Tag: petrodollar

It is in process, the world is disengaging from the United States Dollar as a global unit of trade. What does that mean for America?

“At some point, a crisis of confidence in this so-called money is inevitable. People aren’t going to trust it forever if you continue to create trillions and trillions backed by nothing but a promise from a central bank and a promise from governments. That’s the flaw in all of this. You can’t sustain the perceptions of moneyness forever. 

History has many examples of how money is destroyed by over-issuance, and now we’re watching it in real time.”

Doug Noland
Doug Noland: It’s Too Late To Turn Back Now… I Believe You Should Take Cover!
August 5, 2020

It has begun.

Nations are running away from using the United States dollar. Instead they are choosing to use other methods to pay back their debts and engage in trade. They are using such things a as gold, eyuan, or commodity trading (like oil, wheat or rice).

A new world monetary system is being set up right now which will completely kill the US dollar, which is the world’s reserve currency. At least 23 countries (60% of the world’s GDP) are setting up swap lines which bypass the dollar and SWIFT, which is the dollar-based worldwide financial transaction system. These countries include Russia, China, India, and even Germany, France, and the United Kingdom.

Kevin: You know, I think about where the two of them agree. They would both say that we’re past the point of no return, that money turned into credit, and we’re now in a credit expansion. Noland would say kicking the can down the road is ultimately going to end in dystopia. What Duncan would say is, it’s our only chance at utopia. And they both know that credit probably ends badly, but I think Duncan would just like to have it end badly after he passes away.

David: That may be, so if we have a shot at utopia, let’s spend a little bit more. And that’s a little bit like looking at the hair of the dog as the real solution to a problem with alcoholism.

You’re right. It will take away some of the consequence in the short run.

Kevin: Do you remember Ian McAvity said that a doctor told him to not stop smoking because he had smoked so much that it would probably kill him.

David: That’s right. “You quit now and you’re dead.” That’s really what we’re talking about.

Doug Noland
Doug Noland: It’s Too Late To Turn Back Now… I Believe You Should Take Cover!
August 5, 2020

For several years, financial analysts, primarily those outside the mainstream of academia, have been warning that any day could be the black swan event that collapses the dollar. This collapse will end U.S. hegemony as caretaker of the world’s reserve currency.

That day had arrived last year on 18NOV19 when a former head trader for a major financial institution issued a harbinger. He stated that 23 countries, and 60% of the world’s GDP, are or have setting up new swap lines which bypass the dollar. These systems not only bypass the USD, but they bypass SWIFT, and the BIS.

All of this is ushering in a new global currency system. It is a system that will kill the US dollar.

Who’s abandoning the USD?

Countries are growing weary of losing money on the falling dollar. Many of them want to protect their financial interests, and a number of them want to end the US oversight that comes with using the dollar. Although it’s not clear how many of these countries will actually follow through on an abandonment of the dollar, it is clear that its status as a world currency is in trouble.

Obviously, an abandonment of the dollar is bad news for the currency. Simply put, as demand lessens, its value drops. Additionally, the revenue generated from the use of the dollar will be sorely missed if it’s lost. The dollar’s status as a cheaply-produced US export is a vital part of our economy. Losing this status could rock the financial lives of both Americans and the worldwide economy.

Here’s just a few of the numerous nations that are running away from using the United States Dollar…

Saudi Arabia

The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve.

This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy.

They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US.

Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.

Sudan

Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same.

In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions.

A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a break from the dollar in the future.

Russia

In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.”

Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves.

In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.”

He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.

South Korea

In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US.

Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.

Switzerland

Iran

China

China just announced that it will stop purchasing our debt (holding dollars in reserve). This will force The Federal Reserve to print even more dollars than the $85 billion it’s currently printing.

A few months ago, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other. This was an incredibly important agreement that was virtually totally ignored by the U.S. media. The following is from a BBC report about that agreement:

“China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade. The deal will allow firms to convert the Chinese and Japanese currencies directly into each other. Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.”

Germany

France

France plans currency swap line with China: paper – Reuters

United Kingdom

Japan

Way back in 2016, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other. This was an incredibly important agreement that was virtually totally ignored by the U.S. media. The following is from a BBC report about that agreement:

“China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade. The deal will allow firms to convert the Chinese and Japanese currencies directly into each other. Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.”

India

In December 2018, India and the United Arab Emirates sealed a bilateral exchange swap agreement to boost trade and investment in their own currencies.

A swap is an international contract that is sealed off from a stock exchange and states that the two parties agree to exchange one financial instrument for another within a predetermined term and conditions.

Iran

China (in particular) appears determined to risk US sanctions in order to make a huge investment in the Iranian economy.

The US Treasury Department can only sanction firms that trade in dollars with Iran or that also trade with the US.

China intends its projects in Iran to be funded with soft-money currencies it has accumulated through its vast global trade. In accepting those African and other currencies, Iran will suffer a 30% loss, but it will escape the American net. Rendering American sanctions worthless.

Turkey

In 2018, Turkish President Recep Tayyip Erdogan announced his plans to end the US dollar monopoly by pursuing a policy aimed at excluding the dollar from trading with its partners. According to the president, Ankara is preparing to carry out commercial transactions with China, Russia and Ukraine using national currencies. In addition, it is possible that Turkey will replace the dollar in trade with Iran.

This decision was prompted by both political and economic reasons. Relations between Ankara and Washington deteriorated after the failed coup attempt of July 2016. That year, several media outlets reported that Erdogan suspected that the US was involved in the coup attempt. The Turkish leader also accused Washington of harboring the exiled cleric Fethullah Gulen, who, according to the Turkish authorities, orchestrated the attempted coup.

Venezuela

Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil.

These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy.

Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions.

In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.

Why are they abandoning the USD?

Historically, new world reserve currencies are backed by gold.

China surpassed the US in terms of GDP based on purchasing power parity (PPP), becoming the largest in the world by this measure, International Monetary Fund data show. In 2014 China reached $17.6 trillion or 16.48 percent of the world’s purchasing-power-adjusted GDP, while the US made slightly less, 16.28 percent or $17.4 trillion, the FT reported citing IMF data.

China is sitting there and wondering why the U.S. dollar should continue to be so preeminent if the Chinese economy is about to become the number one economy on the planet.

It’s an advantage for China. It’s an advantage for the rest of the world, and yes even for the USA it’s an advantage…

And so, China, and other emerging powers such as Russia, have been quietly making agreements to move away from the U.S. dollar in international trade over the past few years [and, as such,] the supremacy of the U.S. dollar is not nearly as solid as most Americans believe it to be.

As most Americans have this fantasy where America is empowered by GOD to exist and lord over the rest of the world. It is what all that “exceptionalism” means and refers to…

But, like the elephant in the room, sooner or later, you have to face up to the facts.

As the U.S. economy continues to fade, it is going to be really hard to argue that the U.S. dollar should continue to function as the primary reserve currency of the world. Things are rapidly changing, and most Americans have no idea where these trends are taking the nation.

Most Americans are in a state of denial.

They cannot believe that any other nation would have a currency as important or as valuable as the vaulted US Dollar.

But you know, all you need to do is sit down and reason it all out. It makes quite a bit of sense when you get down to it…

The Ten Reasons

The following are 10 reasons why the reign of the dollar as the world reserve currency is about to come to an end:

#1: China And Japan To Use Own Currencies In Bilateral Trade

Way back in 2016, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other. This was an incredibly important agreement that was virtually totally ignored by the U.S. media.

#2: The BRICS Plan To Use Own Currencies When Trading With Each Other

BRICS is an acronym for the combined economies of Brazil, Russia, India, China and South Africa.

