismissed the above as unlikely, since traders would see the change in strategy coming and front-run China by dumping dollars immediately, decimating the value of China’s remaining reserves. So the only option for China — and Japan, Saudi Arabia and other big trade surplus countries — is to keep playing the game by accumulating dollars in order to protect the value of their current reserves.

But there’s a lot of policy room between unrestrained accumulation and complete abandonment of the dollar. A surplus country can, for instance, keep accepting dollars but convert a growing share of them into other currencies or hard assets, over time lessening the dollar’s relative importance. This, it turns out, is exactly what China has been doing:

China’s Share of Reserves in U.S. Dollar Dives

By Tom Orlik and Bob Davis

Beijing—Fresh U.S. Treasury data suggest that China has lost its taste for investing as much of its $3.2 trillion in foreign-exchange reserves in U.S. dollars and may be increasing its holding of euro-denominated securities during a time that a debt crisis has roiled European markets.

Economists have long warned that if China started to cut back its purchases of U.S. securities, U.S. interest rates could climb, damaging the U.S. economy. China’s diversification of its vast reserves, however, hasn’t caused disruption so far, partly because of strong global demand for U.S. securities as a safe haven during troubled times.

Overall, foreign demand for dollar securities has remained strong; foreign holdings increased $1.8 trillion, or about 17%, to $12.52 trillion over 12 months to June, according to the Treasury data.

But the data, which provide one of the very few clues about how China invests its reserves, suggest that the percentage of dollar holdings in China’s foreign-exchange reserves has fallen to a decade-low of 54% from 65% in 2010. Purchases of U.S. securities equaled just 15% of the increase in China’s foreign-exchange reserves in the 12 months, down from 45% in 2010 and an average of 63% over the past five years, according to calculations based on information published by the U.S. Treasury and the Chinese government.

Some economists said China’s move was well-timed. “It would be optimal for China to adopt a contrarian strategy and pick times when the dollar is strong to aggressively diversify the currency composition of its reserve portfolio away from the dollar,” said Eswar Prasad, a China scholar at the Brookings Institution.

China won’t say how it invests its foreign-exchange reserves, which have grown rapidly over the past decade. Beijing has used its control over the exchange rate as a key plank of its development strategy and has racked up immense trade surpluses. That requires China’s State Administration of Foreign Exchange to invest the proceeds overseas. In the past, SAFE has hinted that about two-thirds of its stash is held in U.S. securities, a percentage that generally has been in line with annual data collected by the U.S. Treasury.

The new Treasury data suggest China has begun to rapidly diversify its portfolio of currencies. “It clearly indicates China’s intention not to put all eggs in one basket,” said Lu Feng, director of Peking University’s China Macroeconomic Research Center.

China has many reasons to try to reduce its exposure to the dollar. They include very low yields paid by Treasuries and a vulnerability to U.S. decisions on managing its debt that could lead to inflation that would erode the value of those holdings. Last summer’s political debate over raising the U.S. debt ceiling sparked worries that the U.S. could default on some payments.

To arrive at the percentage of dollar holdings in China’s reserves, U.S. Treasury data on Chinese purchases of U.S. securities must be compared to Beijing data on its foreign-exchange holdings. That calculation is complicated by the impact of currency movements on the value of China’s reserves. Even so, it is clear that China is purchasing fewer dollar-based securities than it had in the past.

Treasury data show that China’s holdings of U.S securities edged up 7% up to $1.73 trillion as of June 30, translating into an increase of $115 billion from 12 months earlier. Over the same time, China’s foreign-exchange holdings increased by 30% to $3.2 trillion, an increase of $743 billion. Essentially, the pace of China’s purchases of U.S. securities didn’t come close to matching the pace of expansion of its foreign reserve pile, reducing the percentage of dollar holdings in China’s foreign exchange haul.

Nick Lardy, an expert on the Chinese economy at the Peterson Institute, noted that a fall in China’s holdings of debt issues by troubled mortgage giants Fannie Mae and Freddie Mac accounted for most of the decline. Over the period covered by the annual survey, China continued to add to its holdings of U.S. Treasurys, he said.

