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The Almighty Dollar Is In Peril As The Global ‘De-Dollarization’ Trend Accelerates

50 Dollars - Public DomainAs the Obama administration continues to alienate almost everyone else around the entire planet, an increasing number of prominent international voices are starting to question why the U.S. dollar should be so overwhelmingly dominant in global trade.  In previous articles, I have discussed Russia’s “de-dollarization strategy” and the fact that Gazprom is now asking their large customers to start paying in currencies other than the dollar.  But this is not just a story about Russia any longer.  As you will read about below, China and South Korea have just signed a major agreement to facilitate trade with one another using their own national currencies, and even prominent French officials are now talking about the need to use the dollar less and the euro more.  John Williams of shadowstats.com recently said that things have never “been more negative” for the U.S. dollar, and he was right on the mark.  The power of the almighty dollar has allowed all of us living in the United States to enjoy an extremely high standard of living for decades, but as that power now fades it is going to have profound implications for the U.S. economy.  In future years the value of the dollar will go down substantially, all of the imported goods filling our stores will become much more expensive, and it is going to cost the federal government a lot more to borrow money.  Unfortunately, with the stock market hitting all-time record highs and with the mainstream media endlessly touting an “economic recovery”, most Americans are not paying any attention to these things.

French oil giant Total is one of the largest energy companies in the entire world.  On Saturday, Total’s CEO made an absolutely stunning statement.  According to Reuters, he told reporters that there “is no reason to pay for oil in dollars”…

“Doing without the (U.S.) dollar, that wouldn’t be realistic, but it would be good if the euro was used more,” he told reporters.

“There is no reason to pay for oil in dollars,” he said. He said the fact that oil prices are quoted in dollars per barrel did not mean that payments actually had to be made in that currency.

If Gazprom’s CEO had made such a statement, it would not have really surprised anyone.  But this came from a high profile French CEO.  A decade ago, it would have been unthinkable for him to say such a thing.  Wars have been started over less.  Virtually all oil and natural gas around the planet has been bought and sold for U.S. dollars since the 1970s, and this is an arrangement that the U.S. government has traditionally guarded very zealously.  But now that Russia has broken the petrodollar monopoly, the fear of questioning the almighty dollar appears to be dissipating.

And at this point even French government officials are not afraid to publicly discuss moving away from the U.S. dollar.  Just check out what French finance minister Michel Sapin said to the press this weekend…

French finance minister Michel Sapin says “now is the right time to bolster the use of the euro” adding, more ominously for the dollar, “we sell ourselves aircraft in dollars. Is that really necessary? I don’t think so.” Careful to avoid upsetting his ‘allies’ across the pond, Sapin followed up with the slam-dunk diplomacy, “This is not a fight against dollar imperialism,” except, of course – that’s exactly what it is… just as it was over 40 years ago when the French challenged Nixon.

So why are the French suddenly so upset?

Could it be the fact that we just slapped the largest bank in France with a nearly 9 billion dollar fine?…

The remarks come a week after Paris-based bank BNP Paribas (BNP) SA was slapped with a $8.97 billion fine by U.S. authorities for transactions carried out in dollars in countries facing American sanctions. The fine spurred debate in France about the right of the U.S. in extending its regulatory reach beyond its borders.

This is yet another example of how the Obama administration is alienating friends all over the globe.

In fact, there doesn’t seem to be anyone that the Obama administration is afraid of crossing.  Just a couple of days ago, the German press exploded in outrage when Germany arrested a U.S. spy.  Why we feel the need to spy on our friends is something that I will never figure out.

And of course our relations with Russia are probably the worst that they have been since the end of the Cold War at this point.  And as the Russians now rapidly move away from the U.S. dollar, they seem intent on bringing the rest of “the BRICS” with them.  The following is a short excerpt from a recent Voice of Russia article entitled “BRICS morphing into anti-dollar alliance“…

However, in her discussion with Vladimir Putin, the head of the Russian central bank unveiled an elegant technical solution for this problem and left a clear hint regarding the members of the anti-dollar alliance that is being created by the efforts of Moscow and Beijing:

“We’ve done a lot of work on the ruble-yuan swap deal in order to facilitate trade financing. I have a meeting next week in Beijing,” she said casually and then dropped the bomb: “We are discussing with China and our BRICS parters the establishment of a system of multilateral swaps that will allow to transfer resources to one or another country, if needed. A part of the currency reserves can be directed to [the new system].” (source of the quote: Prime news agency)

It seems that the Kremlin chose the all-in-one approach for establishing its anti-dollar alliance. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. At the same time, the new system will also act as a de facto replacement of the IMF, because it will allow the members of the alliance to direct resources to finance the weaker countries. As an important bonus, derived from this “quasi-IMF” system, the BRICS will use a part (most likely the “dollar part”) of their currency reserves to support it, thus drastically reducing the amount of dollar-based instruments bought by some of the biggest foreign creditors of the US.