-Brazil, Russia, India and China (BRIC) Definition

The BRICS continue to flex their muscles. A new agreement will promote the use of their own national currencies when trading with each other rather than the U.S. dollar. The following is from a news source in India:

“The five major emerging economies of BRICS — Brazil, Russia, India, China and South Africa — are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade…

The two agreements will enable credit facility in local currency for businesses of BRICS countries…[which is] expected to scale up intra-BRICS trade that has been growing at the rate of 28% over the last few years but, at $230 billion, remains much below the potential of the five economic powerhouses.”

#3: China and Russia Use Own Currencies In Bilateral Trade

Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade.

In fact, both Russia and China have been using their own national currencies when trading with each other for a couple of years now.

#4: Use Of Chinese Currency Growing In Africa

Who do you think is Africa’s biggest trading partner? It isn’t the United States. In 2009, China became Africa’s biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent.

China seems absolutely determined to change the way that international trade is done. At this point, almost all Chinese companies in Africa are using Chinese currency in cross-border transactions.

#5: China and United Arab Emirates To Use Own Currencies In Bilateral Trade

China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other.

The UAE is a fairly small player, but this is definitely a threat to the petrodollar system. What will happen to the petrodollar if other oil producing countries in the Middle East follow suit?

#6: India To Use Gold To Buy Oil From Iran

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade. For example, it has been reported that India will begin to use gold to buy oil from Iran.

#7: Saudi Arabia Likely to Abandon Use of Petrodollar in Dealings With China

Who imports the most oil from Saudi Arabia? It is not the United States, it is China…Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia…so how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

#8: The United Nations Continues to Push For A New World Reserve Currency

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world. In particular, one UN report envisions “a new global reserve system…that no longer relies on the United States dollar as the single major reserve currency.”

And this pretty much says it all…

#9: The IMF Has Been Pushing For A New World Reserve Currency

The International Monetary Fund has also published a series of reports calling for the U.S. dollar to be replaced as the reserve currency of the world. In particular, one IMF paper entitled “Reserve Accumulation and International Monetary Stability” actually proposed that a future global currency be named the “Bancor” and that a future global central bank could be put in charge of issuing it….

“A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.”

#10: Most Of The Rest Of The World Hates The United States

Global sentiment toward the United States has dramatically shifted, and this should not be underestimated. Decades ago, we were one of the most loved nations on earth [but] bow we are one of the most hated. 

I've said for decades now that the US needs shut down the CIA and close ALL its foreign military bases and bring the troops, planes, ships, and drones home. The CIA has toppled democratically elected governments all over the globe and as a result created hatred for the US. The CIA is the exact opposite of what we believe the US should stand for and support. We need to stop being an empire and start taking care of business right here at home. If we actually do that, maybe in a few decades the rest of the world might forgive us… might… maybe…

-pimaC Aug 17

If you doubt this, just do some international traveling. Even in Europe (where we are supposed to have friends), Americans are treated like dirt. Many American travelers have resorted to wearing Canadian pins so that they will not be treated like garbage while traveling over there.

If the rest of the world still loved us, they would probably be glad to continue using the U.S. dollar but because we are now so unpopular, that gives other nations even more incentive to dump the dollar in international trade.

An Acceleration of the abandonment of the USD

Well, since Donald Trump became President, his foreign policy has been reckless, ruthless and a complete disaster. Other nations now view the United States as a very unstable nation with many problems, that breaks long-standing treaties and contracts, and tries to imposes it’s own rules and laws in areas where it has no authority. In their mind, it’s best to just be isolated from this “train wreck” of a nation.

Trump’s Six-Point Legacy

  1. Bully Allies 
  2. Belittle Friends 
  3. Break Good Deals
  4. Invoke Disastrous Trade and Sanction Policies
  5. Amplify Racial Hatred
  6. Drive Countries Into Deals With China

In regard to points 4 and 6, Trump’s trade and sanction policies have been a disaster on every front.

Most Americans are unaware of this, and they are myopic and are only concerned with the Donald Trump domestic agenda. The Left hate’s it, and the Right love’s it. Only a very small fraction of Americans care about what goes on outside the confines of the United States.

What to expect…

What will happen if the U.S. dollar’s reign as the world reserve currency comes to an end? The answer is simple, as it is clear. The demise of the dollar will also bring radical changes to the American lifestyle.

When this economic tsunami hits America, it will make the 2008 recession and its aftermath look like no more than a slight bump in the road. It will bring very undesirable changes to the American lifestyle through:

  1. massive inflation,
  2. high interest rates on mortgages and cars,
  3. substantial increases in the cost of food, clothing and gasoline and
  4. a much harder time financing its debt.
    • Right now, there is a huge demand for U.S. dollars and for U.S. government debt since countries around the world have to keep huge reserves of U.S. currency lying around for the sake of international trade but what if… the appetite for U.S. dollars and U.S. debt dried up dramatically? That is something to think about.

What happens when fewer and fewer nations use the USD?

As more of these countries realize how irrelevant we have become, I would imagine Americans are about to find out the hard way about the huge trading advantage we have had all along--the world's reserve currency. When they dump the dollar as the main trading tool…

-Rocky Raccoon
17AUG20

A dollar collapse is when the value of the U.S. dollar plummets.

In that scenario, anyone who holds dollar-denominated assets will sell them at any cost. That includes foreign governments that own U.S. Treasurys. It also affects foreign exchange futures traders. Last but not least, it will hit individual investors.

When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them.

This will drive the value of the dollar down to near zero. It would make hyperinflation look like a day in the park.

The conditions that will cause other nations to stop using the USD

There are two conditions that would lead to the crash of the USD;

  • There are alternatives to the USD, whether it is gold, another currency or a commodity such as gold, silver, ore, or food.
  • When the bedrock of the value of the dollar is put in jeopardy by excessive debt.

And make no mistake, then other nations stop using the USD, the currency will “crash” and hyperinflation will be the result.

Right now both conditions are in play in the United States in September 2020.

Explaining how this hyperinflation can occur

The following is compiled from “Explaining How Hyperinflation Could Come To The US” By Andrew Bieszad on August 14, 2020. Reprinted in it’s entirety with very little in the way of editing except to fit this venue.

There are no Americans alive today who remember as older adults the Great Depression. I speak of working men in their thirties or forties already on jobs here. By comparison, the Great Depression was very short, since from the decadence of the 1920s to the crash of 1929, and then twelve years to the entrance of the US in a serious way into World War II, the time from misery to true recovery was twelve years. In fact, the US recovered so well that massive industries grew, people found work, debt was paid down, families were able to settle down, and the country truly grew. The US victory in World War II that followed took the World War II induced economic boom and amplified it many times over, providing a wave of true prosperity that ushered in a small “golden age” in America which lasted until about 1965 if one considers the true effects, and until 2007 if one considers the expansion of credit as a way to prolong the economic effects of World War II through financialization at the expense of the integrity of the dollar.

It is known that around 1965, the post-World War II prosperity boom came to an end. This is also the same time where over the next decade, from 1965 to 1975, there were several major social changes, which for our purposes we will focus on the massive welfare expansions through Johnson’s “great society” reforms and then the subsequent decoupling of the US dollar from the gold standard with the opening up of “free trade” with China in 1973 under the Nixon administration that lead to the decline and death of most US manufacturing alongside the expansion of credit. Since this was all intentional, one can argue that the very towns which the US built up during and after World War II- the famous “mill towns” throughout semi-rural areas that today now are too often defined by drugs, crime, degeneracy, broken families, poverty, and misery compiled upon hopelessness -were manufactured from prosperity to decline per economic policy, knowing this would happen but not caring for the consequences because the economic ability to manipulate trade balances was valued more than the people who would be consuming the traded goods.

