Last month, a “secret meeting” that involved more than 100 executives from some of the biggest financial institutions in the United States was held in New York City. During this “secret meeting“, a company known as “Chain” unveiled a technology that transforms U.S. dollars into “pure digital assets”. Reportedly, there were representatives from Nasdaq, Citigroup, Visa, Fidelity, Fiserv and Pfizer in the room, and Chain also claims to be partnering with Capital One, State Street, and First Data. This “revolutionary” technology is intended to completely change the way that we use money, and it would represent a major step toward a cashless society. But if this new digital cash system is going to be so good for society, why was it unveiled during a secret meeting for Wall Street bankers? Is there something more going on here than we are being told?
None of us probably would have ever heard about this secret meeting if it was not for a report in Bloomberg. The following comes from their article entitled “Inside the Secret Meeting Where Wall Street Tested Digital Cash“…
On a recent Monday in April, more than 100 executives from some of the world’s largest financial institutions gathered for a private meeting at the Times Square office of Nasdaq Inc. They weren’t there to just talk about blockchain, the new technology some predict will transform finance, but to build and experiment with the software.
By the end of the day, they had seen something revolutionary: U.S. dollars transformed into pure digital assets, able to be used to execute and settle a trade instantly. That’s the promise of a blockchain, where the cumbersome and error-prone system that takes days to move money across town or around the world is replaced with almost instant certainty.
So it is not just Michael Snyder from The Economic Collapse Blog that is referring to this gathering as a “secret meeting”. This is actually how it was described by Bloomberg. And I think that there is a very good reason why this meeting was held in secret, because many in the general public would definitely be alarmed by this giant step toward a cashless society. Here is more on this new system from Bloomberg…
While cash in a bank account moves electronically all the time today, there’s a distinction between that system and what it means to say money is digital. Electronic payments are really just messages that cash needs to move from one account to another, and this reconciliation is what adds time to the payments process. For customers, moving money between accounts can take days as banks wait for confirmations. Digital dollars, however, are pre-loaded into a system like a blockchain. From there, they can be swapped immediately for an asset.
“Instead of a record or message being moved, it’s the actual asset,” Ludwin said. “The payment and the settlement become the same thing.”
Why this is so alarming is because we are seeing other major moves toward a cashless system all over the planet. In Sweden, 95 percent of all retail transactions are already cashless, and ATM machines are being removed by the hundreds. In Denmark, government officials actually have a stated goal of “eradicating cash” by the year 2030. And in Norway, the biggest bank in the country has publicly called for the complete elimination of all cash.
Other nations in Europe have already banned cash transactions over a certain amount. Here are just a couple of examples…
As I have written about previously, cash transactions of more than 2,500 euros have already been banned in Spain, and France and Italy have both banned all cash transactions of more than 1,000 euros.
Little by little, cash is being eradicated, and what we have seen so far is just the beginning. 417 billion cashless transactions were conducted in 2014, and the final number for 2015 is projected to be much higher.
The global push toward a cashless society is only going to intensify, because banks and governments both tend to really like the idea of such a system.
Banks really like the concept of a cashless society because it would force everyone to be their customers. There would be no more hiding cash in a mattress at home or trying to pay all of your bills with paper money. Under a cashless system, we would all be dependent on the banks, and they would make lots of money whenever we swiped our cards or our “chips” were scanned.
Governments see a lot of advantages in a cashless society as well. They tell us that they would be able to crack down on drug dealers, tax evaders, terrorists and money launderers, but the truth is that it would enable them to watch, track, monitor and control virtually all of our financial transactions. Our lives would become open books to the government, and financial privacy would be a thing of the past.
In addition, the potential for tyranny would be absolutely off the charts.
Just imagine a world where the government could serve as the gatekeeper for who is allowed to use the cashless system and who is not. They could require that we all submit to some sort of government-issued form of identification before being permitted to operate within the system, or it is even conceivable that a loyalty oath would be required.
Of course if you did not submit to their demands, you could not buy, sell, open a bank account or get a job without access to the cashless system.
Hopefully people can understand where this is going. Paper money is a very important component of our freedom, and if it is taken away from us that will open the door for all sorts of abuse.
Even now, cash is slowly being “criminalized” in America. For example, if cash is used to pay for a hotel room that is considered by federal authorities to be “suspicious activity” that should be reported to the government. Of course it isn’t against the law to pay your hotel bill in cash just yet, but according to the government it is something that “terrorists” do so it needs to be closely watched.
It doesn’t take a whole lot of imagination to see where all of this is going. And for those of us that understand what time it is, this is a clear indication that it is getting late in the game.
*About the author: Michael Snyder is the founder and publisher of The Economic Collapse Blog. Michael’s controversial new book about Bible prophecy entitled “The Rapture Verdict” is available in paperback and for the Kindle on Amazon.com.*
Russian President Vladimir Putin has introduced legislation that would deal a tremendous blow to the U.S. dollar. If Putin gets his way, and he almost certainly will, the U.S. dollar will be eliminated from trade between nations that belong to the Commonwealth of Independent States. In addition to Russia, that list of countries includes Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan and Uzbekistan. Obviously this would not mean “the death of the dollar”, but it would be a very significant step toward the end of the era of the absolute dominance of the U.S. dollar. Most people don’t realize this, but more U.S. dollars are actually used outside of the United States than are used inside this country. If the rest of the planet decides to stop accumulating dollars, using them to trade with one another, and loaning them back to us at ultra-low interest rates, we are going to be in for a world of hurt. Unfortunately for us, it is only a matter of time until that happens.
When I first read the following excerpt from a recent RT article, I was absolutely stunned…
Russian President Vladimir Putin has drafted a bill that aims to eliminate the US dollar and the euro from trade between CIS countries.
