China Moves Closer To Ending Dollar Hegemony
The prequel to this commentary summarized the anti-climactic ending of the U.S. Debt-Ceiling Farce, and the fraudulent non-reaction to this circus by the Western financial system in general, and Western credit-rating agencies in particular.
By its own admission; the world’s largest economy, with the world’s largest debts and largest deficits came within hours of defaulting on payments to its creditors (otherwise known as bankruptcy), and there was essentially no reaction at all from Western credit-rating agencies to this latest exercise in brinksmanship – other than mild applause.
This comes despite the fact that absolutely nothing was resolved in this episode of The Farce, and the exact same parameters have been set up by the Puppets in Washington for an exact repeat of the latest episode, in only three months’ time. No reaction, that is, in the West.
There was, however, reaction elsewhere in the international financial community. One (as yet) quiet Voice raised a note of discord, in contrast to the usual, expected chorus of “Don’t Worry, Be Happy” coming from the Western credit-rating agencies. A Chinese credit-rating agency, Dajong Global Credit Rating immediately cut the U.S.’s credit rating by one notch.
Naturally the (Western) Corporate Media paid minimal attention to this ratings cut, being too busy hyping the fraudulent non-reaction of Western agencies. However, this news out of China is highly significant in two respects.
First of all; the rating cut by Dajong Global did not take the U.S.’s credit rating one notch below the entirely absurd “AAA” rating bestowed upon it by the West’s charlatan-agencies. It was a reduction from “A” to “A-”, about a half-dozen notches below its lofty perch in the West. Indeed, by the time the Washington Puppets finish staging their repeat of this Farce in January/February; U.S. sovereign debt could have an international credit rating near (or at) “junk” – even if there is no default next time the Puppets play their Russian Roulette.
So first of all we see reality reflected in the credit rating of Dajong Global, and with China’s openly/official “centralized economy”; it’s widely understood that Dajong Global is speaking with the voice of China’s government.
The world’s largest debtor, with the world’s largest debts shows not the slightest inclination to even reduce its deficits (let alone reduce debt), and now it is displaying increasing and (highly-public) reticence to simply continue making payments on all that debt. Obviously a near-junk rating is the only rational rating for such a debtor.
But there is also a second, even more important facet to this melodrama which correlates to the reality/honesty reflected in the U.S. sovereign credit rating from Dajong Global (and China): increased international legitimacy (and prestige). There is an obvious agenda as Beijing slowly-but-steadily ratchets up the volume of its own international credit ratings (system) – its quest to relace the dollar as global reserve currency with the yuan.
There are three, obvious prerequisites in attempting to execute such a transition:
- Sufficient economic mass to be able to practically supply/support a monetary base large enough to encompass most international global commerce.
- Sufficient international financial infrastructure to regulate the flow of this currency into (and around) the global economy in a sound and orderly manner.
- Perceived legitimacy.
A brief summation is in order. Hypothetically, Iceland could never establish its own currency, the krona, as reserve currency – no matter how honest, or well-run its banking system might be (now). An economy that small could never supply enough krona for most/all international commerce and remain stable.
Similarly; its own currency and debt markets (and the “infrastructure” which accompanies it) are neither large enough, nor internationalized to a sufficient degree for Iceland to be able to realistically step into such a role. Perhaps most importantly, for those reasons (and many more) Iceland’s krona would never/could never be perceived as a bona fide “reserve currency.”
One cannot foist an unwanted currency onto any two international trading partners, and expect/demand that they religiously use that currency in all of their international transactions. The whole point of a reserve currency is that it is supposed to a financial medium of mutual convenience (and faith).
When is a currency (and the nation behind it) ready to proclaim itself “reserve currency”? When in any given transaction it is the unit of currency most-preferred by both trade-partners. Becoming reserve currency is, indeed, a “popularity contest.”
It is a mammoth undertaking (even in a benign economic climate) to attempt to wean the global economy off of using one unit of currency for its international commerce and onto another one. It is a task an order of magnitude more daunting to attempt to do so in a global economy stressed to the breaking-point from past/current Western financial fraud, and when the current title-holder of “reserve currency” (the U.S.) refuses to voluntarily relinquish its highly advantageous role.
Yet China is well on the way to completing this transition, and (to this point) it has executed its strategy with seamless efficiency. Firstly, it has obviously achieved necessary economic mass to rightfully/rationally assume this role. Indeed, even in the make-believe world of Western economics (and economies); the discussion has now become not “if” but when China becomes the world’s largest economy.
In lock-step with that economic growth and development; China has internationalized its currency, its debt markets, and established all of the necessary financial/bureaucratic infrastructure for the renminbi to replace the dollar – and to do so in a relatively orderly manner.
However the third requisite, while the least-official and least well-defined, is also arguably the most difficult and most important. China must now win a popularity contest – versus the best (and most-shameless) self-promoter the world has ever seen: the United States.
China’s greatest asset in this task is (ironically) the U.S. itself. No amount of “self-promotion” (i.e. Corporate Media propaganda) can hide the putrid stench emanating from the U.S.’s corpse-economy, its Crime Syndicate financial system, its morally-bankrupt foreign policies, and its increasingly fascist/authoritarian domestic policies. The Fourth Reich is not a pretty sight to behold.
Proof of the success of China (and unintended “success” of the U.S.) in winning this global popularity contest comes with the fact that for seven of South-East Asia’s largest and most-dynamic economies, the renminbi is already their “reserve currency.” It is now only a question of when, not if, the renminbi becomes the global reserve currency.
China’s growing economic mass, its growing (and maturing) role in the international financial system, and its steadily growing legitimacy as the world’s (least-worst) “honest broker” have created an economic/monetary inertia sufficient to make it the proverbial “irresistible force”.
Conversely, the United States is now anything but an “immovable object.” Where China has established economically impressive positive inertia in its own development; the U.S. descends in rancid decay – spiraling toward economic implosion.
As explained previously; this translates into the economic “heart-beat” of the U.S. economy. Thus the real question here is not can China wrest this ‘monetary baton’ from the enfeebled grasp of the U.S.? Rather; the real question is: will the U.S. economy survive long enough to hand the baton to China?
Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers/investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.