As one who grew up in the late 1990s and early 2000s before the economic crisis, I saw a lot of this decadence and credit spending as a child, but would not have called it such. Rather, I and many others would have called it “life as normal”, for this is what Millennials and some late Gen-Xers, as well as Zoomers, the arguable children of mostly Boomers and early Gen-Xers, knew to be normal. Life had a certain “pattern” to it, and it was one to follow this pattern if one wanted success. Indeed, there is an argument that can be made that such a pattern was not a bad thing for a time because it was based on a Boomer model of prosperity created by the Silent Generation as a result of World War II prosperity- essentially, one could call it exploiting the benefits of the spoils of war for public use.

But this was not normal, and given the generational gap, few could not have been expected to know otherwise. This is a reason why there is so much anger directed towards Boomers, for giving their children material goods and a pattern of life but not explaining how or why things work, and not giving them a way to fend for themselves if the pattern should fail (because they believed that it would not fail) and that life would continue to go on as normal. In a sense, life always does- even in a war torn zone such as Iraq. The problem is that life is very difficult when one does not know what to do if all one knows is one paradigm to be true.

This was violently exposed in 2007 and into 2008 when after six decades and two years since World War II, and four decades and two years since the Great Society Reforms, and thirty-four years after the dropping of the gold standards and the liberalization of free trade with China that the US dollar was exposed as being insolvent. The reasons for this are simple to understand- a combination of lots of bad debt, questionable financial practices that involved taking debt in the form of mortgages regardless of the viability of the owner to pay back his mortgage, “cutting up pieces” of the mortgage, mixing those pieces in with other mortgages “cut up” in the same way, and selling “bundles” as debt made up of untraceable ownership and questionable stability presented just as good as a Treasury bond but with no way to “re-piece” the trail of ownership if one “link” in the “chain” should default, created a crisis of liquidity and ownership. Nobody could get loans because nobody knew what monies went to who for what, and when this is combined with public debt loads on account of simple overspending and bad financial practices, the result is always the same- default and chaos.

At this point, the US had two theoretical options- she could either allow the economy to slow down naturally and in a Japanese-like scenario, see fluctuating prices along with falling wages and decreased purchasing power that could last decades, or she could service the debts as the way that governments throughout history have traditionally done in such a case, which is to create the money that was needed in circulation to keep people spending, but at a cost of lowering, even if only slightly, the value of the currency itself.

This is the reason why ever since the economy was declared “recovered” in 2009, the US has been theoretically in the middle of deflation. Since it is really a global depression, for the last decade one has seen the manipulation of aggregate demand levels and aggregate asset prices as never before arguably in history. In other words, since 2008, the U.S. and world economies have been slowly circling around the proverbial drain waiting to be flushed into the sewer, a process that if played out, would result in a Japan-like scenario that could last for decades.

However, the U.S. government has been continuing to run massive deficits as it seeks to prop up demand levels by way of “stimulus” spending, but this has simply not been enough to offset the fall in consumer spending. Since 2007, the government has become the “supporter” of all things business, and until recently, propping up all assets, including U.S. Treasuries, by way of “quantitative easing”, which is another way of saying “money printing”.

The Federal Reserve Bank- a private corporation not owned by the government but who controls the money the government issues -knows that a deflationary “death-spiral” as defined by a lack of liquidity (no available cash) will cause less spending, which leads to diminished demand, which leads to more unemployment, which leads to lower consumption, to still lower spending, until the economic machine goes to a halt.

In response, the Federal Reserve Bank bought up assets of all kinds in order to inject liquidity into the system and support prices so as to prevent this deflationary deep-freeze. This has been policy since 2010, and is a “one-size-fits-all” approach”. The danger of this is it sort of like a plumber whose only tool is a wrench- and every problem looks like a bolt or a nut to be turned.

Call it what you want- money printing, quantitative easing, price stabilization -it is all the same result, which is turning on the printing presses and printing money as fast as the machines can put it out (theoretically speaking- most of this is done electronically, so it’s more accurate to say “button pressing”).

This is how the Fed has expanded its balance sheet from about $900 billion in Fall 2008, to about $2.3 trillion in Fall 2010 alone- just two years from the “recession” to the “recovery”, and now that it is 2020, to 6.9 trillion

But is this true deflation, where bond yields (interest return) is low, and unemployment continues to grow?

I wish it was. Rather, we need to talk about something I have been warning about for a long time, which is the Weimarian ghost of that horrible word, hyperinflation.

Why? Because the next step down in this world-historical Global Depression which we are experiencing will likely be hyperinflation.

Most people dismiss the idea of hyperinflation occurring in the United States as something only for the mentally ill, conspiracy fantasists, gold bugs, and survivalists. There is a point to this, for there are a lot of foolish ideas who have their own acolytes..

But what I speak of here is not fantasy. This is not about reading “conspiracies”, or projecting a desire onto a situation.

Apart from what happened with the Weimar Republic in the 1920’s, Western economies have no experience modern with hyperinflation. There were plenty of hyperinflationary events in the 19th century and before, but through careful economic management, the “advanced” economies have learned their lessons and so well that it’s been forgotten.

But there are some countries where one can draw experience from. Most talk about Zimbabwe- as so also have I done -but I would like to use a different example, since the case of Zimbabwe is a classic African example of war leading to mismanagement and corruption. I want to turn to Chile, as while in the Hispanic world, it is highly “europeanized” and yet went through a period of hyperinflation during the Allende government in the early 1970s (1970-1973).

In 1970, Salvador Allende was elected president by roughly one-third of the nation. A hard-core Socialist who headed a coalition called Unidad Popular (Popular Unity), under his government socialists, Communists, and assorted left-leaning parties took over the administration of the country and began to radically transform Chile on a road to left-wing socialism.

What happened was similar to the Russian and Ukrainian experience under life in the post-revolution days. There were land exproprations, nationalization of companies and mines, and the subsequent failure of them as a combination of corruption and inexperience rendered them unable to be used and just brought to run in the same path that the ZANU followed in Zimbabwe with the confiscation of farms that lead to mass starvation in once the arguably most bountiful food producing nation in Africa.

One of the key policies Allende carried out was wage and price controls. He froze prices of basic goods and services and augmented wages- basically, forcing businesses to pay workers more while refusing to allow them the freedom (in a non-greed oriented sense) to increase prices based on market demand. The most common parallel one can draw in our times to this is the “fifteen dollar” minimum wage laws in certain cities for McDonald’s restaurant workers. Yes, the wages increase, but as one can remember in the American cases (as there are multiple areas in which this has happened), employee hours were significantly cut, a lot of workers were fired or laid off, robotics was brought in to replace workers, and prices for food had to increase to the anger of the customer in order to accommodate the wage increases.

At first, this measure worked, as workers had more money, and goods and services still had the same old low prices. The people loved this, and so did what Americans did with toilet paper leading up to the COVID-19 crisis- they went on a shopping spree and rapidly emptied stores and warehouses of consumer goods and basic products. Meanwhile, Chile’s version of the “McDonalds” experiment detailed above, by forcing private companies to raise worker wages while maintaining their same price structures, caused bankruptcy. Allende then nationalized said companies for “the people” and put them back to work, but with the government spending money to keep them running for the same economic reasons, thus operating at a net loss.

This is where hyperinflation fits in, because Allende printed the money needed to pay for expenses for these state-run companies to cover for his irresponsible policies.

This is how hyperinflation came to Chile. Workers had plenty of cash in hand but it was no better than having Monopoly money, since one could not buy goods with it.