This means the creation of a single financial market between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries of the former Soviet Union.
“This would help expand the use of national currencies in foreign trade payments and financial services and thus create preconditions for greater liquidity of domestic currency markets”, said a statement from Kremlin.
For a long time, tensions have been building between the United States and Russia over Syria, Ukraine, the price of oil and a whole host of other issues. But I didn’t anticipate that things would get to this level quite yet. It is expected that Putin’s new bill will become law, and this is only one element of a much larger trend that is now developing.
You see, the truth is that Russia and China have both been dumping dollar-denominated assets for months. The following comes from a recent piece by Mac Slavo…
Last year Russia began unloading massive amounts of their US dollar reserves. In the month of December 2014 alone Putin sold some 20% of the country’s U.S. Treasurys, a move that further increased tensions surrounding what can only be described as economic warfare between East and West.
Then, as if part of a coordinated effort, this summer it was revealed that China had implemented a similar strategy, dumping half a trillion in dollar denominated assets.
But that’s just the beginning of the end for the US dollar. Amid a major meltdown in Chinese stock markets the People’s Republic sold off billions in dollar assets last week in what was reported to be an effort to stabilize their collapsing financial markets.
And now, as Russia’s economy collapses under the weight of American and European sanctions, including what many believe to be widespread downward manipulation of oil prices, Vladimir Putin is sending a clear signal to the central bank of the world’s reserve currency.
China has the second largest economy on the entire planet, and Russia has the tenth largest. In recent years, these two superpowers have become much tighter. For example, just consider this headline from Sputnik News that I came across just today: “Crippling US Foreign Policy Draws Russia, China Closer Together“.
And I don’t know if you have noticed, but U.S. relations with China have turned rather sour lately. Lots of accusations about spying and trade violations have been flying around, and just this week five Chinese warships were spotted off the coast of Alaska. In the months ahead, expect our relationship with China to continue to unravel.
If China and Russia were to both fundamentally reject the U.S. dollar at some point, much of the rest of the world may choose to follow suit.
So why is that important?
The fact that most of the nations of the world use our dollars to trade with one another creates a tremendous amount of artificial demand for our currency. In other words, the U.S. dollar is valued much higher than it otherwise would be just because it is the de facto reserve currency of the planet.
As a result, we can import massive amounts of products at super cheap prices. When we go to Wal-Mart or the dollar store, we can fill up our carts with lots and lots of ridiculously inexpensive stuff. Our standard of living is way higher than it actually should be.
And because the U.S. dollar is used so widely in global trade, major exporting nations end up with giant piles of our currency which they have been willing to lend back to us at ultra-low interest rates. This has made it possible to fund our massively bloated federal government and to go 18 trillion dollars in debt.
If the rest of the world stops using our dollars and stops playing our game, we will be in a tremendous amount of trouble. The cost of imported products would absolutely skyrocket and our standard of living would go way down.
In addition, the federal government (along with state and local governments) would have to pay much more to borrow money which would rapidly create a gigantic debt crisis.
So Russia knows where they could really hurt us. Most of the “power” that America currently projects around the world is based on having the de facto reserve currency of the planet. If you take our financial power away, we would be far, far less imposing on the global stage. Sadly, the truth is that the U.S. military is rapidly shrinking and has largely been defanged by the Obama administration.
A lot of people that will read this article will not understand this, but it is very, very important to keep an eye on this emerging Russian/Chinese alliance. I believe that it is going to play a critical role in world events during the years ahead.
So do you agree with me or do you disagree? Please feel free to join the discussion by posting a comment below…
Over the past decade, there has been only one other time when the value of the U.S. dollar has increased by so much in such a short period of time. That was in mid-2008 – just before the greatest financial crash since the Great Depression. A surging U.S. dollar also greatly contributed to the Latin American debt crisis of the early 1980s and the Asian financial crisis of 1997. Today, the globe is more interconnected than ever. Most global trade is conducted in U.S. dollars, and much of the borrowing done by emerging markets all over the planet is denominated in U.S. dollars. When the U.S. dollar goes up dramatically, this can put a tremendous amount of financial stress on economies all around the world. It also has the potential to greatly threaten the stability of the 65 trillion dollars in derivatives that are directly tied to the value of the U.S. dollar. The global financial system is more vulnerable to currency movements than ever before, and history tells us that when the U.S. dollar soars the global economy tends to experience a contraction. So the fact that the U.S. dollar has been skyrocketing lately is a very, very bad sign.
Most of the people that write about the coming economic collapse love to talk about the coming collapse of the U.S. dollar as well.
But in the initial deflationary stage of the coming financial crisis, we are likely to see the U.S. dollar actually strengthen considerably.
As I have discussed so many times before, we are going to experience deflation first, and after that deflationary phase the desperate responses by the Federal Reserve and the U.S. government to that deflation will cause the inflationary panic that so many have written about.
Yes, someday the U.S. dollar will essentially be toilet paper. But that is not in our immediate future. What is in our immediate future is a “flight to safety” that will push the surging U.S. dollar even higher.
This is what we witnessed in 2008, and this is happening once again right now.
Just look at the chart that I have posted below. You can see the the U.S. dollar moved upward dramatically relative to other currencies starting in mid-2008. And toward the end of the chart you can see that the U.S. dollar is now experiencing a similar spike…
At the moment, almost every major currency in the world is falling relative to the U.S. dollar.
For example, this next chart shows what the euro is doing relative to the dollar. As you can see, the euro is in the midst of a stunning decline…
Instead of focusing on the U.S. dollar, those that are looking for a harbinger of the coming financial crisis should be watching the euro. As I discussed yesterday, analysts are telling us that if Greece leaves the eurozone the EUR/USD could fall all the way down to 0.90. If that happens, the chart above will soon resemble a waterfall.
