The Beginning Of The End For The US Dollar?

Last modified on November 24th, 2010

I’m really surprised I didn’t read more about this today, but I imagine in the coming days more people will have something to say about it. China and Russia announced today that they would only be trading in their respective local currencies for trade between their own countries and abandoning trade settlement with the US dollar.

This is big news.

Ever since the abandonment of the gold standard, all international trades have historically been settled using the US dollar. This coveted position is known as the US Dollar’s Reserve Currency status, and it effectively gives protections for the United States that other countries don’t have. For example, even though the United States has continuously debased its currency by printing money (expressed in terms of gold, the US dollar has lost about 98% of its value since the Federal Reserve came into existence), the US dollar is still in demand since it’s required by other countries to settle trade. As soon as other countries stop using the US dollar to settle their trades, the US dollar will start to collapse – no country will want to hold the dollar since it will continue to lose value rapidly. We know this because the US has, via QE1 and QE2, more than doubled the entire monetary supply, which will lead to huge amounts to inflation (it already has – food is up, oil is up, energy is up, commodities are up).

Both Russia and China are downplaying the significance of this event, but I can’t help but feel it’s a strategic move, at least for China, to eventually abandon the US dollar completely for trades with other countries. China has been encouraging its own citizens to start accumulating gold these last few years, and a collapse or further weakening of the US dollar will only push gold prices higher.

We’ll see what happens next, but I wouldn’t be surprised if more countries start settling trades in local currencies as well.

4 responses to “The Beginning Of The End For The US Dollar?”

  1. China is also trading huge amounts of physical silver and gold outside of the US exchanges, showing more independence and self reliance. They also control 97% of the world’s known supply of rare earth elements used in most electronics/magnets etc.

    At the end of the day he who has the most gold (and silver) wins. The British sterling was once a mighty currency, yet it fell out of favour along with the reach of the British Empire.

    I say it’s about time the US get the hell out of everyone’s business. It’s evident that they’re already becoming less relevant. They still attempt to bully and strong arm other countries into doing things their way, but are not gaining ground.

    The sad truth is that they’ve departed from being the land of the free and the home of the brave to a police state, with an aging population that’s in poor health both economically and physically.

    Their ever expanding government, increasing regulations on business, attacks on the wealthy, and unaffordable higher education, continues to stifle innovation and job creation. This has always been their competitive edge. Now that too is dwindling. The only thing they’ve got that gives them superpower status is their military might.

    They’re basically becoming the former Soviet Union. The only real differences are that they call themselves capitalists. But we all know that the current system is hardly a model of free market capitalism. Mr Obama, tear down those walls!

  2. Anonymous says:

    Great comment, I totally agree with you. The age of the USA is coming to an end. Let’s just hope they don’t get trigger happy near the end.

  3. Hesty says:

    I don’t think it’s that a big deal economically. It’s probably more of just political posturing. Chinese yuan is pegged to US dollar anyway. Before, when Russians want to buy stuff from China, they’ll need to buy some USD and exchange it to Yuan. Now, they can skip the intermediate step and safe a few points off the exchange rate. What will Chinese do with a pile of Ruble anyway? I think they’ll just use it to buy some resources from Russians.

  4. Hesty says:

    I don’t think it’s that a big deal economically. It’s probably more of just political posturing. Chinese yuan is pegged to US dollar anyway. Before, when Russians want to buy stuff from China, they’ll need to buy some USD and exchange it to Yuan. Now, they can skip the intermediate step and safe a few points off the exchange rate. What will Chinese do with a pile of Ruble anyway? I think they’ll just use it to buy some resources from Russians.

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