So what followed? Rationing and “ration cards”, with preference given to the friends of Allende. However, with no real economic fix in sight, people did what happens in all countries, which is they started black markets in staple goods, and only accepting American dollars because due to Allende’s policies, the Chilean escudo was worthless.

By 1973, the crisis was so miserable that the stock market and housing market collapsed as people lost everything they had. Nothing was safe from sale on the black market for all practical purposes as people traded very precious things simply for a little food and drink to stay alive. The crisis resulted in the success of the CIA-backed coup that overthrew Allende in September 1973 and installed the dictator Augusto Pinochet.

So having this context, and knowing how serious hyperinflation can be, let’s take a look at deflation and inflation again, and see how the various movements of the economic world differ.

In a deflationary environment, where commodity prices are more or less stable, wages drop, asset prices fall, and credit markets shrink, for in such an environment, there is really no inflation, for one cannot have overvaluing (inflation) if values are dropping. To say such is a contradiction.

Inflation and hyperinflation are thus not merely the same thing. It is not that the latter is on “steroids” but, like the goat and the sheep, two animals that share a similar look but are very distinct.

Inflation is when assets become overvalued because people want them so much. To use car language, it’s when the economy “overheats”. Think people paying one-hundred dollars for a “Beanie Baby” during the Beanie Baby craze of the late 1990s. A Beanie Baby is worth three to five dollars, not one hundred. But, if people will pay one hundred dollars for it, who is to say a business will not charge that? Greed yes, but such is the nature of man. This is inflation as a textbook definition- when an economy’s consumables (labor and commodities) are so “in-demand” because of (theoretical) economic growth and easy access to money (meaning either you are earning a lot, have a lot saved to draw on, or are borrowing the money on credit) that lets people spend money like a sailor in a bar. It is classic “supply and demand”, the “if they build it they will come” mentality.

This mentality should not be considered a modern thing either. It has been seen in Europe with the “Tulip speculation” of the 17th century, and was a main reason for the “boom-bust” economics of the 19th century that would destroy wealth as fast as it would create it, since the cycle, while it can be a brutal thing, is actually a natural process on the sine-wave of economic growth, for there is a start, a demand that grows, followed by a peak, a small decline, then a major decline, then a recovery to normalcy, back to interest again that the cycle continues on. This is found in all countries and peoples, and what the desire of government through “central planning’ has always been is to keep the “highs high and the lows gone”, meaning to always push for stability or growth so that money is made and either to minimize or completely eliminate any downturn in the economy so that money is not lost or that what money is lost is lost on people who are poor and not in the “economic club” of the wealthy.

But hyperinflation? Not so at all, for this is the loss of faith in the currency. Prices rise in a hyperinflationary environment like in an inflationary environment not because people want more money for their labor or for commodities, but because people are trying to get out of the currency -so they will pay anything for a good which is not the currency because the currency is becoming merely worth the paper it is printed on.

Right now, the U.S. government is indebted tremendously, varying from 108% to 159% depending on how it is measured.

Pick the percentage you wish, it does not really matter because it is all bad. The reason for this is because the Federal Reserve is printing money to do all things, from purchasing Treasuries in order to finance the fiscal shortfall existing, to bail out the public, and to keep major corporations from having to cease production due to deficits. The overall purpose of this is to try to maintain aggregate demand levels and support asset prices for the benefit of those invested into them. It is a process of the continued financialization of the economy that has been happening since the 1970s.

A deflationary cycle would last decades, and it would be very economically difficult, but with decreasing prices and the resulting job losses and business closures that would follow, it would overall result in the same thing, which is a recovery in the economy by way of a return to “normalcy”.

But this is not going to happen. Forget talk of “double-dip” recessions and that nonsense because the US is still in the first economic “dip” since 2007. No matter all the stimulus, no matter all the “liquidity” injections for over 10 years not, the economy is going down and both the Federal government and the Federal Reserve are going to use the same- and only tool -they have used to fix it, which is money printing.

This is the paradox. It’s these very fixes that are pulling us closer to the edge of a fiscal cliff because they have undermined faith in the currency itself and the ability of the US to service her debts. Treasury bonds? They are useless, and yet they are literally the only thing(s) holding the whole economy together because it is debt being used to service debt that is merely more debt.

We are talking about a financial “minefield” here- one mistake, and the thing explodes.

So then, how could hyperinflation happen?

First, there needs to be a reality check. It won’t be forever, so forget about Mad Max type scenarios, for those are fantasies of films and not reality.

Second, realize that life will go on, and America will be pretty much like it is today, with more poor people. In reality, at this point, as I have noted, hyperinflation is probably the only way that the economy will (in a practical sense) reset to better times, as a collapse in the currency, just like with a true bankruptcy, abolishes debt.

Third, the same rules of history apply. The famous saying “Buy when there’s blood on the streets” is the literal truth in this point. The best way to prepare for this is, in my personal opinion (and not giving any sort of financial advice, but just observations on the counsel of history) to lower personal debts, purchase useful commodities, and consider tangible assets that preserve value such as metals and even one may also regard land as doing the same.

Fourth, in hyperinflation, asset prices don’t skyrocket save on paper. They collapse, both nominally and in relation to real commodities. To use an example with housing, a $500,000 house falls to $70,000 or less, or better yet, 50 ounces of silver becomes something that can actually buy you expensive stuff you normally could not purchase in “normal” times such as land or heavy machinery.

Likewise, I’m not saying “when” this will happen, and hopefully there may be intervening circumstances that delay or even partially hinder the potential of paying $500 instead of $5 for a Starbucks latte. What happens after is also anyone’s guess, since while there are patterns, it would function in harmony with political changes, which can mean anything from a decline in currency value repegged against the old currency for a buyback (such as “buying back” into the new currency at a 30% discount such as what happened during the Great Depression), or an outright dictatorship with wage-price controls.

My observation is that no matter what happens, the current situation cannot continue. The Global Depression we are in is being exacerbated by the very measures being used to fix it, and in a story like this one cannot have a good ending.

The way that any of such crises will happen will be with an event. Right now, COVID-19 is being blamed for “destroying” the economy, but in reality just exposed the rot that was already there. The printing of money under COVID-19 with an upcoming second stimulus check is also only going to worsen the current scenario.

So let’s take this into consideration- how could this happen, an using COVID-19 as an example?

One word: homes.

Before the emergence of Mortgage Backed Securities (MBS), most mortgages were issued by a local savings or loan company. The note of debt usually didn’t go anywhere save down the street. But once mortgage loan securitization happened, things fell apart.

Basically, what happened was personal mortgages were sold off in “slices” in bundles with other mortgages. These were “bundled” into special arrangements designed to hold the loans for tax purposes and sold off as bonds with safety equivalent to those issued by the US treasury, backed by the ability of people to pay their mortgages.

But the big question- what happens if people borrow more than they can, or lie on their statements of assets, or lose a job?

Here is the sinister part. When an MBS was first created, all the mortgages were in good standing because they were all brand new loans. Statistically, some would default and some others would be paid back in full, but no one knew which one or how. Yet by the process of “cutting up” these loans into multiple “bundles”, nobody knew anymore who had ownership of what part as there were so many scattered pieces.

To use the example of the Three Stooges (since this is the level of financial mismanagement we are talking about) consider that a man gets a mortgage. His bank sells his mortgage note to Moe, who sells a piece of it to Larry, who chops another part off and sells it to Curly, and all our notarized signatures are actually, physically on the note, one after the other as holding a share of the profits from the same mortgage note. If for whatever reason, the original holder skips any payment, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer knows whom to pay. The result? The bank just forecloses on the man who failed to pay in an effort to get money back for the Three Stooges without giving him ever a change to remedy his situation. The Stooges walk away with at least some money back in their pockets, and the common man suffers a debilitating financial loss.