And of course it isn’t just the euro that is plummeting. The yen has been crashing as well. The following chart was recently posted on the Crux…
Unfortunately, most Americans have absolutely no idea how important all of this is. In recent years, growing economies all over the world have borrowed gigantic piles of very cheap U.S. dollars. But now they are faced with the prospect of repaying those debts and making interest payments using much more expensive U.S. dollars.
Investors are starting to get nervous. At one time, investors couldn’t wait to pour money into emerging markets, but now this process is beginning to reverse. If this turns into a panic, we are going to have one giant financial mess on our hands.
The truth is that the value of the U.S. dollar is of great importance to every nation on the face of the Earth. The following comes from U.S. News & World Report…
In the early ’80s, a bullish U.S. dollar contributed to the Latin American debt crisis, and also impacted the Asian Tiger crisis in the late ’90s. Emerging markets typically have higher growth, but carry much higher risk to investors. When the economies are doing well, foreign investors will lend money to emerging market countries by purchasing their bonds.
They also deposit money in foreign banks, which facilitates higher lending. The reason for this is simple: Bond payments and interest rates in emerging markets are much higher than in the U.S. Why deposit cash in the U.S. and earn 0.25 percent, when you could earn 6 percent in Indonesia? With the dollar strengthening, the interest payments on any bond denominated in U.S. dollars becomes more expensive.
Additionally, the deposit in the Indonesian bank may still be earning 6 percent, but that is on Indonesian rupiahs. After converting the rupiahs to U.S. dollars, the extra interest doesn’t offset the loss from the exchange. As investors get nervous, the higher interest on emerging market debt and deposits becomes less alluring, and they flee to safety. It may start slowly, but history tells us it can quickly spiral out of control.
Over the past few months, I have been repeatedly stressing that so many of the signs that we witnessed just prior to previous financial crashes are happening again.
Now you can add the skyrocketing U.S. dollar to that list.
If you have not seen my previous articles where I have discussed these things, here are some places to get started…
“Guess What Happened The Last Time The Price Of Oil Crashed Like This?…”
“Not Just Oil: Guess What Happened The Last Time Commodity Prices Crashed Like This?…”
“10 Key Events That Preceded The Last Financial Crisis That Are Happening Again RIGHT NOW”
The warnings signs are really starting to pile up.
When we look back at past financial crashes, there are recognizable patterns that can be identified.
Anyone with half a brain should be able to see that a large number of those patterns are unfolding once again right before our eyes.
Unfortunately, most people in this world end up believing exactly what they want to believe.
No matter how much evidence you show them, they will not accept the truth until it is too late.
The Russians are actually making a move against the petrodollar. It appears that they are quite serious about their de-dollarization strategy. The largest natural gas producer on the planet, Gazprom, has signed agreements with some of their biggest customers to switch payments for natural gas from U.S. dollars to euros. And Gazprom would have never done this without the full approval of the Russian government, because the Russian government holds a majority stake in Gazprom. There hasn’t been a word about this from the big mainstream news networks in the United States, but this is huge. When you are talking about Gazprom, you are talking about a company that is absolutely massive. It is one of the largest companies in the entire world and it makes up 8 percent of Russian GDP all by itself. It holds 18 percent of the natural gas reserves of the entire planet, and it is also a very large oil producer. So for Gazprom to make a move like this is extremely significant.
When Barack Obama decided to slap some meaningless economic sanctions on Russia a while back, he probably figured that the world would forget about them after a few news cycles.
But the Russians do not forget, and they certainly do not forgive.
At this point the Russians are turning their back on the United States, and that includes the U.S. dollar.
What you are about to read is absolutely stunning, and yet you have not heard about it from any major U.S. news source. But what Gazprom is now doing has the potential to really shake up the global financial landscape. The following is an excerpt from a news report by the ITAR-TASS news agency…
Gazprom Neft had signed additional agreements with consumers on a possible switch from dollars to euros for payments under contracts, the oil company’s head Alexander Dyukov told a press conference.
“Additional agreements of Gazprom Neft on the possibility to switch contracts from dollars to euros are signed. With Belarus, payments in roubles are agreed on,” he said.
Dyukov said nine of ten consumers had agreed to switch to euros.
And Gazprom is not the only big company in Russia that is moving away from the U.S. dollar.
According to RT, other large Russian corporations are moving to other currencies as well…
Russia will start settling more contracts in Asian currencies, especially the yuan, in order to lessen its dependence on the dollar market, and because of Western-led sanctions that could freeze funds at any moment.
“Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies, and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times, which was published in an article on Sunday.
Diversifying trade accounts from dollars to the Chinese yuan and other Asian currencies such as the Hong Kong dollar and Singapore dollar has been a part of Russia’s pivot towards Asian as tension with Europe and the US remain strained over Russia’s action in Ukraine.
And according to Zero Hedge, “expanding the use of non-dollar currencies” is one of the main things that major Russian banks are working on right now…
Andrei Kostin, chief executive of state bank VTB, said that expanding the use of non-dollar currencies was one of the bank’s “main tasks”. “Given the extent of our bilateral trade with China, developing the use of settlements in roubles and yuan [renminbi] is a priority on the agenda, and so we are working on it now,” he told Russia’s President Vladimir Putin during a briefing. “Since May, we have been carrying out this work.”
“There is nothing wrong with Russia trying to reduce its dependency on the dollar, actually it is an entirely reasonable thing to do,” said the Russia head of another large European bank. He added that Russia’s large exposure to the dollar subjects it to more market volatility in times of crisis. “There is no reason why you have to settle trade you do with Japan in dollars,” he said.
The entire country is undergoing a major financial conversion.
