“Mutually assured destruction” was a doctrine that rose to prominence during the Cold War, when the US and the USSR faced each other with nuclear arsenals so populous that they ensured that any nuclear exchange between the two great military powers would quickly lead to mutual overkill in the most literal sense.Notwithstanding the newly dismal relations between the US and Russia, “mutually assured destruction” now best describes the uneasy stand-off between an increasingly indebted US government and an increasingly monetarily frustrated China, with several trillion dollars’ worth of foreign exchange reserves looking, it would now appear, for a more productive home than US Treasury bonds of questionable inherent value.
Until now, the Chinese have had little choice where to park their trillions, because only markets like the US Treasury market (and to a certain extent, gold) have been deep and liquid enough to accommodate their reserves.
The above FT article points to three related policy developments on the part of the Chinese authorities:
- China’s appetite for US Treasury bonds is on the wane;
- China is ramping up its overseas development programme for both financial and geopolitical reasons;
- The promotion of the renminbi as a global currency “is gradually liberating Beijing from the dollar zone”.
The US has long enjoyed what Giscard d’Estaing called the “exorbitant privilege” of issuing a currency that happens to be the global reserve currency.
The FT article would seem to suggest that the days of exorbitant privilege may be coming to an end – to be replaced, in time, with a bi-polar reserve currency world incorporating both the US dollar and the renminbi.
(The euro might be involved, if that demonstrably dysfunctional currency bloc lasts long enough.)
Here’s a quiz we often wheel out for prospective clients:
- Which country is the world’s largest sovereign miner of gold?
- Which country doesn’t allow an ounce of that gold to be exported?
- Which country has advised its citizenry to purchase gold?
Three questions. One answer. In each case: China.
Is it plausible that, at some point yet to be determined, a (largely gold-backed) renminbi will either dethrone the US dollar or co-exist alongside it in a new global currency regime?
We think the answer is yes, on both counts.
Meanwhile the US appears to be doing everything in its power to hasten the relative decline of its own currency.
There is a new ‘big figure’ to account for the size of the US national debt, which now stands at $18 trillion.
That only accounts for the on-balance sheet stuff. Factor in the off-balance sheet liabilities of the US administration and pretty soon you get to a figure (un)comfortably north of $100 trillion.
It will never be paid back, of course. It never can be. The only question is which poison extinguishes it: formal repudiation, or informal inflation.
Full article: Yes, It’s Possible For A Gold-Backed Renminbi To Dethrone The US Dollar (Zero Hedge)