But this is just the start. Expand this to real estate, and rental properties for landlords. If COVID-19 puts people out of work, how can anyone pay? Likewise, what happens if businesses cannot pay their mortgages or rentals on commercial real estate, who are also indebted to banks? Likewise, what happens when multiple mortgages owned by separate people are bundled together?

Do you see the can of worms that’s opening up? We are talking about a chain reaction like a nuclear bomb.

  • No job
  • —> cannot pay rent/mortgage —> forces foreclosure/eviction
  • —> cannot get renter to make up difference —>
  • —> disrupts ability of landlord/company to pay for his mortgage —>
  • —> forces foreclosure —> big real estate goes back to bank —>
  • —> bank tries to sell it —-> nobody wants to buy because no money and too big —>
  • —> real estate falls to disrepair —> now nobody wants it —>
  • —> prices have to go down —> people lose money, including banks —>
  • —> people need money for a bailout like the rest of the country —>
  • —> more bailouts devalues the currency —>
  • —> the devolution of the currency means more poverty and job losses and back to he beginning.

This is not a recovery. This is a death spiral that we are circling.

It is estimated that 33% of renters or 12 million people, to make their full payment in July, meaning that 12 million could be on the cusp of eviction in a matter of months. In total, about 40 million- or about the size of Poland as a nation -are at risk of losing their homes. In addition, landlords are set to lose billions of dollars this year over the inability of tenants to pay rent.

This year alone, tens of millions of Americans were pushed into instant poverty, many face housing insecurity and homelessness as the labor market recovery reserves. This has led to millions of permanent job losses. Many Americans already had insurmountable debts and no savings, because they simply could not due to rising prices and a dead economy.

But this is nothing. Watch as more big corporations are go bankrupt, more businesses fail, more workers are laid off, and the financial dominoes start to fall at lightning speed.

Over the last 4 months, more than 50 million Americans have filed new claims for unemployment benefits, mostly with the specter of a permanent job loss looming. As we reported, one survey from USA Today discovered that 47 percent of all unemployed workers now believe that their “job loss is likely to be permanent”.

In April, 78% of those in households experiencing job loss felt that that situation would be temporarily. But now, 47% think that job loss is likely to be permanent, according to The Associated Press-NORC Center for Public Affairs Research.

This isn’t a joke.

People are really suffering and are going to suffer more in the future, and this is why I have been warning this Christmas there will not be a Christmas “sleigh ride”- such as going through the snow on a horse-drawn sleigh that is popular in American lore -but rather a “slay ride”.

A “slay ride”, implying violence and a sort of butchery found in a horror film, except this time the film is real life.

And the slaughter will be to people’s personal finances and the retail market since being forced to spend money on essentials such as food, water, and utilities, and maybe not even having enough for that.

The retail sector is going to be absolutely decimated since 25% to 40%, as I have noted before is made in the time from Thanksgiving to Christmas. With most likely poor sales for the future, there will inevitably be more layoffs, more job destruction, and more poverty.

If one wants to see what the retail sector is going to look like, one only needs to go to a local mall.

Many of them are dead or dying as evidenced by the ongoing store closures, the proliferation of people “hanging out” but not shopping (as in looking for a warm place to stay, not actually going there for leisure purposes) has continued to grow, and the fact that many of the stores are disorganized, dirty, or just falling apart. The mall, being a creation of the consumerist post-World War II economy is, like the post-World War II world, falling apart at the seams.

So what is the answer from Congress?

Two words, as noted before: money printing.

Consider that in the last few months, the US printed more money than all that was printed in the first two centuries of the US’s existence.

“The United States printed more money in June than in the first two centuries after its founding,” Morehead wrote. “Last month the U.S. budget deficit — $864 billion — was larger than the total debt incurred from 1776 through the end of 1979.” (source)

Buy why continue to print, if it will destroy the economy? As noted above, to question money-printing as the one-size-fits-all solution to every economic problem is to question the power structure of the status quo and the only tool used to manage said problem. Basically, it is telling the plumber with the wrench he needs a different tool, but since he has no other tools, he doubles-down and insists on using the wrench.

But what happens when people cannot pay their bills and still do not have a job? They already are going to get two checks- essentially 2007-type bailouts.

Who is to stop a third?

A fourth?

A fifth?

Money being thrown out of helicopters?

There is nothing. Nothing at all. The people figured out they can print themselves the treasury.

Historically speaking, there is a point in any human society that people can get the idea into their heads that they can “print their way to prosperity”, sometimes also called “voting themselves the treasury” while providing less than what is required to sustain those benefits.

This means in every case death for a society because it destroys the value of the means of exchange in one case, and in a more insidious example, in the name of “fairness” it can create polarizing factions that demand special fiscal handouts, to which other groups form and demand “justice” in the form of equal handouts, until eventually the money runs out, people become angry, and start fighting.

In both cases, the trust needed to sustain a society is destroyed, and chaos results that has to be restored by a new currency and many times, since economics is the predecessor to political change, a new government has to be instituted to restore the loss of order.

For people wondering, the US has already been on this road for decades, beginning with the ponzi scheme of Social Security, for while it was well-intentioned and may have worked in select cases, the philosophy, composition, and size of the US make it very difficult for such a system to successfully function in the US without causing a complete breakdown at some point.

The “Great Society” programs had a similar effect, for while it is true that all societies give welfare, the welfare given was not managed through churches or based upon available resources, but was funded through financialization at which the root was money printing.

It is one thing to help people with money that one has, but an entirely different matter to do the same thing but on credit that one cannot pay back without destroying one’s own finances. This is not even a matter of taxation either, since the taxes collected do not even pay into the actual programs, but rather are interest payments to the Federal Reserve Bank (a private company) on the money that they loan to the US government at her request to run said programs.

Thus the argument of “my money is going to welfare junkies” (as so many will say) is absolutely not true- the problem is not “those people on welfare”, but rather the criminally irresponsible financial policies and practices that “we the people” voted for and have continued to accept because it provides to the public the surface benefit of “extra wealth” by letting the same individuals buy fancy cars, nice homes, take big vacations, and dine luxuriously through borrowed money to be paid at a later time but which mathematically can never be paid off lest the value of the money itself collapse. Welfare is not ultimately paid for by taxes and arguably has not been since 1973, as it has all been paid for by money printing.

But to stay on the topic of “welfare junkies”, the biggest of such are not poor people in apartments in the inner cities or trailers in the woods, but are the very same corporations and their CEOs that are called “captains of industry” and “business leaders” that Americans are told to hail as intelligent and model citizens. These people are largely not leaders or admirable, but criminals in suits and with lots of servants to help them perform their actions (whether those working for them realize the totality of what is happening or not).

The reason for this is because it is they who lobby for either lower taxes for themselves or for increased tax schemes so that they can force average to small business owners out of business through excessive taxes while at the same time through as series of deceptive accounting tricks (like the “Double Irish” or the “Dutch Sandwich”) pay little to no taxes at all.

Thus having the effect of paying less while it appears to the public that these are “responsible corporate citizens” who are encouraging “their fellow businessmen” to “pay their fair share” since they are “good patriotic American citizens”, when the reality is they are just con men peddling dishonesty and criminality for their own gain at the loss of everyone.

Back in 2007, when millions of people had their finances destroyed by the crash, did the public receive a financial bailout? Absolutely not. Instead, it was major corporations who received it in the form of the TARP plan.