This is just staggering.
Meanwhile, Russians have been pulling money out of U.S. banks at an unprecedented pace…
So in March, without waiting for the sanction spiral to kick in, Russians yanked their moolah out of US banks. Deposits by Russians in US banks suddenly plunged from $21.6 billion to $8.4 billion. They yanked out 61% of their deposits in just one month! They’d learned their lesson in Cyprus the hard way: get your money out while you still can before it gets confiscated.
For those that don’t think that all of this could hurt the U.S. economy or the U.S. financial system, you really need to go back and read my previous article entitled “De-Dollarization: Russia Is On The Verge Of Dealing A Massive Blow To The Petrodollar“. The truth is that the U.S. economic system is extremely dependent on the financial behavior of the rest of the globe.
Because nearly everyone else around the rest of the planet uses our currency to trade with one another, that keeps the value of the U.S. dollar artificially high and it keeps our borrowing costs artificially low.
As Russia abandons the U.S. dollar that will hurt, but if other nations start following suit that could eventually cause a financial avalanche.
What we are witnessing right now is just a turning point.
The effects won’t be felt right away. So don’t expect this to cause financial disaster next week or next month.
But this is definitely another element in the “perfect storm” that is starting to brew for the U.S. economy.
Yes, we have been living in a temporary bubble of false stability for a few years. However, the long-term outlook has not gotten any better. In fact, the long-term trends that are destroying our economic and financial foundations just continue to get even worse.
So enjoy the “good times” while you still can.
They certainly will not last too much longer.
Is the petrodollar monopoly about to be shattered? When U.S. politicians started slapping economic sanctions on Russia, they probably never even imagined that there might be serious consequences for the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting ready to pull the trigger on a “de-dollarization” plan. For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia and China about the need to change to a new system, but nobody has really had a big reason to upset the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to completely reevaluate the financial relationship that it has with the United States. If it starts trading a lot of oil and natural gas for currencies other than the U.S. dollar, that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.
The fact that the Russian government has held a meeting to discuss “getting rid of the US dollar in Russian export operations” should be front page news on every mainstream news website in the United States. That is how big this is. But instead, we have heard nothing from the big mainstream news networks about this so far. Instead, we have only heard about this from Russian news sources such as the Voice of Russia…
Russian press reports that the country’s Ministry of Finance is ready to greenlight a plan to radically increase the role of the Russian ruble in export operations while reducing the share of dollar-denominated transactions. Governmental sources believe that the Russian banking sector is “ready to handle the increased number of ruble-denominated transactions”.
According to the Prime news agency, on April 24th the government organized a special meeting dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia.
The “de-dollarization meeting” was chaired by First Deputy Prime Minister of the Russian Federation Igor Shuvalov, proving that Moscow is very serious in its intention to stop using the dollar.
So will Russia go through with this?
After all, this wouldn’t just be a slap in the face. This would essentially be like slamming an economic fist into our nose.
You see, Russia is not just a small player when it comes to trading oil and natural gas. The truth is that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world.
If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the monopoly of the petrodollar.
In order to do this, Russia will need trading partners willing to go along. In the article quoted above, the Voice of Russia listed Iran and China as two nations that would potentially be willing to make the switch…
Of course, the success of Moscow’s campaign to switch its trading to rubles or other regional currencies will depend on the willingness of its trading partners to get rid of the dollar. Sources cited by Politonline.ru mentioned two countries who would be willing to support Russia: Iran and China. Given that Vladimir Putin will visit Beijing on May 20, it can be speculated that the gas and oil contracts that are going to be signed between Russia and China will be denominated in rubles and yuan, not dollars.
And the reality of the matter is that China has seemed ready to move away from the U.S. dollar for quite some time. In a previous article, I included a quote from a French news source that discussed how China’s official news agency has even called for a “new international reserve currency… to replace the dominant US dollar”…
For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback’s role as the default global reserve unit.
But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China’s official Xinhua news agency called for a “de-Americanised” world.
It also urged the creation of a “new international reserve currency… to replace the dominant US dollar”.
For much more on what China is thinking, please see my previous article entitled “9 Signs That China Is Making A Move Against The U.S. Dollar“.
So why is the petrodollar so important?
Well, it creates a tremendous amount of demand for the U.S. dollar all over the globe. Since everyone has needed it to trade with one another, that has created an endless global appetite for the currency. That has kept the value of the dollar artificially high, and it has enabled us to import trillions of dollars of super cheap products from other countries. If other nations stopped using the dollar to trade with one another, the value of the dollar would plummet dramatically and we would have to pay much, much more for the trinkets that we buy at the dollar store and Wal-Mart.
In addition, since the U.S. dollar is essentially the de facto global currency, this has also increased demand for our debt. Major exporting nations such as China and Saudi Arabia end up with giant piles of our dollars. Instead of just letting them sit there and do nothing, those nations often reinvest their dollars into securities that can rapidly be changed back into dollars if needed. One of the most popular ways to do this has been to invest those dollars in U.S. Treasuries. This has driven down interest rates on U.S. debt over the years and has enabled the U.S. government to borrow trillions upon trillions of dollars for next to nothing.
But if the rest of the world starts moving away from the U.S. dollar, all of this could change.
In order for our current standard of living to continue, it is absolutely imperative that everyone else around the globe continues to use our currency.
So if Russia really does pull the trigger on a “de-dollarization” strategy, that would be huge – especially if the rest of the planet started following their lead.
The U.S. economy is already teetering on the brink of another major downturn, and there are a whole host of indications that big trouble is on the horizon. For much more on this, please see the article that I posted on Monday entitled “If Economic Cycle Theorists Are Correct, 2015 To 2020 Will Be Pure Hell For The United States“.