Monthly data on China’s holdings of U.S Treasurys has been seen as less reliable than the annual survey. But the Treasury has now introduced a new survey technique intended to improve the accuracy of the data. The latest numbers show China’s holdings of U.S Treasurys dropped to $1.15 trillion in December, falling $156 billion since the period covered by the annual survey. That suggests China’s diversification away from dollars may have continued in the second half of 2011.
As China has appeared to lose its dollar appetite between June 2010 and 2011, the greenback weakened 9.2% against a broad range of currencies according to the Federal Reserve. It has since risen about 3%, as the euro crisis deepened and the U.S. economy has shown signs of strengthening.

Where did the money not invested in dollars go? China’s SAFE won’t say. Officials at the foreign-exchange agency didn’t respond to questions faxed to them on Thursday.

But China’s leaders have made increasingly strong statements that they would like to help the 17-nation euro zone deal with its troubles. In February, Premier Wen Jiabao, speaking at the EU China summit, said “Europe is a main investment destination for China to diversify its foreign-exchange reserves.”

Klaus Regling, the chief executive of the European Financial Stability Facility—the euro-zone’s rescue fund for Greece and other financially troubled nations—was in Beijing in October for talks with SAFE. Regular talks have continued since then and EFSF documents show that Asia, apart from Japan—essentially China—accounted for between 14% and 24% of purchases for three EFSF bond sales worth €13 billion in the first half of 2011, before Mr. Regling’s trip to Beijing.

Stephen Green, China economist at Standard Chartered, said the majority of China’s increased investment in Europe has probably gone into core euro zone countries like Germany that boast relatively low debt levels. Chinese officials have privately made clear that they are wary of buying bonds directly from Greece, Portugal and other troubled European nations.
With Europe’s fiscal situation being even more precarious than that of the U.S., a shift of reserves into euros brings its own risks.

Mr. Green, the Standard Chartered analyst was acerbic in describing China’s choice between investing in the U.S. and Europe: “At least if you diversify into Europe, you are balancing your risks between two equally awful fiscal messes.”

Some Thoughts
Moving out of dollars and into euros, even via German bonds, is not, as the analyst quoted above points out, an especially high-percentage bet. There are two explanations here: 1) China doesn’t understand Europe’s dilemma, which is that either the eurozone falls apart — a bad thing for all European paper — or Germany takes the peripheral countries’ debt onto its own balance sheet via guarantees and direct aid, which is bad specifically for German paper. Or 2) China grasps Europe’s situation but is so desperate to get out of dollars that it’s willing to “diversify” into something just as bad.

But it’s not just euro-bonds that China is accumulating. They’ve been buying gold (only admitting it after the fact), and farmland and mines in Africa and Latin America. So the quality of their portfolio is rising as it shifts towards hard rather than financial assets.

As the article also notes, China’s scaling back of its dollar holdings in relative terms hasn’t caused the dollar to tank because the rest of the world is so troubled that money is flowing into dollars by default. This is probably temporary. Either the rest of the world gets its act together and begins to look safe again or the US is sucked into the maelstrom of a eurozone implosion or Middle East war or whatever. Or our ongoing debt binge finally gets the scrutiny it deserves and even in an unsafe world the US is discovered to be fundamentally unsound.

So for surplus countries the dollar’s recent exchange rate stability is a great chance to sell into strength and accelerate their diversification programs. Next year’s numbers will probably show another big shift out of dollars.

Why does it matter what China or any other country does with dollars the US has already created and spent? Because the foreign exchange markets are where the dollar’s value is determined, and the numbers are now huge. There are maybe $3 trillion in the vaults of just a handful of countries, all of whom want to protect their investment and none of whom trusts the US to do it for them. If China is seen as easing itself out of dollars without adverse consequence, then the other big dollar holders will be tempted to follow suit. The result: a growing number of sellers, which will eventually send the dollar down at an accelerating rate, which will cause the remaining dollar holders to panic and head for the exits. Trillions of dollars being converted to hard assets or euros and yen (or Mexican pesos or Brazilian real) all at once is a currency crisis that the Fed won’t be able to stop.

  • Mn

    A communist country would crash the dollar? Why in the world would they think of doing that? Better yet, why in the world would our government facilitate the process!

    • http://ronpaul2012 Pup

      You forgot to post the obligatory “end sarcasm”, but we get your meaning. The only real way to protect your wealth, whether you are China or Joe six pack is to hoard gold and silver. It’s that simple. Oh, and RON PAUL 2012!

