Deathblow to the Dollar

Lessons from 2015, for today:

 

https://images.thetrumpet.com/555b6a9e!h.355,id.11867,m.fit,w.640

(Gary Dorning/The Trumpet)

 

 

The world is entering a new economic era—one that won’t be defined by America.

This past March marked a radical turning point for the global economy, particularly the United States’ economic dominance.

China proposed the launch of the Asian Infrastructure Investment Bank (aiib)—a new, Chinese-run international bank specifically designed to challenge U.S. global economic leadership. America tried to convince other nations not to agree to join. But it failed—even with its closest allies.

For the U.S., it was an unmitigated disaster.

It should be a “wake-up call,” to a “new economic era,” wrote former Treasury Secretary Larry Summers.

The world essentially closed ranks and turned its back on America.

“The battle of wills between Beijing and Washington over a China-sponsored development bank for Asia is turning into a rout,” wrote the Washington Times. “[T]he Obama administration has found itself isolated and embarrassed as its top allies lined up this week to join the proposed Asian Infrastructure Investment Bank” (March 18).

And sadly, it was America’s most important ally that led the defection.

The World Turns

The story begins with a 2013 speech by newly crowned Chinese leader Xi Jinping. He outlined the creation of a new international investment bank where nations could pool money to invest in the developing world. China would provide $50 billion in seed money and retain up to 50 percent ownership.

This was not a simple public relations effort aimed at helping China’s Asian neighbors. In fact, Xi Jinping was up front about the bank’s purpose: It would compete with the U.S.-dominated World Bank and Asian Development Bank. The New York Times later called it a “direct threat” to the post-World War ii financial system dominated by the U.S.

But few in Washington paid it much heed—at first. Policymakers refused to believe that America’s allies would even consider joining such an obviously anti-American effort.

Then, last year, a strange thing happened. Australia announced it would join China to become a founding member of the bank.

America was shocked. Australia is one of America’s closest allies.

Then the United Kingdom dropped an economic bomb.

In a move that the Financial Times said shocked even the Chinese, British Chancellor of the Exchequer George Osborne said his nation would apply to join the aiib as a founding member.

The announcement caught Washington completely off guard. It was clear Washington had not been notified. A White House spokesman mumbled something about the United Kingdom being a sovereign nation and as such was free to make its own decisions.

Then the dam burst. Five days later, Germany, France and Italy said they too would join China’s bank. They represent the world’s fourth-, sixth- and eighth-largest economies. Norway, Sweden, Finland, the Netherlands and Denmark filed for membership as well.

Even South Korea and Taiwan—two nations very dependent on America for geopolitical and military support—said they would join China’s bank.

Australia recanted its recantation and said it would join the aiib after all.

So what happened?

The Writing Was on the Wall

It has become impossible to ignore China’s rise. In 2010, China overtook the U.S. to become the world’s biggest energy consumer. It doubled its energy usage in just 10 years. And in the past, being the world’s biggest consumer of fossil fuels was synonymous with being its dominant economy. Now it is the world’s largest energy producer too. That same year, China passed America to become the world’s largest market for motor vehicles. Last year it became the world’s largest importer of agricultural products. It consumed more cement in the past three years than America did in the entire 20th century. From its insatiable appetite for iron and copper to its unrivaled imports of gold bullion, China consumes more resources than anyone else. And no wonder: China produces 54 percent of the world’s textiles. It produces 95 percent of the world’s rare earth elements. Twenty-six nuclear power plants are under construction—almost half as many as currently exist in the U.S. The list goes on.

But here is what the world is finally recognizing. On a per-capita basis, Chinese consumption is still just a fraction of the typical American’s or European’s. China is going to get bigger and more powerful. A lot bigger. A lot more powerful.

In October, the International Monetary Fund released the latest numbers for global gross domestic products. It estimated that when you adjust the national economic output to account for purchasing power within each nation, China produced $17.6 trillion worth of “real” goods and services—compared to America’s $17.4 trillion.

For the first time since World War i, America was arguably not the leading economic power on the planet.

The world has changed—and almost nobody in America noticed.

But outside America, nations are scrambling to catch a ride on the rising Chinese juggernaut. Or at least get out of the way.

Payback

Yet for Britain there may have been an additional motive.

Starting from practically his first day in office, President Obama sought to diminish America’s relationship with Britain. There are many examples: Sending the Churchill bust home; calling the Falklands the Malvinas; dismissing with royal protocol.

Alternative System

The United States dominates the global financial system. And the dollar is the world’s reserve currency.

Whether you are trading oil, purchasing a boatload of wheat, financing the construction of a mine in Burkina Faso, or buying an Airbus 380, you most likely need dollars—and you need to use the U.S. interbank payment system (swift).

Geopolitically, the dollar’s dominance means it can force nations to comply with its will, or as countries like Iran and North Korea have experienced, revert back to bartering to buy and sell products internationally.

Yet great power, particularly the real or perceived abuse of great power, leads to insurrection.

The Swift Road to Destruction

China is on the cusp of launching its long-awaited international payment system. Chinese officials say it could go live in September or October. The system will allow foreign banks to conduct transactions in yuan instead of dollars and transfer funds across international borders without using America’s swift payment system.

If successful, the newly created China International Payment System (cips) will remove the biggest hurdles to internationalizing the yuan. It will cut costs, reduce processing times, and simplify the transactions associated with obtaining and using yuan. Reportedly, 13 Chinese banks and seven foreign banks are now testing the system.

Purchasing international goods in yuan will soon be as simple and inexpensive as using the dollar. Reuters compared the creation of cips to a “worldwide payments superhighway” for the yuan.

It’s true that global yuan usage is still a fraction of the dollar’s, but China’s move to create its own competitive version of America’s swift system is a huge piece of infrastructure going into place to allow the yuan to grab global market share from the dollar.

And that could mean that life in America may be about to radically change.

A New World

Reserve currency status is golden. It gives America special privileges and enormous power. It lets Americans borrow money at lower rates than their Asian and European counterparts. It subsidizes their standard of living. It allows politicians to hand out generous social welfare packages, and it gives American corporations an important leg up on their foreign competitors.

When economic trouble strikes, America is able to crank up the printing presses and flood the economy with dollars—and the world has little choice but to keep accepting them and using them. This lets America boost its economy without experiencing many of the negative consequences normally associated with “quantitative easing.” The rest of the world bears the burden.

This has been called America’s “exorbitant privilege.” Or as U.S. Treasury Secretary John Bowden Connally Jr. famously told a group of European finance ministers, the dollar “is our currency, but it’s your problem.”

But the world is finally taking action to fix this problem.

It is a sign that although the U.S. dollar may appear strong right now, its long-term fundamentals are swiftly eroding. And with it, American power and prosperity.

Biblical prophecy is explicit in forecasting America’s decline. Beyond that, it foretells exactly which power will replace the U.S. as the world’s preeminent economy—and includes a chilling description of the frenzy of participation it will arouse from greedy and unprincipled investors and merchants all over the planet. It is truly a horrifying picture of the post-American world.

The groundwork for that world is being laid today. The blows to America’s economic might are descending rapidly and forcibly. Brace yourself: A new economic age is about to begin.

Full article: Deathblow to the Dollar (The Trumpet)

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