• America’s Dim Mak point 3: Dollar vulnerability

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    VICTOR N. CORPUS

    ONE of the pillars propping up the United States’ superpower status and worldwide economic dominance is the US dollar’s being accepted as the predominant reserve currency. Central banks of various countries have to stock up their dollar reserves because they can only buy their oil requirements and other major commodities in US dollars.

    This US economic strength, however, is a double-edged sword and could turn out to be America’s economic Achilles’ heel. A run on the US dollar, for instance, which would cause a dollar free-fall, can bring the country’s entire economy toppling down. What is frightening for the US is that China, Russia and Iran possess the power to cause a run on the dollar and force its collapse.

    China’s foreign exchange reserve reached $3.12 trillion as of October 2016. This puts China on top of the list of countries with huge foreign exchange reserve holdings. This is almost $2 trillion more than the next country in line – Japan, with only $1.24 trillion. China also owns $1.157 trillion in US debt as of September 2016, the biggest amount owed by the US to a foreign country. These huge forex reserves and US debt holdings are China’s aces. But there are other important aces up China’s sleeve: gold. China has been the largest producer of gold in the world for several years now – since 2007. In 2015, China’s gold production reached 490 tons. But the more important factor is the huge gold purchases done officially and unofficially that go in the tens or sometimes hundreds of tons per month. China has been using its massive forex reserves to buy all the gold it can buy; as much as the market can bear. Not only is China buying much of the world’s gold output; it is also buying the gold mines that produce the precious metal. And this massive gold hoarding and silent accumulation has been going on for years, in preparation for the time that China is prepared to announce a gold-backed yuan.

    Meanwhile, Russia and Iran are among the top oil and gas producers in the world, along with Saudi Arabia and the US. Although the US has caught up with Russia and Iran (former No. 1 and No.2, respectively) as a result of fracking shale, the US is faced with the problem of bringing its gas output to European and Asian markets; unlike Russia which has existing gas pipelines to Europe and Asia. Saudi Arabia, on the other hand, is important in this equation because the Saudis hold the key to the petrodollar. Saudi Arabia has a big say on the survival or demise of the petro dollar; if Saudi Arabia stops selling its oil in US dollars and starts using other currencies, that would start the end of the dollar’s status as the world’s reserve currency. Since a law was passed in the US Congress that would allow the victims of 9/11 to file damage suits against the Saudi ruling family, Saudi-US relations have been frosty.

    China had foreseen the possible collapse of the dollar when the US started its “quantitative easing” (QE) policy in the aftermath of the global economic crisis of 2008. In order to save US banks that were “too big to fail,” the US Federal Reserve resorted to QE. QE is nothing more than the FED printing money out of thin air to restore liquidity to the failing banks and prevent their outright bankruptcy. Then, every time the federal government suffered a budget deficit ($587 billion in 2016), the answer was another QE. When there was a huge trade deficit gap to be filled ($500.4 billion for 2015), the response was QE. When there were foreign debts to be paid ($73 million per day to China alone), of course QE. China knew that this QE thing cannot last. Russia, Iran as well as Saudi Arabia also knew.

    When QE started, China took steps to meet the impending challenge. She started secretly to convert its US dollar assets in its huge reserves into hard assets: gold, silver, other strategic metals, strategic oil reserves, mines, oil fields, high technology companies, urban real estate, farmlands, port/airport facilities, railway networks, highways, communication facilities, power plants, revival of the ancient Silk Road, development of economic zones, etc. When part of the QE overflowed into China via speculators, China simply printed its own currency to exchange for the inflow of QE dollars and used the same dollars to add to the buying spree as enumerated above, after making sure that the local currency printed did not create inflation by taking appropriate measures through its local banks. So, when the day of reckoning for the US dollar arrives, most of China’s dollar assets would have been converted into hard assets that will shoot up in value when the dollar falls.

    China can even determine or dictate when that day of reckoning for the US dollar will come. All she has to do is to announce to the world that henceforth, China is backing its currency with gold. This will be followed by Russia, Iran and perhaps, even Saudi Arabia, announcing that henceforth, they will not accept the dollar for oil and gas transactions. All the central banks of the world will then be rushing to the exit with their US dollar holdings. That will spell the end of the once mighty dollar.

    When the dollar was removed from the gold standard in August 1971, it gained strength from its use as the currency of choice in oil transactions. Once the dollar is rejected in favor of another currency for oil transactions, it will rapidly lose value and central banks all over the world will be racing to diversify to other currencies. The shift away from petrodollar to a basket of currencies will have a potentially catastrophic effect on the US dollar. And that shift began in 2008 with new oil exchanges set up in St. Petersburg, Shanghai, Dalian, Mumbai, Qatar and Tehran. The massive shift away from the dollar in energy transactions could cause the dollar to collapse; and, the whole US economy could come crashing down with it –a scene reminiscent of the collapse of the TwinTowers on September 11, 2001. But this one will be a thousand times more ruinous.

    As Sun Tzu said in his Art of War, “. . . attaining one hundred victories in one hundred battles is not the pinnacle of excellence. Subjugating the enemy’s army without fighting is the true pinnacle of excellence.”

    The fall of the US dollar will hasten the end of Pax Americana.