  • http://sevencontinents@mindspring.com Benjamin Cole

    A cheaper dollar? Bring it on. USA exports will surge, and our economy will do better. It is also encouraging domestic energy production.

    The Chinese have a lot of dollars. So what. They can: Hold onto them, meaning they gave us goods in exchange for paper. 2) Buy something back from us, meaning our exports surge.

    Oh yeah, they can convert them into other currencies, but sooner or later the dollars either come back us to buy something, or they were a gift of goods to us.

    I look forward to a cheaper USA dollar. The further down it goes, the better.

    • http://roycobden.wordpress.com Roy Cobden

      A slightly cheaper dollar may help you. A trashed, crashed dollar won’t. A loss of purchasing power in the dollar will be reflected in climbing commodity prices (as priced in USD).

      How well will your world work when hard assets & energy prices go through the roof (in USD terms) and you can effectively only afford to buy a small fraction of what you used to be able to afford? You think $8/gal gasoline would hurt? The Brits pay that now, so that’s not even “out there”. How about $15/gal gasoline? How about $25 gas?

      How well will your world work in a more extreme scenario where nobody outside the US will even accept a greenback because they don’t trust them and don’t want them? What good will a tsunami of worthless dollars do coming back to you if you can’t turn them around to buy something else?

      Be careful what you wish for.

      • http://www.AllenCurrie.ca JustamereBear

        Roy and more importantly Benjamin

        That decreasingly valuable dollar is the subject of “Operation Phoenix” my popular recent novel. I urge you to read it and consider whether it is possible.

        This may seem self serving but it is not because I provide an entirely free read at my website http://www.AllenCurrie.ca “Operation Phoenix” is written in the manner of Orwells “1984″. In the 1940′s he observed a trend and said if this trend continues the world will look like this in 1984. He set his protagonist down in that world and watched him. Largely his forecasts were uncanny. My novel sprung from a trend I noticed in 1987 and quote “A must read. If there ever was a story that predicted a very possible future this is it.”

        Be careful what you wish for indeed.

    • http://dpc.ucore.info Dawid Ciężarkiewicz

      You realize that import is good and export is necessarily evil to have import? If you disagree, invite some burglars to export your savings, plasma tv and stereo, for free. I’m sure it will make you happy if you enjoy export so much. :)

    • Jason Emery

      Antal Fekete has covered this ‘cheap dollar good for exports’ fallacy numerous times. If you are a USA based producer, and the dollar declines in purchasing power, what happens to your input costs?

      Actually, it is a moot point, though. Manufacturing activity, as a percentage of the USA economy, has declined for decades. Even if the perfect combination of currency stability, tariffs, tax rates and other factors magically appeared, it would still take decades to rebuild our manufacturing industry.

      The main problem is that our minimum wage is way tOo high to compete with the rest of the world. Since it would be politically impossible to lower it to $1.50/hour, and make us competitive, it will just stay at $7.50 while the rest of the world’s minimum wages rises to that level. If hyperinflation takes hold, it won’t take all that long. I think $15/gal gasoline might be a tad low, however. More like $30/gal in a couple of years.

      • http://www.AllenCurrie.ca JustamereBear

        What is worse, The US has shipped almost all its manufacturing equipment to low cost places like China, and now cannot become isolationist even if they wanted to.

  • Bruce C.

    The main dilemma for all concerned is the lack of options to the US dollar. Despite all that has occurred in recent years the US is still the world’s biggest economy, still has the reserve currency, and still has the world’s biggest and most powerful military. I think it’s also true that the world is more stable and prosperous because of the United States, though it seems impossible to determine the extent to which that is true. Nevertheless, most people believe that, so I find it hard to imagine how other fiat currencies of the world are going to be much of an alternative if the US dollar collapses.

    Hard assets and commodities may seem to be alternatives but without a viable currency system they can’t be monetized. Similarly, precious metals like gold and silver, may seem to be obvious money alternatives especially for individuals, but there is too little of it to be a viable alternative for trillions of US dollars, let alone all the other currencies.

