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.