    A graduate of Philippine Military Academy Class 1967 and an MPA 1990 from the Kennedy School of Government, Harvard University, Brig. Gen. Victor N. Corpus (AFP, retired) spent five years with the New People’s Army (1971-1976) was detained for 10 years under martial law and sentenced to death by musketry. He but later became chief of the Intelligence Service of the Armed Forces of the Philippines.

    viccor2003@yahoo.com

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    5 Comments

    1. QE hinges on sovereign guarantees and institutions that control massive flows of hard currencies, commodities, and precious metals: controls/dominates the major economies. The US dollar is backed by much of the tangible reserves and non-tangible assets of the US that it will continue to dominate world economics. WilI China call its massive US debt holdings? Where will they put all that forex reserve?
      It’s always interesting to learn/watch the transactions of the NY Stock Exchange, the Federal Reserve Board, Chicago Commodities Board and the London Metals Exchange all electronically transacted in US dollar!

      • If memory serves, the height of this talk was back in 2007 to early 2008. The Sovereign Debt Crisis that came after the Housing Bubble exposed fundamental flaws in the other financial pillars of the world economy. China’s currency is not exactly kosher, The Euro was built on a shaky foundation where the EU does not control the fiscal side of the equation even if they can engage in a FED stye QE (besides everything is limited to what Germany, the Euro paymaster is willing to shoulder), the Yen continues to be suffering from the 90’s real estate bubble, and in the end there really isnt enough Gold or precious metals in the world to cover a 107.5 (as of 2014) Trillion global economy. The greenback is the only girl in the dance.
        So the talk of the dollar losing it’s reserve currency status has died. In fact when the S & P and Moody’s downgraded the US credit rating, the dollar instead of weakening strenghted vis a vi other currency as most money managers continue to view it as a safe haven. Hence everything is still quoted in dollars. It will take a black swan event that no one has yet even dreamed of the world to shift reserve currency, and while I do not know what can precipitate this, I can tell you it will cause so much pain 7 billion or so people in the world that will cause a sea of government’s collapsing and a new world order ushering instability and uncertainty as it is in the end uncharted territory.

    2. Every America-lover should read this, including the ones in the Manila Times. One aspect that you did not cover is who are the ultimate beneficiaries of this house of cards called the US dollar which is backed by nothing but the military might of the US?. The dollar is absolutely controlled by the US Fed (they decide how much to print and what interest to charge) which is a private entity owned by private bankers who all belong to a historically notorious ethnic tribe and they are all rooted in the City of London , the financial capital of the world that is at the same time inextricably intertwined with the Vatican. Supposing that Washington sides with Moscow and Beijing to dump the current financial system based on the dollar and replaces it with a new one that is backed by precious metals and oil and is not controlled by private bankers? That will lead to a collapse, but only of the current overlords of debt in the City of London and the Vatican, but the rest of the world will not suffer because this will entail the repudiation of debt to these private bankers who just manufactured all this debt out of nothing anyway. It will lead to a New World Order but not the kind many are expecting, and without a need for a world war to achieve. Is Trump the man that this much needed scenario is waiting for?

    3. I think you may have gotten it wrong. True China does have a huge amount of dollar reserves. But in the end, it would do them no good to try and shake the dollar boat, since if it sinks, it will also sink whatever holdings they have as well. Not to mention the severe financial shock a dollar meltdown will cause in the international markets, it would 2008(squared).
      Also China needs around 3 trillion dollars in reserves just keep it’s economy humming along smoothly. Concerned were raised that they are depleting their reserves much faster than usual in order to defend the Yuan. As a result the authorities have instituted indirect capital controls to keep the dollar from exiting the Chinese economy. They have some measure of success but the jury is still out. One Chinese magnet in fact did the most creative means of sending dollar out of China. He stockpiled tons of aluminum billets in Mexico and other countries to try and get around the Capital controls.
      Also a lot of folks in the financial community know that the Chinese economy has a lot of smoke and mirrors. It’s system of reporting it’s economic status has always been suspect. As a result many have used unconventional ways to measure Chinas’s economic output from freight volume, electricity output, seaport cargo volume to floor space currently under construction. And while it has pledge to maintain the Yuan to Western standards when they were admitted to the IMF basket of currency, they have since about face and in order to battle the capital flight.
      Ditto Russia. It has also used up so much of it’s reserves, it has now cracked open the piggy bank of pension fund to try and finance it way out of the low oil/sanction environment.
      The only other big currency is that of the Euro, but given the issues with some of the peripheral countries such as Greece and Brexit, it may not be stable enough for too long.
      Saudi too needs more dollars. In fact they just recently tried to raise funds with in a attempt to plug the holes in it’s budget given the low price of petroleum.
      So in the end the dollar is really the only one out there that can act as a reserve currency.
      QE was not used by the FED to save the banks, it’s TARP. Originally designed to buy distressed assets which was found to be too slow and cumbersome for save a panicked and frozen market, so they just decided to gather the head of the big banks to the New York Fed and forced them to take the monies wether they needed it or not. QE was used to promote economic growth. Due to the political impasse in Washington, Congress refused to work with Obama in any massive stimulus bill, as such the FED was forced to keep QE program for longer than usual. QE in fact has caused some banks and pension funds some distress because it kept the spread too low and many funds use the difference in the spread to make money.
      In the end Globalization has for better or worst link so much of the world economy that what happens on one side of the world reverberates to the other end. This is the lesson many policy makers learned the hard way in 2008, so when the Chancellor of the Exchequer (G Brown) refused to sign give the go ahead for Barclay to buy then Lehman because they did not want the “American Cancer spreading to the British bank”, it created the global freeze in financial system which in the end affected them and the rest of Europe.

    4. China has been steadily selling off its US Treasuries. Already, Japan has surpassed China as the biggest holder of US debt. Unless China stops selling the dollar will continue to be pressured and severely weakened. Couple that with the massive spending Trump has promised, 2017 may hold a lot of surprises for the planet.