    I had a conversation with an actual real, live investment banker and venture capitalist recently and he said that there is so little gold available to buy (never mind silver) that big institutional money could never get into it (never mind entire for-ex reserves of countries). China is probably buying, and mining, as much of it as it can and it has a hell of a long way to go. Maybe 2% of its foreign exchange reserves are in gold. It may be accumulating hundreds of tonnes a year but it could take decades to reach the status of the US (uh…I mean the NY Fed) or even Italy.

    Of course, none of this means that the US dollar won’t be worth the paper it’s printed on, just that there really aren’t any places to hide.

    • Dave Ziffer

      Bruce C: Since you are talking to investment bankers … I would be very interested in the answer to a nagging question. Silver bulls like Eric Sprott have been spending the last year talking about how brisk the sales of silver are (actual metal, that is, not silver “paper”) and how the sales are outstripping supply. To hear Sprott and others talk, you’d think we’d be down to our last ounce pretty soon. Yet the trend line for the price of silver has been flat for the past year. Can anybody explain how physical silver can be being snapped up at the same dollar volume as gold (which means it’s moving at 50 times the physical quantity of gold) with both of them in short supply and with silver being mostly irretrievably consumed by industry, and yet the price remains flat? Thanks.

      • Bruce C.

        I doubt he nor just about any banker (of whatever stripe) would know the answer to that question. In fact they know relatively little about a lot of things despite what obviously you and most other people think. Banks and bankers are some of the stupidest people I have ever dealt with. Actually, stupid isn’t quite the right word because they don’t lack intelligence it’s just that they have a very bizarre point of view. Very compartmentalized, unimaginative and non conceptual. They don’t question very much and they don’t integrate. The banker I know I’ve known for years and he is no slouch professionally. He’s worked “on” Wall Street for at least 30 years and now owns a small investment banking firm in Manhatten that specializes in “taking companies from seedlings to oaks” as he puts it (as opposed to providing seed capital for startups.) So he may know a lot about business minutia (and yacht racing) but about alternative subjects like precious metals he is ASTONISHINGLY ignorant.

        For example, I was talking to him about the difference between silver Philharmonic coins and silver American Eagles and he didn’t know anything about them. HE HADN’T EVEN HEARD OF THEM, in fact. Then his typical banker arrogance came through as he condescendingly asserted that “those must be those over-priced commemorative coins that you see on TV.” Then I said, “No they’re not,” and he said, “Yes they are.”

        I then asked what he thought about gold – something not so “esoteric” – and he said, “Not much.” Gold was of no interest to him because there’s not enough of it around. My guess is that he thinks silver is more common than gold because it costs less.

        Any how, my opinion to your question is that there is more silver available than advertised, and the higher the price gets the more there will be. That is, until people get to the point that they really would rather have metal instead of paper, paper tender will trump everything else. The key to this whole precious metals theme is for large numbers of people to make the switch. As long as the market for PMs is relatively tiny or segregated to central banking settlements it’s going to remain a side show.

        • Dave Ziffer

          You might find this Ted Butler interview (link below), in which he asks the same question that I did (about three minutes in) to be interesting. Unfortunately no matter how much anybody talks about it, I have never heard anyone explain how banks make money by holding large short positions in anything for decades. I mean, if you are going to artificially suppress the price of something and then continue to hold short positions, it seems to me that you must eventually lose your shirt. anyway here it is: http://www.youtube.com/watch?v=XrO1cA4MprQ&feature=related

        • http://www.AllenCurrie.ca JustamereBear

          Yes, they are unbelievably obtuse. I was once talking with a EuroDollar professional TRADER for one of the big banks and asked him “What exactly is a Eurodollar?” He couldn’t tell me so I had to tell him. The Eurodollar got its big boost during the Vietnam war. The US spent over one Trillion on that war, a good deal of it in salaries. Charley the drug dealer made out like the bandit he was. But keeping his stash in Vietnam was a bit risky so he paddled his sampan around to Switzerland and deposited.

          Now banks make money by loaning it. There is something called the bank multiplier which allows them to lend several times what they have on hand. The local laws (around the world) restrain banks from lending infinitely against what they are holding in the local currency. However, the Swiss do not control foreign currencies, and the Swiss banks are not under the control of the US. So bankers had no requirement to maintain any reserves at all on their USD holdings. These greedy little souls began to lend more and more US dollars. Soon US dollars were sloshing around the world totally without any controls whatsoever. Trillions of them. The US treasury is a midget besides the bankers when it comes to creating money.