Just about the last thing that we need right now is for our petrodollar monopoly to be threatened.
It would be nice if things would calm down in Ukraine and the relationship between the United States and Russia could go back to normal.
Sadly, that does not appear likely any time soon.
In fact, the Ukrainian government has already admitted that “we are essentially at war“, and on Tuesday six Ukrainian soldiers were killed and eight were wounded in a convoy attack in eastern Ukraine.
The regions in eastern Ukraine that have just declared independence have given the government in Kiev until Wednesday to pull their forces out of eastern Ukraine or else face war.
If a full blown civil war does erupt in Ukraine, it is going to take this crisis to a completely new level.
Unfortunately, most Americans are incredibly apathetic at this point and know very little about what is going on.
But in the end, this could have dramatic implications for all of us.
In order for our current level of debt-fueled prosperity to continue, the rest of the world must continue to use our dollars to trade with one another and must continue to buy our debt at ridiculously low interest rates. Of course the number one foreign nation that we depend on to participate in our system is China. China accounts for more global trade than anyone else on the planet (including the United States), and most of that trade is conducted in U.S. dollars. This keeps demand for our dollars very high, and it ensures that we can import massive quantities of goods from overseas at very low cost. As a major exporting nation, China ends up with gigantic piles of our dollars. They lend many of those dollars back to us at ridiculously low interest rates. At this point, China owns more of our national debt than any other country does. But if China was to decide to quit playing our game and started moving away from U.S. dollars and U.S. debt, our economic prosperity could disappear very rapidly. Demand for the U.S. dollar would fall and prices would go up. And interest rates on our debt and everything else in our financial system would go up to crippling levels. So it is absolutely critical to our financial future that China continues to play our game.
Unfortunately, there are signs that China has now decided to start looking for a smooth exit from the game. In November, I wrote about how the central bank of China has announced that it is “no longer in China’s favor to accumulate foreign-exchange reserves”. That means that the pile of U.S. dollars that China is sitting on is not going to get any higher.
In addition, China has signed a whole host of international currency agreements with other nations during the past couple of years which are going to result in less U.S. dollars being used in international trade. You can read about many of these agreements in this article.
This week, we learned that China started to dump U.S. debt during the month of December. Many have imagined that China would try to dump a flood of our debt on to the market all of a sudden once they decided to exit, but that simply does not make sense. Instead, it makes sense for China to dump a bit of debt at a time so that the market will not panic and so that they can get close to full value for the paper that they are holding.
As Bloomberg reported the other day, China dumped nearly 50 billion dollars of U.S. debt during the month of December…
China, the largest foreign U.S. creditor, reduced holdings of U.S. Treasury debt in December by the most in two years as the Federal Reserve announced plans to slow asset purchases.
The nation pared its position in U.S. government bonds by $47.8 billion, or 3.6 percent, to $1.27 trillion, the largest decline since December 2011, according to U.S. Treasury Department data released yesterday.
This is how I would do it if I was China. I would try to dump 30, 40 or 50 billion dollars a month. I would try to make a smooth exit and try to get as much for my U.S. debt paper as I could.
So if China is not going to stockpile U.S. dollars or U.S. debt any longer, what is it going to stockpile?
It is going to stockpile gold of course. In fact, China has been voraciously stockpiling gold for quite some time, and their hunger for gold appears to be growing.
According to Bloomberg, more than 80 percent of the gold that was exported from Switzerland last month went to Asia…
Switzerland sent more than 80 percent of its gold and silver bullion and coin exports to Asia last month, the Swiss Federal Customs Administration said today in an e-mailed report. It imported most from the U.K.
Hong Kong was the top destination at 44 percent on a value basis, with India at 14 percent, the Bern-based customs agency said in its first breakdown of the gold trade data since 1980. Singapore accounted for 8.6 percent of exports, the United Arab Emirates 7.9 percent and China 6.3 percent.
When China imports gold, most of it goes through Hong Kong. We know that imports of gold from Hong Kong into China are at an all-time record high, but we don’t know exactly how much gold China has accumulated at this point because they quit reporting that to the rest of the world a number of years ago.
When it comes to global finance, China is playing chess and the United States is playing checkers. China knows that gold is a universal currency that will hold value over the long-term. As the paper currencies of the world race toward collapse, China could end up holding most of the real money and that would be a huge game changer when they finally reveal that fact…
The announcement of China’s new gold hoard will send shockwaves through the financial markets, and make China and the Chinese yuan (their national currency) even bigger players at the international table.
International banking expert James Rickards compared it to a game of Texas Hold ‘Em poker:
“You want a big pile of chips. The U.S. has a big pile of chips, Europe has a big pile of chips. The U.S. has 8,000 tonnes [metric tons] of gold, 17 members of the euro system have 10,000 tonnes. China at 1,000 tonnes is not a player, but at 5,000 tonnes, they are a player.”
There are some really good points made in the quote above, but I do take exception with a couple of things. First of all, I believe that China now has far more than 5,000 tons of gold. Secondly, I seriously doubt that the U.S. still actually has 8,000 tons of gold or that Europe still actually has 10,000 tons of gold.
As China (and eventually the rest of the world) moves away from a U.S.-based financial system, the consequences are going to be dramatic.
For instance, right now the average rate of interest that the U.S. government pays on debt is just 2.477 percent. That is ridiculously low and it is way below the real rate of inflation. It is simply not rational for anyone to lend the U.S. government money so cheaply, and at some point we are going to see a dramatic shift.
When that day arrives, interest rates are going to rise dramatically. And if the average rate of interest on U.S. government debt rises to just 6 percent (and it has been much higher than that in the past), we will be paying out more than a trillion dollars a year just in interest on the national debt.
