A very interesting item appeared through the official Chinese news agency, Xinhua, in which the Chinese government is effectively calling for the end of the U.S. dollar as the world’s reserve currency, stating that the world should “…start considering building a de-Americanized world.” (Source: “Commentary: U.S. fiscal failure warrants a de-Americanized world,” Xinhua web site, October 13, 2013.)
In my view, the commentary was intended to voice the opinion of Chinese leaders that they are fed up with the political fighting in Washington, leaving China’s trillions of dollars in U.S. debt in the hands of ineffective leaders.
With the U.S. dollar as the reserve currency, there is very little recourse for many nations around the world. You have to remember that for countries to make large trades on an international scale, a reserve currency is required for transactions. Increasingly, China is looking to move away from the U.S. dollar as reserve currency to lessen its reliance on our nation. This is part of the reason why China’s leaders are looking to move away from an export-led economy and toward a more domestic-oriented economy.
However, much of the commentary was geared towards politics, rather than purely economics; one example: the U.S. is “meddling in the business of other countries,” a not-too-subtle hint that we should stay out of China’s affairs.
They are right in one aspect: we have abused our power as the reserve currency and have run up a massive amount of U.S. debt. At some point, countries around the world that depend on the U.S. dollar as the reserve currency as well as trillions of dollars in invested U.S. debt, will get fed up and look to alternatives.
In one sense, we are lucky that the rest of the world is in such a mess. If you were China and you had trillions of dollars in excess foreign reserves (mainly U.S. dollars) that you need to invest, what are the alternatives? Japan’s debt? There’s no return, and it’s too risky. What about Europe’s debt? Possibly, but it’s still riskier than U.S. debt.
Part of the reason why China has been aggressively buying gold as well as physical properties and businesses around the world is that this helps the country diversify its foreign reserves. As the level of U.S. debt continues to grow and political grandstanding makes America look like a laughingstock to the rest of the world, this further raises doubts as to the rationality of having the U.S. dollar as reserve currency forever.
I wonder whom the Chinese are talking about when they state “the cyclical stagnation in Washington….has left many nations’ tremendous dollar assets in jeopardy.”
Obviously, the Chinese are talking about themselves, since they are the single largest holder of U.S. debt, with approximately $1.3 trillion. It’s unknown what the total amount of U.S. dollar-denominated assets China holds, but it’s certainly in the trillions of dollars.
This isn’t the first time that the Chinese have mentioned the need for an alternative reserve currency. Voices around the world continue to grow every time the pathetic leaders in Washington make our nation look like a joke.
If we ever lose reserve currency status, we only have ourselves to blame. We’re the ones who voted for these incompetent clowns in Washington, who have run up the U.S. debt and have done nothing to form any sort of long-term plan to get us out of this mess (just a short-term band-aid solution that pushes the decision back to another day)—and we may be able to add the loss of the dollar’s reserve currency status to that list.
As an investor, what should you do?
Diversifying your portfolio is really the key for long-term wealth. Having some part of one’s investment away from the U.S. dollar, as a hedge or insurance policy, makes sense over the very long term. This includes owning some precious metals, such as gold, which would benefit from a decline in the U.S. dollar.
This article China Leads Campaign to Replace the Dollar as Reserve Currency was originally published at Investment Contrarians