Of course the key economic player in the BRICS alliance is China.

So will China actually go along with a “de-dollarization” strategy?

Well, the truth is that China has been making moves to become more independent of the dollar for a long time, and it has just been announced that China and South Korea have signed an agreement which will mean more direct trade between the two nations using their own national currencies…

China’s central bank has authorized the Bank of Communications, the country’s fifth largest lender, to undertake yuan clearing business in the South Korean capital, the People’s Bank of China (PBoC) said in a statement.

The announcement came as Chinese President Xi Jinping wrapped up a state visit to South Korea on Friday. China is seeking to make the yuan – also known as the renminbi – used more internationally in keeping with the country’s status as the world’s second biggest economy behind the United States.

Unfortunately, most Americans don’t care about any of this at all.

They don’t understand that more U.S. dollars are actually used outside the United States than are used inside the United States.  Because most of the rest of the world uses U.S. dollars to trade with one another, this has created a tremendous amount of artificial demand for our currency.  In other words, the value of the U.S. dollar is much higher than it otherwise would be, and this has enabled us to import trillions of dollars of products at ridiculously low prices.  The standard of living that we enjoy today is highly dependent on this arrangement continuing.

And our ability to fund the federal government and our state and local governments is heavily dependent on the rest of the planet loaning our dollars back to us for next to nothing.  If we actually had to pay realistic market rates to borrow money, the finances of the federal government would have already collapsed long ago.

So it is absolutely imperative for our own economic well-being that this “de-dollarization” trend not accelerate any further.  The rest of the world could actually severely hurt us by deciding to stop using the almighty dollar, and the more that the Obama administration antagonizes both our friends and our foes around the globe the more likely that is to happen.

We live in very perilous times, and the almighty dollar is more vulnerable now than it has been in decades.

If it starts collapsing, it will take down the entire U.S. financial system with it.

Let us hope that we still have a bit more time before that happens, because once the U.S. dollar collapses it will be exceedingly painful for all of us.

18 Signs That The Global Economic Crisis Is Accelerating As We Enter The Last Half Of 2014

Accelerating - Public DomainA lot of people that I talk to these days want to know “when things are going to start happening”.  Well, there are certainly some perilous times on the horizon, but all you have to do is open up your eyes and look to see the global economic crisis unfolding.  As you will see below, even central bankers are issuing frightening warnings about “dangerous new asset bubbles” and even the World Bank is declaring that “now is the time to prepare” for the next crisis.  Most Americans tend to only care about what is happening in the United States, but the truth is that serious economic trouble is erupting in South America, all across Europe and in Asian powerhouses such as China and Japan.  And the endless conflicts in the Middle East could erupt into a major regional war at just about any time.  We live in a world that is becoming increasingly unstable, and people need to understand that the period of relative stability that we are enjoying right now is extremely vulnerable and will not last long.  The following are 18 signs that the global economic crisis is accelerating as we enter the last half of 2014…

#1 The Bank for International Settlements has issued a new report which warns that “dangerous new asset bubbles” are forming which could potentially lead to another major financial crisis.  Do the central bankers know something that we don’t, or are they just trying to place the blame on someone else for the giant mess that they have created?

#2 Argentina has missed a $539 million debt payment and is on the verge of its second major debt default in 13 years.

#3 Bulgaria is desperately trying to calm down a massive run on the banks that threatens of spiral out of control.

#4 Last month, household loans in the eurozone declined at the fastest rate ever recorded.  Why are European banks holding on to their money so tightly right now?

#5 The number of unemployed jobseekers in France has just soared to another brand new record high.

#6 Economies all over Europe are either showing no growth or are shrinking.  Just check out what a recent Forbes article had to say about the matter…

Italy’s economy shrank by 0.1% in the first three months of 2014, matching the average of the three previous quarters. After expanding 0.6% in Q2 2013, France recorded zero growth. Portugal shrank 0.7%, following positive numbers in the preceding nine months. While figures weren’t available for Greece and Ireland in Q1, neither country is showing progress. Greek GDP dropped 2.5% in the final three months of last year, and Ireland limped ahead at 0.2%.