Even more frightening is what a rapidly changing interest rate environment would mean for our banking system. There are four large U.S. banks that each have exposure to derivatives in excess of 40 trillion dollars. You can find the identity of those banks right here. Interest rate derivatives make up the biggest chunk of those derivatives contracts. As John Embry told King World News just the other day, when that bubble bursts the carnage is going to be unprecedented…
“Stockman brought up a brilliant point, the fact that we have hundreds of trillions of dollars of interest rate swaps, which are polluting the world’s banking system. If we see growing volatility in interest rates, and I think that’s inevitable with what’s going on, that would cause spasms in the financial system. And if something goes wrong in the derivatives market, Heaven help us because the leverage that is imparted to the banking system through these derivatives is unholy.”
Unfortunately, very few of the “experts” will ever see this crash coming.
Very few of them saw it coming in 2000.
Very few of them saw it coming in 2008.
And very few of them will see it coming this time.
I really like what Paul B. Farrell had to say about this…
Early warnings of a crash are dismissed over and over (“just a temporary correction”). They gradually numb us about the inevitable. Time after time we forget history’s lessons. Until finally a big surprise catches us totally off-guard. Financial historian Niall Ferguson put it this way: Before the crash, our world seems almost stationary, deceptively so, balanced, at a set point. So that when the crash finally hits — as inevitably it will — everyone seems surprised. And our brains keep telling us it’s not time for a crash.
Till then, life just goes along quietly, hypnotizing us, making us vulnerable, till a shocker like Lehman Brothers upsets the balance. Then, says Ferguson, the crash is “accelerating suddenly, like a sports car … like a thief in the night.” It hits. Shocks us wide awake.
Don’t let the upcoming crash take you by surprise.
The warning signs are very clear.
Get ready while you still can.
The death of the dollar is coming, and it will probably be China that pulls the trigger. What you are about to read is understood by only a very small fraction of all Americans. Right now, the U.S. dollar is the de facto reserve currency of the planet. Most global trade is conducted in U.S. dollars, and almost all oil is sold for U.S. dollars. More than 60 percent of all global foreign exchange reserves are held in U.S. dollars, and far more U.S. dollars are actually used outside of the United States than inside of it. As will be described below, this has given the United States some tremendous economic advantages, and most Americans have no idea how much their current standard of living depends on the dollar remaining the reserve currency of the world. Unfortunately, thanks to reckless money printing by the Federal Reserve and the reckless accumulation of debt by the federal government, the status of the dollar as the reserve currency of the world is now in great jeopardy.
As I mentioned above, nations all over the globe use U.S. dollars to trade with one another. This has created tremendous demand for U.S. dollars and has kept the value of the dollar up. It also means that Americans can import things that they need much more inexpensively than they otherwise would be able to.
The largest exporting nations such as Saudi Arabia (oil) and China (cheap plastic trinkets at Wal-Mart) end up with massive piles of U.S. dollars…
Instead of just sitting on all of that cash, these exporting nations often reinvest much of that cash into low risk securities that can be rapidly turned back into dollars if necessary. For a very long time, U.S. Treasury bonds have been considered to be the perfect way to do this. This has created tremendous demand for U.S. government debt and has helped keep interest rates super low. So every year, massive amounts of money that gets sent out of the country ends up being loaned back to the U.S. Treasury at super low interest rates…
And it has been a very good thing for the U.S. economy that the federal government has been able to borrow money so cheaply, because the interest rate on 10 year U.S. Treasuries affects thousands upon thousands of other interest rates throughout our financial system. For example, as the rate on 10 year U.S. Treasuries has risen in recent months, so have the rates on U.S. home mortgages.
Our entire way of life in the United States depends upon this game continuing. We must have the rest of the world use our currency and loan it back to us at ultra low interest rates. At this point we have painted ourselves into a corner by accumulating so much debt. We simply cannot afford to have rates rise significantly.
For example, if the average rate of interest on U.S. government debt rose to just 6 percent (and it has been much higher than that at various times in the past), we would be paying more than a trillion dollars a year just in interest on the national debt.
But it wouldn’t be just the federal government that would suffer. Just consider what higher rates would do to the real estate market.
About a year ago, the rate on 30 year mortgages was sitting at 3.31 percent. The monthly payment on a 30 year, $300,000 mortgage at that rate is $1315.52.
If the 30 year rate rises to 8 percent, the monthly payment on a 30 year, $300,000 mortgage would be $2201.29.
Does 8 percent sound crazy to you?
It shouldn’t. 8 percent was considered to be normal back in the year 2000.
Are you starting to get the picture?
We need other countries to use our dollars and buy our debt so that we can have super low interest rates and so that we can afford to buy lots of cheap stuff from them.
Unfortunately, the truly bizarre behavior of the Federal Reserve and the U.S. government over the past several years is causing the rest of the world to lose faith in our currency. In particular, China is leading the call for a “de-Americanized” world. The following is from a recent article posted on the website of France 24…
For decades the US has benefited to the tune of trillions of dollars-worth of free credit from the greenback’s role as the default global reserve unit.
But as the global economy trembled before the prospect of a US default last month, only averted when Washington reached a deal to raise its debt ceiling, China’s official Xinhua news agency called for a “de-Americanised” world.
It also urged the creation of a “new international reserve currency… to replace the dominant US dollar”.
So why should the rest of the planet listen to China?
Well, China now accounts for more global trade than anyone else does, including the United States.
China is also now the number one importer of oil in the world.
At this point, China is even importing more oil from Saudi Arabia than the United States is.
China now has an enormous amount of economic power globally, and the Chinese want the rest of the planet to start using less U.S. dollars and to start using more of their own currency. The following is from a recent article in the Vancouver Sun…
Three years after China allowed the yuan to start trading in Hong Kong’s offshore market, banks and investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.
