Monday, November 30, 2015

Chinese Yuan Expected To Be Added By IMF

From the Guardian:

China’s efforts to make the yuan an international currency on a par with the US dollar are to receive a fillip with the International Monetary Fund widely expected to add it to a special basket of global currencies.
Analysts say the shareholders in the Washington-based IMF will vote on Monday to include the yuan, also known as the renminbi, as the fifth member of its special drawing rights currency basket alongside the dollar, the Japanese yen, sterling and the euro.

China has been lobbying for the IMF to add the yuan to its basket of reserve currencies, which it uses to lend to sovereign borrowers. A vote to include the currency in the SDR basket would mark a significant milestone for Beijing, according to experts.

“The direct impact won’t be felt in the near term, not least because implementation of the new basket won’t be until Q3 2016. However the symbolic importance cannot be overlooked,” said Andrew Malcolm, Asia head of capital markets at law firm Linklaters.

“By effectively endorsing the renminbi as a freely useable currency, it sends a strong signal about China’s importance in the global financial markets.”

This is BAD news for the United States.   The Chinese have been working for years, playing the long game, to replace the U.S. dollar as the reserve currency of the world.  Basically after World War II, we became the world's global bank.   Everyone buys goods with U.S. dollars.  If the country of Georgia wants Russian oil, they would convert their money to dollars, buy the oil from Russia, and Russia would either hold onto the the dollars in an account or convert it to the Russian ruble.

Because our Federal Reserve has engaged in bad monetary policy to prop up our economy -- printing money, monetizing our debt by buying our treasury bonds with U.S. dollars, which is essentially like paying off one credit card with another -- and because we have ballooned our debt in the last 12 years (and yes, the GOP is to blame as well, the rest of the world is looking to dump the U.S. dollar.

We have flooded the world with U.S. dollars, and now the world is looking to ditch them.   What happens when you have a very large supply of a commodity that suddenly no one wants?  The value of that commodity plummets.   This is called inflation.   The price of goods is not going up; the value of the money used to purchase the goods is going down.

Inflation is already creeping into the price structure at the retail level -- look at the cost of meat, bread, eggs, and milk compared to 12 years ago.

If the U.S. dollar is dropped as the world reserve currency, we can expect hyperinflation and an economic crash that is going to make the last recession and the Great Depression look like minor market corrections.

Many countries already have agreements to trade in the yuan instead of the dollar, like Australia and Russia.  Essentially, I think the world has come to the conclusion that the United States cannot get its fiscal house in order, and that until we do, they are not going to be tied to a currency that is rapidly depreciating into worthlessness due to our high deficit spending trend and the inability to live within our means.   It's what banks do.  If they have a customer they consider to be a bad risk, they do not approve the mortgage, credit card, etc.  

Most people in the U.S. think the federal government will never run out of money. The truth is we ran out of money $19 trillion  ago, and now the consequences of our actions are having systemic, economy threatening repercussions.

The sad fact is that China has its own economic issues and was forced to devalue its currency in August as its stock market crashed.  The yuan is far from a sure bet, but at this point a lot of the world may be playing the odds and judging that the dollar is more vulnerable in the long term.

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