Now it should be made very clear that the bailouts were not good, and they should never have happened. However, noting this, if major companies were bailed out at the ostensible taxpayer expense and thus putting the country on a long-term road to either a very painful deflationary depression that would likely persist for decades or the more likely chance of hyperinflation, why should the general public, who was deceived by these same companies and politicians for years, not receive a bailout too?

The only way to fix the financial problems, regardless of now or 2007, was to fix the debt issue, and the only way to do this would be either to pay it back- which is mathematically impossible because of how the Fed system works -or to declare a jubilee, disown the debt, shut down the Federal Reserve Bank, arrest the officers of the bank, and seize control over money creation, which would plunge the US into about a decade of financial disorder but would be long-term healthy for the country as it would reset the currency and allow asset prices to stabilize and permit for real value to be created so that all men and companies, small or big, could benefit for true long term prosperity.

But that is not what has been allowed to happen and is likely not going to be allowed to happen, and especially at the current time. The only way to fix the current problems of the system is either a debt jubilee or to allow it to be run as it is until it naturally and inevitably will collapse. In both cases, such will be at a point when the debt can be disposed of and the economic system rebuilt.

This has been the greatest benefit of COVID-19 and the ensuing first and soon to be second stimulus check that will follow from Congress. Some people complain as to why the government is “giving away taxpayer money”, when not only is the reality that the government is just printing money and handing it out regardless of what the taxpayers give, but if the government will give nearly limitless amounts of welfare to major corporations for decades yet continue to force the common taxpayer to pay ever more money to the government, what reason is there that the taxpayer, who is most likely (based on statistical analyses about debt per person) overloaded with debt, should not be given a financial bailout too? Legally speaking companies are people in the US (“non-human persons”), so if a non-human person can get a bailout, is it not more important that “human persons” receive them, since societies are made of people? There is no real argument, if one supports the bailout of corporations, not to bail out the general public, because the philosophy is the same, and if the government will insist upon bailouts for companies, it is hypocrisy to deny the common man what a company would receive.

The end of the world is coming for the US economy as we understand it through a post-World War II paradigm, and that is something which all must accept but is not necessarily a bad thing, as all things come to an end.

The real trick, however, is to prepare for after the end of the “apocalypse” because life must continue on- it will go on in the middle of chaos (as it does in any war zone) as well -and how one prepares will determine one’s future after the crisis is over, and likely as in the case with World War II for many decades to come, so the impact will last beyond one’s life and extend to family and future generations.

The discussion of how to handle this for specifics is another topic for a different time. But returning to the issue of inflation versus hyperinflation, the concern now is not to fight policies being instituted or to make bold public statements- since these rarely do any good unless there is already an organic or manufactured groundswell of support guiding the end goal that such a public declaration would support to the exact same end -but to focus on the current fiscal path that has been chosen and is going to be chosen.

Hyperinflation is not the choice of most people, but rather it is the choice being forced on the average citizen that he cannot control happening but rather how he deals with in based on the current circumstances.

For example, say that you are placed in front of a massive floodgate. The gate is going to be opened upon you, and you cannot hide from it. 

You are going to get hit by the water and it is going to knock you around, and there is no way to avoid this. 

However, you have twenty-four hours to prepare.What would you do? 

Would you just “show up” to the gates and do nothing? Or instead, would you take some precautions? For example, you could buy a lifejacket. But would you stop there? Would you possibly consider with that lifejacket a helmet to prevent head trauma, and maybe a wetsuit too? If you had the money, would you consider investing in a pair of goggles and even maybe some flippers so you could swim? 

If you had a lot of money and wanted to try to make the best, would you consider purchasing a set of scuba gear so that you could swim with the currents and even explore them?

The choice is for you to make, but at the very least, a good lifejacket is in order because if you have that, you may lose consciousness, you may be cold, you may have a lot of pain to endure, but it is very, very unlikely you will drown. This is something that all people can do for themselves that is very effective.

Take this same example and apply it to the situation of the financial markets with inflation and hyperinflation. Most people are not rich and cannot afford a lot of the expensive measures that those with greater financial means could employ. However, they can take basic measures to protect themselves.

Hyperinflation is not a fun thing to think about.

However, it is real, it is historical, it can happen to anyone, and knowing the principles by which it can come to pass helps one to avoid its effects. Knowing the signs of the times, it would be wise to pay attention, as the signs are becoming too clear.

So what is the USA actually doing to mitigate this situation?

At the moment, the global financial system is centered on the United States but that will not always be the case.

As far as international monetary policy goes the United States under Trump has been radical.

The Trump administration has pursued a unilateralist and bilateralist vision for foreign exchange policy. This policy is vastly different from the multilateralist approach of its predecessors over the prior 25 years.

Treasury secretaries in the Clinton, Bush, and Obama administrations avoided commenting on currency markets, and when forced to do so simply backed a “strong dollar.” This gave administrations the moral high ground to criticize others, especially Japan, when they sought to weaken their currencies. That high ground is gone.

The United States led the G7 and G20 in 2013 in developing new currency commitments—orienting macroeconomic policies toward achieving domestic objectives using domestic instruments; not targeting exchange rates for competitive purposes; and refraining from competitive devaluation.

Now, the president and some advisers tweet to promote dollar weakness, alleging that foreign monetary policy accommodation, for example by the European Central Bank (ECB), is tantamount to currency manipulation. 

Monetary policy transmission works through a number of channels—lending, asset prices, yield compression, and confidence, for example. 

Exchange rates are also a key monetary policy transmission channel.

But the administration disregards that euro-area growth is anemic and inflation persistently well below target, giving the ECB strong internal reasons to pursue accommodation.

U.S. growth performance has been superior to that in Europe and Japan, and thus U.S. rates are higher. The administration’s trade wars and tariff threats reinforce a risk-off market environment, further supporting dollar appreciation. Massive U.S. fiscal deficits also push the U.S. current account deficit higher, while boosting the need for capital inflow. If the president wishes to see a weakening in the dollar, the best way to achieve that is not to tamper with U.S. out-performance but to work with others to boost their performance, while ending trade wars.

In August, as the renminbi (RMB) fell below 7.0 per dollar after an intensification of U.S.-China trade tensions, the president ordered Treasury to designate China for “currency manipulation.” The designation was unwarranted. The RMB is managed, not “manipulated.” China could prevent the RMB from falling by drawing down reserves. But the currency fell in large part because market participants viewed depreciation as offsetting the competitiveness hit from higher tariffs.
The designation contradicted the Treasury’s own criteria for assessing whether “manipulation” and harmful currency practices were being pursued. China’s current account surplus in 2018 was around 0.5 percent of GDP, a relatively small surplus; on a net basis, China sold a small amount of dollars in market intervention. To be sure, China has a large bilateral surplus with the United States, but economists dismiss the relevance of bilateral balances.
A country “manipulating” its currency to gain an unfair competitive advantage in international trade would be expected to purchase dollars to hold its currency down and run large current account surpluses as a share of GDP. China does not fit that bill.

More generally, Treasury is undermining the integrity of its Foreign Exchange Report. It recently cut its current account “monitoring” threshold from 3 to 2 percent of GDP in order to pick up more countries, but this level is too low given economic structures. At one point, it placed India on its monitoring list, even though India ran a current account deficit. Italy and Ireland, too, were placed on the list. Prior to the manipulation designation, China was on the monitoring list, even though it only tripped one (the bilateral balance) trigger, whereas placement on the list requires triggering two criteria. On the plus side, Treasury has acted to expand the report’s country coverage, encompassing a number of smaller Southeast Asian surplus nations.

According to media reports, the administration has debated intervening in currency markets to push the dollar down. For example, the United States could buy euros or RMB, pushing up their values and thus the dollar down.

