Robert Fisk's article in The Independent on October 6, “The Demise of the Dollar,” has created many shock waves in the currency markets. Fisk reported that major Arab nations are secretly planning to dump the current petrodollar scheme in favor of pricing oil in a basket of currencies. Included in this basket will be the yen, yuan, euro, a new, pan-Arab currency, and gold bullion. Co-conspirators include Saudi Arabia, Russia, Brazil, China, France, and the formerly compliant Japanese. This validated my July prediction that the Persian Gulf states will eventually accept yuan in exchange for oil.
It's no accident that three of the four BRIC nations are active participants in this plan. The leaders of these nations have moved beyond BRIC being a theoretical construct invented by Goldman Sachs in 2001. They have formed an actual alliance based on common goals, cooperating both politically and economically.
The BRIC governments also share a distrust of American motives. Asserting their growing independence, Brazil, Russia, India and China held their first formal conference this June in Yekaterinburg, and the United States was not permitted to attend as an observer. They understandably didn't want to share the details of their tactics to lessen their exposure to dollar depreciation. The leaders of the BRIC countries have already publicly discussed purchasing each other’s bonds and engaging in intra-group currency swaps. Two of the nations – Russia and China – are members of the Shanghai Cooperation Organization (SCO) who have agreed in principle to using regional currencies in trade.
Every member but Russia has committed to purchasing IMF bonds denominated in Special Drawing Rights, which includes such non-dollar currencies such as the yen, euro, and pound. The nations have a combined holding of $2.8 trillion in USD reserves, so any commitment to sell dollar instruments or even lessen the scale of purchases is a serious threat to the currency.
While many of the governments involved have denied oil plan, it fits in with the alternative currency initiatives already announced. In addition, the Gulf Cooperation Council's move toward monetary union is far from unique. Just two years ago, former Mexican President Vincente Fox mentioned on Larry King Live that he had discussed a single currency for the Americas with President Bush, but this was part of a “very long term” plan. In April 2008, the 10 ASEAN countries (Association of Southeast Asian Nations) met to discuss “monetary integration” and cooperation with regional non-members China, South Korea and Japan. Even the Bank for International Settlements called for eliminating national currencies and forming regional currency blocs “based on the dollar, euro and renminbi or yen” in 2006. It makes sense that nations would collaborate to form currency life rafts to survive the eventual sinking of the U.S. dollar, now listing badly to starboard.
Gold Shines Again
Despite the fact that most Western financial advisors and economists perceive gold as an oddly fetishized commodity, the global majority understands this metal is the king of currencies. I view this inclusion of gold in a monetary basket as a transitional state to a gold backed currency.
After all, this possibility was broached a few months ago at the July G8 meeting. Gold coins imprinted with the slogan “Future World Currency” were presented to each of the world leaders. Originally designed to unite Europe with the United States, Russian President Medvedev expanded its scope and touted it as the new “supranational currency.” While China was not present at this meeting, its steady drumbeat of complaints about U.S. monetary policy suggests it was behind this initiative.
Nevertheless, I don’t believe either President Medvedev or President Hu of China actually wants to unite the globe under one monetary standard, even if it uses gold coins. Instead, they are clearly trying to move from the current dollar hegemony to a system of competing reserve currencies without crashing the global economy.
Each country has ambitions to supplant the U.S. dollar with its own money. Medvedev hasn't been shy about expressing his desire to convert the ruble into an international medium of exchange. China is now selling yuan-denominated bonds outside its borders as an intermediate step toward forming a globally traded currency.
Many nations from South Africa to Argentina have purchased bullion for their reserves, but China has the inside track when it comes to replacing the USD with an alternative hard currency. China has much larger forex reserves with which it can acquire assets, and it didn’t
suffer a depression at the turn of the century as Russia did.
As I explained in my July article, “Gold, the U.S. Dollar and the Chinese Yuan,” the Chinese have a long term goal to become the pre-eminent reserve currency. The government allowed the private ownership and sale of gold by their citizens in 2002 in order to re-monetize the metal, and now they are promoting silver purchases as well. The Chinese know they must step in to facilitate the move back to hard money.
Chinese officials are aware of the significance of the bailouts I discussed last fall in my essay, “US Dollar Doomed as Credit Crisis Turning into a Currency Crisis.” Despite rhetoric to the contrary, the situation has only worsened over the past year. The potential liabilities have increased to $23.7 trillion, according to the TARP's special inspector general, Neil Barofsky. The tremendous inflation of the money supply was billed as a necessary rescue of the global financial system, but in reality, the U.S. will effectively default on its obligations through hyperinflation.
In the meantime, China is scouring the world, securing gold and hard assets in exchange for its dollar promises. The Chinese will swap this paper for bullion as long as counterparties are willing to make the trade. Fortunately for them, Western central banks continue to unload gold both openly and surreptitiously in order to make their currencies look solid. Nonetheless, if these nations don’t curb their reckless spending, they will find their global influence draining away even faster than the metal China is actively acquiring.
Copyright © 2009 Jennifer Barry