          Because bankers are so myopic, we have the same problem with the largely unregulated derivatives today, in additioin to the uncontrolled USD. In fact I am downright terrified. Sleep on Joe sixpack.

      • Tom Nacey

        Answer to dwindling supply and flat price? Pricing at the margin. As long as there is any extra supply, price is just a value judgement. As soon as demand outreaches supply, then price determines who gets it and who doesn’t. What will Motorola be willing to pay for the 1/10 ounce that goes into each cell phone? What would it cost Motorola to stop selling cell phones? The paper price controls silver until it doesn’t. Kind of like the economics of marriage. Two can live as cheaply as one, for half as long.

    • http://ronpaul2012 Pup

      Bruce C.

      Let me quote you:

      “Similarly, precious metals like gold and silver, may seem to be obvious money alternatives especially for individuals, but there is too little of it to be a viable alternative for trillions of US dollars, let alone all the other currencies.”

      How can you think this statement is true? Why are there “trillions of US dollars” in the first place? Because there is NOTHING backing them. Prior to the creation of the illegal Federal Reserve scam we had price stability. The dollar has lost 99% of its value since then. That is why we need so many more fiat dollars to support a given amount of “real” wealth.

      The statement you made shows not how insignificant gold has become, but how inflated, unstable and valueless the dollar has become. We are not looking for an “alternative for trillions of US dollars” we are looking for a stable form of money, that holds its value relative to REAL goods and services, and is not subject to confiscation through debasement.

      If you stop pricing tangible assets in terms of dollars and start pricing them in terms of gold or silver ounces all of a sudden the gold standard makes more sense. The utility of a house hasn’t changed, but it’s USD price has. Why? The utility of a gallon of gasoline hasn’t changed, but it’s USD price has. Why? Gallon of milk, loaf of bread, haircut, man’s suit, pair of shoes, ammunition, a Big Mac…same story. It’s funny how, when you price that gallon of gasoline in silver, you actually find that gasoline hasn’t gotten more expensive at all, the currency we use to pay for it just buys less of it. In terms of silver, gasoline has gotten cheaper in the last ten years according to Ron Paul’s statements to Ben Bernanke this week. What has happened is that the dollar has become worth less.

      Those “trillions of dollars” are in name only, and do not represent any specific “real” economic value from one day to the next. I imagine that if they had held a constant value since 1913 they would really be “billions of dollars”. They are a legal fiction.

      Price things in real money, gold and silver. Issue paper money backed by a specific value or weight of gold or silver. Otherwise, how do you know what a dollar is worth? It isn’t written down anywhere what our currency represents. It is backed by nothing. We need to revert to the system that has WORKED for 6000 years and stop fooling ourselves by thinking paper IOUs have any real value beyond the willingness of the greater fool to accept them. Because, as you can see, we are running out of greater fools. China has decided to pass on the chance to buy dollars, and so have the smart individuals in the world looking to preserve their wealth.

      Sorry for the poor quality of my post, I’m not a professional writer.

      • Bruce C.

        I understand your sentiment and fundamentally you’re right. What I’m referring to is the practical difficulty of switching from the out of control fiat money system we have now to something more reliable, and I don’t just mean a commodity backed system. For one thing, the rarity of gold means that some other medium based on gold would be needed for currency to supply the world’s money needs. But that is already one step closer to what we have today. What could screw up even that system is the same thing that ruins all fiat systems: politics and corruption, which leads to debasement. Any system devised will require a lot of what the financial world seriously lacks these days for it to work, and to last.

        Ann Barnhardt wrote a good piece about this just yesterday at her website Barnhardt.com. She’s a real Christian but I like her spirit.

      • Bruce C.

        Correction: that’s Barnhardt.BIZ, not dot com.

        • Jason Emery

          Most of the so-called money that ‘must’ be moved to gold, should there be a currency change, doesn’t even exist. Take the trillions in the social security trust fund. There’s nothing in there but i.o.u.’s and those i.o.u.’s won’t be honored, whether we are on the dollar standard or the gold standard.

          Or all the trillions of sovereign debt. Not a penny of that will ever be repaid. When we shift back to a hard money system, it will be written off, either officially, or assigned such a low gold or silver value as to disappear, from the perspective of sovereign debt holders.

