The U.S. Dollar in Decline

Today, an ominous story about the U.S. dollar was overlooked by the mainstream media.

It won’t happen today. It won’t happen tomorrow. But yesterday, China and Japan took a subtle but giant leap toward deposing the U.S. dollar as the currency of global exchange.

What, exactly, did China and Japan agree to? What possible impact could something that happened on the other side of the world yesterday affect every American’s pocketbook tomorrow?

The Decision

It sounds innocent enough.

China and Japan agreed to promote all international trade between themselves through direct currency exchanges of the Japanese yen and the Chinese yuan. China’s currency is also called the renminbi.

Currently, they conduct trade through U.S. dollars.

They will also promote development of a market for companies involved in exchanges of their currencies.

In other words, they overtly moved toward replacing the U.S. dollar as the official international reserve currency.

The Way We Were

Global Commerce and International Currency Reserves: 1999-2011 (Source: The Market Oracle)

In the year 2000, just 12 years ago, over 70% of the world’s official foreign exchange currency reserves were in U.S. dollars.

Being the world’s official foreign exchange currency gives the United States special status and all Americans benefit from that status in the form of lower costs for borrowing money.

As of today, U.S. Treasury bonds have a yield of 2.03%. That is very cheap money. For all the things Americans want to buy on credit – cars, homes, etc. – it  keeps interest rates very low. The Federal government borrows on that rate to the tune of about $4.2 billion every day.

That yield is low because the U.S. dollar is the official currency of foreign exchange. The world wants dollars to conduct global commerce and it has confidence in the strength of the United States and the dollar.

The Chinese own about $1.2 trillion in U. S. debt and the Japanese own about $880 billion in U.S. debt. They are the United States’ two largest debt holders.

The Winds of Change Have Shifted East

Since 2000, U.S. debt has tripled and confidence in the U.S. dollar is wavering.

Since 2000, the dollar has shrunk to 60% of world currency reserves and is slowly being eaten away. That percent is about to make a dramatic plunge.

The Euro, the 2nd largest currency of foreign exchange at 28%, is in serious jeopardy because of the continuing European debt crisis.

Big international investors don’t really want to trade in U.S. dollars but, at the moment, its the only game in town.

Yesterday China and Japan signaled that is about to change. There is a new sheriff coming to town. That sheriff is the renminbi, China’s currency!

Conclusions

China and Japan are the world’s 2nd and 3rd largest economies. They are the United States largest and 2nd largest debtors.

Asia is, by far, the largest growth region in global economics this decade. China is poised to replace the United States as the world’s largest economic power in late 2016.

What this agreement means is that China and Japan are combining their considerable economic muscle to challenge and replace the U.S. dollar as the foreign currency of exchange.

That new currency will become the yuan (renminbi). As that happens both China and Japan will sell off their U.S. holdings and convert them to yuan and yen.

As China and Japan rapidly divest themselves from the U.S. dollar it will, in turn, drive up the yields on U.S. Treasury bonds and the cost of borrowing will rise and rise.

With a national debt of $15.1 trillion already the burden of excessive debt growth will become overpowering.

Think Greece, folks!

As U.S. debt spirals out of control and the cost of borrowing bankrupts the nation into poverty it will be traced back to yesterday’s decision.

But you didn’t hear it on CNN or read about it on a headline in the New York Times.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Dec 26, 2011, in China, Economy, Global Economy, Japan, news, Politics, U.S. Economy, World Economy and tagged , . Bookmark the permalink. 4 Comments.

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