In the rare instances when the United States intervened in the past two decades, it did so on a concerted basis with G7 partners. There is little reason to believe any current U.S. operation would be concerted. A solo U.S. euro operation would not likely succeed—unless the Fed stood ready to print unlimited dollars to intervene, U.S. resources are highly constrained; the euro/dollar market is vast; the ECB could buy as many dollars as the United States could sell.

Such considerations would pertain to intervention in the Chinese currency. The Chinese authorities can exert a strong influence over banks operating in the on and offshore markets. Even if such an operation occurred, the United States would confront difficult operational issues about investing the currency proceeds.

The administration put forward a Commerce Department rule proposal to treat currency undervaluation as a countervailable subsidy, an idea the Bush administration rejected.

The proposal is problematic. Currency values are determined by balance of payments flows, not just trade accounts, and in turn by monetary and fiscal policies. There is no precise way to assess currency undervaluation. Even if one could, that would not address whether undervaluation was attributable to that country’s policies, or perhaps the flip side of policies in the overvalued currency country. The undervaluation of a country’s multilateral exchange rate also does not tell one the amount of bilateral undervaluation versus the dollar. For example, the subsidy would differ if the optimal bilateral balance deficit between the United States and China were $400 billion or zero.

The administration is aggressively pursuing trade provisions in currency deals, and this trend started under the Obama administration. The Trump administration amped up, pushing welcome side understandings on intervention alongside the revised United States-Korea Free Trade Agreement (KORUS) deal. The United states-Mexico-Canada Agreement (USMCA) provisions, though, allow certain exchange rate transparency and reporting issues, unrelated to monetary policy, to be included in dispute resolution. While the practical import of the USMCA currency provisions is minor, their inclusion in dispute resolution sets a precedent that could errantly allow trade authorities to stray into macroeconomic policy settings.

Some in the administration have also discussed taxing foreign inflows, consistent with a draft Senate bill of Senators Hawley and Baldwin. Such policies would stand in strong opposition to the longstanding openness of U.S. capital markets.

The administration’s robust unilateral use of financial sanctions could also corrode the dollar’s future global use. Past administrations sought to build multilateral coalitions for deploying financial sanctions. In doing so, officials balanced considerations on using sanctions with the implications for the dollar’s financial and reserve currency roles.

The Trump administration has used financial sanctions far more aggressively and unilaterally. While there is no realistic alternative to the dollar for the foreseeable future, our traditional allies have been put off by the administration’s unilateralism, as best reflected in Europe’s effort to create the Instrument in Support of Trade Exchanges or INSTEX, a plan to circumvent the dollar’s use to allow Europe to trade with Iran.

The Trump administration’s views on the dollar, foreign exchange policy, and external developments are a major departure from the practices followed by the United States over the past 25 years.

These policies and practices are alienating allies and eroding the multilateral fabric underpinning the international monetary system.

And the largest, and most powerful nation that is able to influence the USD and the international monetary system is China. And President Trump has declared “war” on China. labeling it an “enemy”, conducting a “hybrid war” with it, and engaging it in every way (s0 far) short of a nuclear exchange (aside from the BRI explosion)…

How China Could Crash the US Dollar on a Whim

Over the last 30 years, China’s economy has grown at an average annualized rate of nearly 10%. While this statistic alone is jaw-dropping, what is more impressive is the extent to which the nominally Communist country’s economy has become intertwined in the global economy.

China now exerts enormous influence over the economies of virtually every country in the world, and a slight change in its domestic economic policy has the potential to send shock-waves rippling throughout the world.

Nowhere is this more apparent-and frightening-then in China’s economic relationship with the United States, which is very much at the mercy of China when it comes to prices, wages, interest rates, most importantly, the value of the Dollar.

The precariousness of this relationship is already the subject of significant publicity, redolent of the Japanaphobia of the 1980’s that saw American economists scare-mongering about Japanese control of the US economy. [Of course this later turned out to be unfounded, but that is beyond the scope of our discussion.]

With regard to China, most of the analysis is focused on its growing foreign exchange reserves, the majority of which are held in Dollar-denominated assets. Here, from US house prices to global commodity prices, from interest rates to inflation rates, we will observe how China could cripple the US economy, both willfully and unintentionally, if so desired.

Forex Reserve Diversification

Let’s begin with an examination of China’s forex reserves, which is probably China’s biggest bargaining chip in its economic relationship with the US. Up until a decade ago, China’s currency, the RMB or Yuan, was pegged to the Dollar.

As with any peg, there often develops a discrepancy between the fixed value of the currency and the value that the market would assign if the currency were permitted to float. As China’s economy surged ahead, especially over the last five to ten years, tremendous pressure began to build under the RMB. In order to maintain the peg and hold down the value of the RMB, China began accumulating foreign exchange reserves by withdrawing foreign currency from circulation. Today, China’s foreign exchange reserves are massive, at $1.4 trillion as of September 2007.

In the eyes of American policy-makers, this presents a problem because the majority of these reserves are held in Dollar-denominated assets, namely in the form of US Treasury securities. The US government theoretically could not be happier that foreign Central Banks are willing to finance its perennial budget deficits. However, this borrowing has reached a point where foreigners now control over 40% of the US national debt. Moreover, long-term US interest rates are market-driven, based on the buying and selling of US government bonds. In other words, the US has gradually ceded control of its long-term interest rates to foreign Central Banks, namely China and Japan.

As the Dollar has depreciated, many Central Banks have begun “diversifying” their forex reserves, by switching from Dollar assets to assets denominated in other currencies.

This is problematic for the Dollar for two reasons.

First, switching from US assets to European assets, for example, directly causes the Dollar to depreciate.

Second, the bulk sale of US treasury securities (whether or not they are replaced with other US-assets) causes US bond prices to decline and hence, yields to increase.

Thus, if China suddenly decided to diversify its reserves, for economic and/or political reasons, it could potentially crash the Dollar and send US long-term interest rates skyward.

Since mortgage rates are tied directly to government bond yields, a rise in interest rates would probably also affect US real estate prices. Higher interest rates would make borrowing for a home more difficult, which would lower the demand for houses and thus, the value of American real estate.

In fact, China created the China Investment Co. Ltd., capitalized with almost $300 Billion, charged with investing its vast forex reserves in higher-yielding assets. However, the company’s inaugural investment was a stock purchase in the Blackstone group, an American private equity firm.

Thus, while it seems likely that China will gradually discard some of its stock of US Treasury Securities, the affect on the value of the Dollar will be minimal. Besides, while China would certainly punish US businesses and consumers by unloading US Treasuries on the market, it would punish itself even more, since the value of the government bonds that it didn’t sell would decline.

This is considered “the nuclear option”.

Currency Manipulation

The second aspect of the China-US economic relationship which China could wield to its advantage is the RMB, itself. American public officials enjoy criticizing China for failing to allow its currency to appreciate more quickly. But it’s really all lies and distortions.

What policymakers don’t realize is that a rapid appreciation in the RMB would actually harm the US economy.

Coupled with its growing role as the world’s factory, China’s cheap currency has made Americans wealthier, by increasing their purchasing power. As production of labor-intensive goods was outsourced to China over the last decade, prices for finished products began to fall both in real terms and in nominal terms. While the effect on US employment trends is debatable, its effect on prices has been unambiguous. Thus, even while the American economy boomed, inflation remained relatively modest by historical standards. This allowed the Federal Reserve Board to hold interest rates down and foment economic growth.

As the RMB appreciates, Chinese producers will become ever-more forced to pass along some of the price increase to consumers. Now, if China was to suddenly revalue its currency by the 25%-30% that western policy-makers are demanding, prices on a whole host of Chinese products would jump up overnight.