          With modern debit card technology, very little gold and silver will be needed to run a hard money system. You will use either actual metal, or swipe your gold/silver backed debit card, to make a purchase.

          • http://ronpaul2012 Pup

            Quoting myself from above:

            “Those “trillions of dollars” are in name only, and do not represent any specific “real” economic value from one day to the next. I imagine that if they had held a constant value since 1913 they would really be “billions of dollars”. They are a legal fiction.”

            I agree Jason Emery. Those “trillions of dollars” don’t exist anywhere in the physical word. They are a fiction; IOUs denominated in a fictional “currency” that is backed by nothing. If you are dependent on a fixed income or a pension (including social security) when the dollar rolls over you are dead. All “old dollars” and everything that has been promised or put on contract in “old dollars” will be written of or defaulted on when the “new dollar” replaces it. They will have to force a huge devaluation into the conversion from old to new in order to save the system. Everyone not holding physical assets will lose their shorts.

            My *unprofessional* advice; get a low, fixed rate mortgage on a house for the longest term possible with the least amount of money down possible. Then make the minimum payment each month and accumulate as much silver and gold as possible. When hyperinflation/dollar collapse come you will have a real asset with “no” debt beacuse the mortgage will be in old dollars, which will be worthless compared to gold and silver. So, you can either pay it off with an ounce or two of silver after the collapse, or just stop paying altogether once your bank goes under and there is nobody left to collect.

    • Marty

      What makes anyone believe the US has any gold reserves after Rubin’s phony strong Dollar policy lent, swapped or outright sold reserves in the latter nineties when gold was under $500. No wonder they don’t want an audit. Larry Summers and Greenspan did likewise after Rubin.

  • Agent P

    I think the rest of the world knows what time it is. And our military might, influence and intimidation is in the process of running its course. We’ve heard repeatedly – since 2008, how there is ‘nowhere else to go’ other than the $DX. Perhaps – for a time longer. However, I wouldn’t bet against the notion that quietly and methodically as possible, other countries are preparing themselves for a shift out of $ hegemony. Certainly not overnight. Better than that; the slow way. The Permanent way. When our comeuppance knocks at the door, it’s all over. And right now, the only thing keeping that Grim Reaper at bay is the sort of empty ‘jawboning’ that brought gold & silver low yesterday and the grace of our history.

    • http://www.AllenCurrie.ca JustamereBear

      I posted this elsewhere and sorry for the bandwith. Do read the predictive novel “Operation Phoenix` for free at http://www.AllenCurrie.ca

      Is China making its move?
      China offers other Brics renminbi loans
      By Henny Sender in Hong Kong and Joe Leahy in São Paulo
      March 7, 2012 8:06 pm

      China intends to extend renminbi loans to other Brics nations, in another step towards the internationalisation of its currency.

      The China Development Bank will sign a memorandum of understanding in New Delhi with its Brazilian, Russian, Indian and South African counterparts on March 29, say people familiar with their talks. Under the agreement CDB, which lends mainly in dollars overseas, will make renminbi loans available, while the other Brics nations’ development banks will also extend loans denominated in their respective currencies.
      ************

      Why do I find this important? For many years the Chinese have been buying commodities (such as copper) mines and other commodity based assets as fast as they could. Makes good business sense. Invest your profits to secure against price and supply disruption. And they did have a lot of profits resting on an increasingly shaky US dollar base. Commodities in hand were far better.

      Last week I noticed a couple of separate news items. One specifically dealt with a new announcement that China was prepared to ”do business” with their trade partners in Yuan. (read we are pressuring them) The second was a chart showing that their percentage reserves in USD have dropped from 65% to 54% in two years!!! That is IN ADDITION to the trade surpluses that the China is running with the US. Money that the US sends more or less directly to China. Last year alone the US ran a $272 billion trade deficit with China. Given the absolute size of their reserves, their announcement of a year or two ago that they would “diversify out of the US dollar,” they are doing so at a mind boggling pace. Almost impossible to move those quantities in the foreign exchange markets without major disruption. My antennae went straight up.