And over the past few years we have seen the global use of the yuan rise dramatically…
International use of the yuan is increasing as the world’s second-largest economy opens up its capital markets. In the first nine months of this year, about 17 percent of China’s global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.
Of course the U.S. dollar is still king for now, but thanks to a whole host of recent international currency agreements this status is slipping. For example, China just recently signed a major currency agreement with the European Central Bank…
The swap deal will allow more trade and investment between the regions to be conducted in euros and yuan, without having to convert into another currency such as the U.S. dollar first, said Kathleen Brooks, a research director at FOREX.com.
“It’s a way of promoting European and Chinese trade, but not doing it with the U.S. dollar,” said Brooks. “It’s a bit like cutting out the middleman, all of a sudden there’s potentially no U.S. dollar risk.”
And as I have written about previously, we have seen a bunch of other similar agreements being signed all over the planet in recent years…
1. China and Germany (See Here)
2. China and Russia (See Here)
3. China and Brazil (See Here)
4. China and Australia (See Here)
5. China and Japan (See Here)
6. India and Japan (See Here)
7. Iran and Russia (See Here)
8. China and Chile (See Here)
9. China and the United Arab Emirates (See Here)
10. China, Brazil, Russia, India and South Africa (See Here)
But do you hear about any of this on the mainstream news?
Of course not.
They would rather focus on the latest celebrity scandal.
Right now, the global move away from the U.S. dollar is slow but steady.
At some point, some trigger event will likely cause it to become a stampede.
When that happens, demand for U.S. dollars and U.S. debt will disintegrate and interest rates will absolutely skyrocket.
And if interest rates skyrocket that will throw the entire U.S. financial system into chaos. At the moment, there are about 441 trillion dollars worth of interest rate derivatives sitting out there. It is a financial time bomb unlike anything the world has ever seen before.
There are four “too big to fail” banks in the United States that each have more than 40 trillion dollars worth of total exposure to derivatives. The largest chunk of those derivatives is made up of interest rate derivatives. In case you were wondering , those four banks are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.
A huge upward surge in interest rates would absolutely devastate those banks and cause a financial crisis that would make 2008 look like a Sunday picnic.
Right now, the leader in global trade seems content to use U.S. dollars for most of their international transactions. China also seems content to hold more than a trillion dollars of U.S. government debt.
If that suddenly changes someday, the consequences for the U.S. economy will be absolutely catastrophic and every single American will feel the pain.
The standard of living that all of us are enjoying today depends largely upon China. They can bring down the hammer at any moment and they know it.
The number one American export is U.S. dollars. It is paper currency that is backed up by absolutely nothing, but the rest of the world has been using it to trade with one another and so there is tremendous global demand for our dollars. The linchpin of this system is the petrodollar. For decades, if you have wanted to buy oil virtually anywhere in the world you have had to do so with U.S. dollars. But if one of the biggest oil exporters on the planet, such as Saudi Arabia, decided to start accepting other currencies as payment for oil, the petrodollar monopoly would disintegrate very rapidly. For years, everyone assumed that nothing like that would happen any time soon, but now Saudi officials are warning of a “major shift” in relations with the United States. In fact, the Saudis are so upset at the Obama administration that “all options” are reportedly “on the table”. If it gets to the point where the Saudis decide to make a major move away from the petrodollar monopoly, it will be absolutely catastrophic for the U.S. economy.
The biggest reason why having good relations with Saudi Arabia is so important to the United States is because the petrodollar monopoly will not work without them. For decades, Washington D.C. has gone to extraordinary lengths to keep the Saudis happy. But now the Saudis are becoming increasingly frustrated that the U.S. military is not being used to fight their wars for them. The following is from a recent Daily Mail report…
Upset at President Barack Obama’s policies on Iran and Syria, members of Saudi Arabia’s ruling family are threatening a rift with the United States that could take the alliance between Washington and the kingdom to its lowest point in years.
Saudi Arabia’s intelligence chief is vowing that the kingdom will make a ‘major shift’ in relations with the United States to protest perceived American inaction over Syria’s civil war as well as recent U.S. overtures to Iran, a source close to Saudi policy said on Tuesday.
Prince Bandar bin Sultan told European diplomats that the United States had failed to act effectively against Syrian President Bashar al-Assad and the Israeli-Palestinian conflict, was growing closer to Tehran, and had failed to back Saudi support for Bahrain when it crushed an anti-government revolt in 2011, the source said.
Saudi Arabia desperately wants the U.S. military to intervene in the Syrian civil war on the side of the “rebels”. This has not happened yet, and the Saudis are very upset about that.
Of course the Saudis could always go and fight their own war, but that is not the way that the Saudis do things.
So since the Saudis are not getting their way, they are threatening to punish the U.S. for their inaction. According to Reuters, the Saudis are saying that “all options are on the table now”…
Saudi Arabia, the world’s biggest oil exporter, ploughs much of its earnings back into U.S. assets. Most of the Saudi central bank’s net foreign assets of $690 billion are thought to be denominated in dollars, much of them in U.S. Treasury bonds.
“All options are on the table now, and for sure there will be some impact,” the Saudi source said.
Sadly, most Americans have absolutely no idea how important all of this is. If the Saudis break the petrodollar monopoly, it would severely damage the U.S. economy. For those that do not fully understand the importance of the petrodollar, the following is a good summary of how the petrodollar works from an article by Christopher Doran…
In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.
This means that every country in the world that imports oil—which is the vast majority of the world’s nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.
This arrangement works out very well for the United States because we can wildly print money and run up gigantic amounts of debt and the rest of the world gobbles it all up.