This would adversely affect American purchasing power and limit consumption to such an extent that the US would be in danger of slipping into recession.

While the trade deficit that is the bane of American politicians’ existence might decrease in the long-term, it would skyrocket in the short-term. Besides, as many analysts have been quick to point out, there is not much overlap between Chinese and American production.

Thus, a more expensive Yuan would send production to other parts of Asia, rather than back to America. As is what is currently going on with some of the cheaper and simpler products.

Direct Competition with US Exporters

A more potent (and plausible) weapon would be to compete more directly with US exporters, by expanding into high-technology products. America currently leads in a handful of high-technology industries.

  • Business
  • Financial
  • IT services
  • Aircraft and spacecraft,
  • Semiconductors,
  • Specialized computers,
  • Pharmaceuticals,
  • Measuring and control instruments.

China has specialized in manufacturing labor-intensive products, which have long since been manufactured outside of the United States. As previously stated, a revaluation of the Chinese Yuan would surely not return production to the US. However, if China were to expand into capital-intensive and/or high-technology products, it could easily steal market-share and jobs from the US.

Key points
Many observers doubt that China can assume global technological leadership, but there are very good reasons to believe it will.

Four factors comprise ‘technology leadership’: 

[1] Research and development (R&D) intensity, 
[2] R&D personnel, 
[3] number of scientific publications, 
[4] The number of patent applications.

Three factors contribute to China’s growing technology capacity and eventual global technology leadership: 

[1] China offers technology innovators a massive domestic market.
[2] China’s government has the authority to shape industrial policy and provide infrastructure.
[3] Globalization has benefited and will continue to benefit China through technology transfer and spillovers.

Limiting the Importation of US Products

Of course, there is also the imports side of the trade equation.

China is one of the United States’ largest export markets. Which isn’t saying much, America just doesn’t manufacture or create much inside of America any more. Never the less, limiting the importation of US goods and services would certainly be felt in the US. Though, truthfully, aside from aircraft and food products like wheat, it doesn’t amount to much.

Some anti-competitive options include tariffs, import taxes, quotas, or a simple ban on the importation of certain types of products.

Raw Material Pricing

In addition, there is the impact that China’s economic growth has exerted on global raw material prices. It has been said that 25% of the world’s construction cranes are currently located in China, to support the country’s building boom. These massive development and infrastructure projects require proportionally massive quantities of raw materials, namely cement and steel. 

Bank of America Merrill Lynch strategists, in a note, point out that the U.S. Department of Defense has termed China’s domination of the rare earth market as potentially dangerous, given the offshoring of manufacturing and vulnerabilities in America’s manufacturing and defense industrial base.

China produced about 78% of rare earths in 2018, and owns about 40% of global resources. Bank of America strategists noted the dominance of China is due to the fact that its government classified them as a strategic resource and has emphasized exploration and extraction of the raw materials for about 100 years.

The analysts said China made the materials available at a low cost in the 1990s, hurting competitors and limiting expansion of rival producers. There are 17 rare earth elements, which are not actually rare but refining them from ore is costly and results in pollution.

— With reporting by CNBC’s Eunice Yoon and Fred Imbert.

Competition for Energy

China was responsible for three quarters of the world’s energy consumption growth, followed by India and Indonesia. The U.S. and Germany posted the largest declines.

-Fossil Fuels Still Supply 84 Percent Of World Energy

China is now the world’s largest consumer of energy, the largest producer and consumer of coal, and the largest emitter of carbon dioxide. Over the last half century, China’s large manufacturing-based economy has primarily been fueled by coal. From 1990 to 2018, China increased its coal consumption from 0.99 billion tons to 4.64 billion tons.

The nation that consumes the most fuel and raw materials can also control the pricing.

Conclusion

America has been printing money “like it there is no tomorrow”.

This will eventually lead towards hyperinflation of some magnitude.

How bad or severe the influence will be on America, the American economy, and on Americans will depend upon the international relationships that America maintains. Most significantly the relationships that it has with the largest and most influential nations. namely; China.

But there is a problem.

President trump despises China. He has set China up as the big old “boogie man”, the evil villain from which all the woes of American can be blamed upon. You have to be living under a rock not to realize this.

Now, of course, China could respond in kind. And in doing so, the entire American “house of cards” would come tumbling down.

But it hasn’t.

Not yet, at least.

In short, China has several economic “weapons” at its disposal for countering the US, ranging from the manipulation of its currency to the diversification of its burgeoning stock of forex reserves. It also has several less blunt options to choose from, such as enabling Chinese companies to compete more directly and effectively with US companies, and opposing the US in securing a domestic energy supply.

On all of these fronts, the US is essentially “playing with fire”, since it has become so dependent on China as the world’s factory.

Ultimately, it seems unlikely that China will deliberately butt heads with the US unless it is first provoked, but America should nonetheless be respectful to China, since its economy hangs in the balance.

And it is because of this that someone should slap Trump and his neocon advisors at the side of their heads and ask them WHAT THE FUCK ARE THEY DOING? Because, like it or not, China is the nation that is holding “all the cards”. Not the United States. And the only reason why Americans are not paying $67 for a gallon of gasoline is because China has decided that the likelihood of Trump remaining in office for eight years is unlikely. And that any replacement would be in the best interests of China at this time.

But that is not how the USA sees things.

The ONLY way that the USA can get out of this future cluster-fuck is to engage in a war with China, and then blame all the subsequent collapsing on China. But, as the events of 2020 has shown, the planned results will not unfold as is desired and expected. Thus we have three very likely scenarios;

[1] Full-on World War III. Whether with China or with Asia. As there is no fucking way that the oligarchy is going to accept an internal revolt of the American peasantry and their eventual torture and beheadings. This is ultimately the most undesirable outcome. The USA will strike first, without Congressional approval. Then after the fact, the Senate will “rubber stamp” the approvals.

[2] A gradual collapse of the United States unfolding with greater and greater alarm. Attempts to distract attention of the American peasantry away from the turmoil has been met successfully. Thus, the oligarchy has decided that an uprising of the surfs is the lesser of two evils. This is the outcome of the more retrospective of the oligarchy who have support networks outside of the area of hostilities. This is, after all, something that they can continue to manage, as complex and ugly as it appears.

[3] An increasing civil war scenario as in scenario #2 (above), only with an attempt to distract the peasantry with an external villain (scenario #1 above). That would mean a few years of gradually increasing Civil War style events. Maybe two to three years worth, followed by a move of desperation to “rally America together to fight some evil”. With the rally a complete failure, and a full on World War III being the result. This is the most probable outcome.

What’s your opinion? One, two or scenario three?

Do you want more?

I have more posts like this in the SHTF and Trump Trade War Indexes…

SHTF Articles

Articles & Links

You’ll not find any big banners or popups here talking about cookies and privacy notices. There are no ads on this site (aside from the hosting ads – a necessary evil). Functionally and fundamentally, I just don’t make money off of this blog. It is NOT monetized. Finally, I don’t track you because I just don’t care to.

To go to the MAIN Index;

Master Index

.

  • You can start reading the articles by going HERE.
  • You can visit the Index Page HERE to explore by article subject.
  • You can also ask the author some questions. You can go HERE .
  • You can find out more about the author HERE.
  • If you have concerns or complaints, you can go HERE.
  • If you want to make a donation, you can go HERE.

Please kindly help me out in this effort. There is a lot of effort that goes into this disclosure. I could use all the financial support that anyone could provide. Thank you very much.

Error! Missing PayPal API credentials. Please configure the PayPal API credentials by going to the settings menu of this plugin.