      This announcement is especially significant to me. In my mind there cannot be any good for the USD in these moves and their subsequent reactions. This has to be a sneak nuclear attack where the Chinese assume that they will get hurt but not nearly as much as the current entities in the world financial system. In fact that is probably true, especially since the US has depleted its financial nuclear stockpile. As well, The US has its hands tied via the amount of bonds the Chinese hold. Those inscrutable Orientals are really good at surprise attacks, an objective that most warriors lust after.

      Waking up on Dec 8 with half your fleet gone by surprise attack is not fun. Right now I am suggesting I can see financial Kamakasi planes on the horizon. Better the US should take its eyes off Europe again to glance west for just a moment or two.

      Mind you, I don’t think it is going to be much of a surprise to the powers that be. Recently the US has been passing all sorts of legislation designed to control its own home turf. I don’t think they really have any choice being bankrupt and all. March 16, Friday night, Obama signed the National Defense Resources Preparedness Executive Order. The Federal Government’s plans for 100% control of private resources, labor, and assets in the event of an emergency.
      http://www.whitehouse.gov/the-press-office/2012/03/16/executive-order-national-defense-resources-preparedness
      For example section 502; to employ persons of outstanding experience and ability without compensation and to employ experts, consultants, or organizations. – Get high or numb, using your method of choice before reading the document.

      Is the hair on the back of your neck rising yet? Just like under Hitler, this control will last as long as the president decides that a state of emergency exists.

  • W G Thompson

    To hear the old-line Boston Trustee
    types tell it, “We solved the currency
    question right from the start: One
    Treasury, one currency, one central
    government. Why can’t Europe drop
    their antagonisms and be more like
    us?” They forget that in 1790 we
    shared a common language and a common
    destiny (developing a continent).
    Since those unifying features are
    glaringly absent from Europe’s history
    and present position, I’ll give the
    EU and its Belgian-concocted Euro no
    more than 6 years before it turns into
    another Pompeii. Sorry, Brussels!
    WGT

  • Sarah

    Well Thompson, you might be right that the EU and the Euro are gone in six years. But for critisising the EU for not following the same path as the USA, that would mean that you think America is on the right path.
    Take a look at Weimar Republic (Germany between the first and second world war). That will explain why Germany is not so hot for printing money. There is enough printing going on already (LTRO). Seeing that America has borrowed more that its GDP (with 2,5 trillion of GDP being made up), real unemployment is about 22%, a big chunk of the US debt is maturing soon and any rize in the interest for debt will have an serious impact, especially combined with a outflow of UST, well to me that seems like Greece on steroids. Real US inflation is already around 10% (try shadowstat.com instead of the goverment’s numbers).

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  • Hopps

    This ain’t a buy the rumor sell the news type event, where the hysteria leading up to the event is greater than the actual event. This is the opposite. They are putting everything they have into keeping the rumor quiet. Anyone that even mentions the chance that the dollar could collapse is viewed as a paranoid lunatic. The dollar hasn’t gone out yet. Its still “game on” full court press to keep it at a whimper stage. You will hear a bang alright. Our press will never cover it accurately to prevent panic. In the game of financial weapons of mass destruction, the dollar reigns supreme, get set for a bang like the world has never experienced..

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  • JR

    I would really like to see a response to the counter argument, found at http://thepoog.com/?p=1546#more-1546 . Basically, the author there notes there is no way for China to dump its holdings, as it will only get, in return, US dollars. Subsequently, it would have to find someone, a la the card game old maid, to take them, which won’t be possible. Would love to see comments on this!

  • Tony D

    Definitely enjoying the discussion about the USD and gold.
    But a couple of things I believe. The destruction of the USD, which is happening and is inevitable will take a lot longer than we believe as TPTB are ALL IN and they have huge resources to keep kicking the can down the road. I think we will get to the stage on Blogs like this where we are saying “Why hasn’t the Dollar imploded yet ?” for a year or two before it actually happens,. We see the implosion coming nobody really expects it in immediate sense. Linked to this idea is that while the US deficit is huge and unsustainable we are no where near it being recognised as catastrophic as it will be by 2020 (24 trillion ?).
    My second point is that it is highly unlikely that in the real world the US will go to a hard backed currency. Why would the people who are in power after a crash not just reset the system with promises “not to crash it next time because we’ve learned from our mistakes?” Because the general population is economically illiterate and gullible they will be able to get away with this fiction, just like the “too big to fail” argument which goes against all principles of capitalism and sound economics.
    Currently, the world doesn’t operate on sound principles of economics, even after the crisis of 2008, so why would things change ? While the MSM is able to adequately manipulate information to the masses nothing much will change, even after a crash. Don’t be surprised if people holding PMs are vilified as the reason for the collapse. This is how things work in reality.