In 2012, the United States ran a trade deficit of about $540,000,000,000 with the rest of the planet. In other words, about half a trillion more dollars left the country than came into the country. These dollars represent the number one “product” that the U.S. exports. We make dollars and exchange them for the things that we need. Major exporting countries (such as Saudi Arabia) take many of those dollars and “invest” them in our debt at ultra-low interest rates. It is this system that makes our massively inflated standard of living possible.
When this system ends, the era of cheap imports and super low interest rates will be over and the “adjustment” to our standard of living will be excruciatingly painful.
And without a doubt, the day is rapidly approaching when the petrodollar monopoly will end.
Today, Russia is the number one exporter of oil in the world.
China is now the number one importer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.
So why should Russia, China and virtually everyone else continue to be forced to use U.S. dollars to trade oil?
That is a very good question.
In fact, China has been making a whole lot of noise recently about the fact that it is time to start becoming less dependent on the U.S. dollar. The following comes from a recent CNBC article authored by Michael Pento…
Our addictions to debt and cheap money have finally caused our major international creditors to call for an end to dollar hegemony and to push for a “de-Americanized” world.
China, the largest U.S. creditor with $1.28 trillion in Treasury bonds, recently put out a commentary through the state-run Xinhua news agency stating that, “Such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated.”
For much more on all of this, please see my previous article entitled “9 Signs That China Is Making A Move Against The U.S. Dollar“.
But you very rarely hear anything about this on the evening news, and most Americans do not understand these things at all. The fact that the U.S. produces the de facto reserve currency of the planet is an absolutely massive advantage for us. According to John Mauldin, this advantage allows us to consume far more wealth than we actually produce…
What that means in practical terms is that the United States can purchase more with its currency than it produces and sells. In theory those accounts should balance. But the world’s reserve currency, for all intent and purposes, becomes a product. The world needs dollars in order to conduct its trade. Today, if someone in Peru wants to buy something from Thailand, they first convert their local currency into US dollars and then purchase the product with those dollars. Those dollars eventually wind up at the Central Bank of Thailand, which includes them in its reserve balance. When someone in Thailand wants to purchase an imported product, their bank accesses those dollars, which may go anywhere in the world that will take the US dollar, which is to say pretty much anywhere.
And as Mauldin went on to explain in that same article, a significant amount of the money that we ship out to the rest of the globe ends up getting reinvested in U.S. government debt…
That privilege allows US citizens to purchase goods and services at prices somewhat lower than those people in the rest of the world must pay. We can produce electronic fiat dollars, and the rest of the world accepts them because they need them to in order to trade with each other. And they do so because they trust the dollar more than they do any other currency that is readily available. You can take those dollars and come to the United States and purchase all manner of goods, including real estate and stocks. Just this week a Chinese company spent $600 million to buy a building in New York City. Such transactions happen all the time.
And there is one other item those dollars are used to pay for: US Treasury bonds. We buy oil and all manner of goods with our electronic dollars, and those dollars typically end up on the reserve balance sheets of other central banks, which buy our government bonds. It’s hard to quantify the exact amount, but these transactions significantly lower the cost of borrowing for the US government. On a $16 trillion debt, every basis point (1/10 of 1%) means a saving of $16 billion annually. So 5 basis points would be $80 billion a year. There are credible estimates that the savings are well in excess of $100 billion a year. Thus, as the debt grows, the savings also grow! That also means the total debt compounds at a lower rate.
Unfortunately, this system only works if the rest of the planet has faith in it, and right now the United States is systematically destroying the faith that the rest of the world has in our financial system.
One way that this is being done is by our reckless accumulation of debt. The U.S. national debt is now 37 times larger than it was 40 years ago, and we are on pace to accumulate more new debt under the 8 years of the Obama administration than we did under all of the other presidents in U.S. history combined. The rest of the world is watching this and they are beginning to wonder if we are going to be able to pay them back the money that we owe them.
Quantitative easing is another factor that is severely damaging worldwide faith in the U.S. financial system. The rest of the globe is watching as the Federal Reserve wildly prints up money and monetizes our debt. They are beginning to wonder why they should continue to loan us gobs of money at super low interest rates when we are beginning to resemble the Weimar Republic.
The long-term damage that we are doing to the “U.S. brand” far, far outweighs any short-term benefits of quantitative easing.
And as Richard Koo has brilliantly demonstrated, quantitative easing is going to cause long-term interest rates to eventually rise much higher than they normally should have.
What all of this means is that the U.S. government and the Federal Reserve are systematically destroying the financial system that has enabled us to enjoy such a high standard of living for the past several decades.
Yes, the U.S. economy is not doing well at the moment, but we haven’t seen anything yet. When the monopoly of the petrodollar is broken, it is going to be absolutely devastating.
And as I wrote about the other day, when the next great economic crisis strikes it is going to pull back the curtain and reveal the rot and decay that have been eating away at the social fabric of America for a very long time.
Just check out what happened in Detroit recently. The new police chief was almost carjacked while he was sitting in a clearly marked police vehicle…
Just four months on the job, Detroit’s new police chief got an early taste of the city’s hardscrabble streets.
While in his patrol car at an intersection on Jefferson two weeks ago, Police Chief James Craig was nearly carjacked, police spokeswoman Kelly Miner confirmed today.
Craig said he was in a marked police car with mounted lights when a man quickly tried to approach the side of his car. Craig, who became police chief in June, retold the story Monday during a program designed to crack down on carjackings.
Isn’t that crazy?
These days, the criminals are not even afraid to go after the police while they are sitting in their own vehicles.
And this is just the beginning. Things are going to get much, much worse than this.
So let us hope that this period of relative stability that we are enjoying right now will last for as long as possible.
The times ahead are going to be extremely challenging, and I hope that you are getting ready for them.