  • http://www.adovationz.co.nz Digby

    Its all very interesting and confusing.
    Who or what to believe.
    Is the dollar going to crash or what
    Is the Yuan going to be a reserve currency and fully floating and convertible soon?
    How can the USA stop its huge debt growing
    How can the USA stop importing so much Chinese stuff.
    Will wages real equilibrium at some time in the future ?
    Australian wages are very high at $15 an hour.

  • Donald

    Regardless of whether you have total faith in paper currency or gathering physical assets for the financial armegeddon you should realize that even on a most basic level preparation for the future is a wise move. For example you have a choice of washing your body and your laundry or not. Which one you choose will have a noticeable affect on your life the next day for better or worse. The next thing to consider is that big business or the goverment isnt looking out for the well being of our households. Think about this…if you or I default on a loan we know without a doubt someone will take our house, car, and future income. We will be poor and faced with starting over. Countries and central banks default on their financial responsibilities and they get MORE money. Last thing on my mind is that gold and silver has been a true measure of wealth since at least biblical days. Jesus Christ was sold out to the powers that be of the time for silver. I don’t see precious metals as fading out in our life time. Can paper currency make such a historical claim?

  • Ron Pollan

    The Federal Reserve and U.S. Treasury are the world’s largest Ponzi scheme. How long can it go on? That is what we are betting on when we buy silver and gold, how long until we hit the jackpot? It is truly a shame we are RULED by such a rotten, heathen group as we have in Washington, Wall Street, etc. Look up redemption draweth nigh. God Bless, Ron

  • Ron Pollan

    Moderation, indeed. Ron

  • http://www.scholasticsnakeoil.blogspot.com Dona Furiosa

    The erosion of the dollar is the “elephant in the room” that almost nobody in public life is talking about. And, if it’s allowed to continue (I see no reason why it won’t; the plutocracy benefits from it.), it will be the undoing of this country, as well as much of the world’s economy.

    One of the basic problems is that people in the industrialized world have placed their trust in institutions rather than individuals, families and communities. That, of course, is one of the reasons why families and communities are falling apart–which, of course, gives more power to institutions.

    People are not willing to help, or be helped by, those who are closest (emotionally and spiritually as well as physically) to them. Yet they trust governments to take care of them in their old age. When institutions like government (as well as banks and other corporations) are more empowered than individual people, the only result can be further isolation. That is exactly what the plutocracy wants: Atomized people will continue to buy the things they use every day from countries most of them have never seen, eat food prepared by complete strangers and send their money to acronyms. Really, under such conditions, how can we have a situation other than the one we’re witnessing.

  • http://www.westcoastladybugs.com RUSS SMITH

    Hi!, Patrons Et Al:

    What good are legal assumption here? When the whole fiat system goes legal, we’ll see the real legal attache cases coming out of the woodworks making everyone pay the true pipers of the new era and nobody so far can stretch their immaginations that far ahead to see clearly enough what’s ahead but the legal headwinds you and I can be sure will be strong ones for us to entertain for certain. The question now is how much legal advice then will a new $ legally and morally purchase?

    RUSS SMITH, CALIFORNIA
    resmith@wcisp.com

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  • Matthew

    The Chinese must wonder where this will all end. All this money printing, what will it do to the price of gold and silver? It seems so far nothing much has changed in the prices of precious metals for a year, despite the crisis with the Euro and Greece’s managed default. I wonder how long this can carry on.

  • Jimmy

    I just want to say that this forum is rife with what seems like pretty intelligent people. I also might add that I’m not the best writer. However, I do have a related question. China is seemingly investing it’s money in other assets and currencies besides the dollar, but I also heard that they’re purchasing a lot of corn from the U.S. How does this help or hurt our situation? I’m very new to all the jargon and basic concepts of what I’ve so far read,so any help and explanation to this question is greatly appreciated. How are we supposed to educate the masses about this? What are we as a community to do? I’m kind of scared for coming times, I’m not gonna lie…

    Peace and Love to all!


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