#7 A few days ago it was reported that consumer prices in Japan are rising at the fastest pace in 32 years.

#8 Household expenditures in Japan are down 8 percent compared to one year ago.

#9 U.S. companies are drowning in massive amounts of debt, but the corporate debt bubble in China is so bad that the amount of corporate debt in China has actually now surpassed the amount of corporate debt in the United States.

#10 One Chinese auditor is warning that up to 80 billion dollars worth of loans in China are backed by falsified gold transactions.  What will that do to the price of gold and the stability of Chinese financial markets as that mess unwinds?

#11 The unemployment rate in Greece is currently sitting at 26.7 percent and the youth unemployment rate is 56.8 percent.

#12 67.5 percent of the people that are unemployed in Greece have been unemployed for over a year.

#13 The unemployment rate in the eurozone as a whole is 11.8 percent – just a little bit shy of the all-time record of 12.0 percent.

#14 The European Central Bank is so desperate to get money moving through the system that it has actually introduced negative interest rates.

#15 The IMF is projecting that there is a 25 percent chance that the eurozone will slip into deflation by the end of next year.

#16 The World Bank is warning that “now is the time to prepare” for the next crisis.

#17 The economic conflict between the United States and Russia continues to deepen.  This has caused Russia to make a series of moves away from the U.S. dollar and toward other major currencies.  This will have serious ramifications for the global financial system as time rolls along.

#18 Of course the U.S. economy is struggling right now as well.  It shrank at a 2.9 percent annual rate during the first quarter of 2014, which was much worse than anyone had anticipated.

But if U.S. economic numbers look a bit better for the second quarter, that doesn’t mean that we are out of the woods.

As I have stressed so many times, the long-term trends and the long-term balance sheet numbers are far, far more important than the short-term economic numbers.

For example, if you went to the mall today and spent a thousand dollars on candy and video games, your short-term “economic activity” would spike dramatically.  But your long-term financial health would take a significant turn for the worse.

Well, when we are talking about the health of the U.S. economy or the entire global financial system we need to keep the same kinds of considerations in mind.

As for the United States, whether the level of our debt-fueled short-term economic activity goes up a little bit or down a little bit is not what is truly important.

Rather, the fact that we are nearly 60 trillion dollars in debt as a society is what really matters.

The same thing applies for the globe as a whole.  Right now, the citizens of the planet are more than 223 trillion dollars in debt, and “too big to fail” banks around the world have at least 700 trillion dollars of exposure to derivatives.

So it doesn’t really matter too much whether the short-term economic numbers go up a little bit or down a little bit right now.  The whole system is an inherently flawed Ponzi scheme that will inevitably collapse under its own weight.

Let us hope that this period of relative stability lasts for a while longer.  It is a good thing to have time to prepare.  But you would have to be absolutely insane to think that the biggest debt bubble in the history of the world is never going to burst.

 

Who Needs The United States? Not Russia And China

Vladimir PutinRussia and China have just signed what is being called “the gas deal of the century”, and the two countries are discussing moving away from the U.S. dollar and using their own currencies to trade with one another.  This has huge implications for the future of the U.S. economy, but the mainstream media in the United States is being strangely quiet about all of this.  For example, I searched CNN’s website to see if I could find something about this gas deal between Russia and China and I did not find anything.  But I did find links to “top stories” entitled “Celebs who went faux red” and “Adorable kid tugs on Obama’s ear“.  Is it any wonder why the mainstream media is dying?  If a particular story does not fit their agenda, they will simply ignore it.  But the truth is that this new agreement between Russia and China is huge.  It could end up fundamentally changing the global financial system, and not in a way that would be beneficial for the United States.

Russia and China had been negotiating this natural gas deal for ten years, and now it is finally done.  Russia is the largest exporter of natural gas on the entire planet, and China is poised to become the world’s largest economy in just a few years.  This new $400 billion agreement means that these two superpowers could potentially enjoy a mutually beneficial relationship for the next 30 years…

Russia reached a $400 billion deal to supply natural gas to China through a new pipeline over 30 years, a milestone in relations between the world’s largest energy producer and the biggest consumer.

President Vladimir Putin is turning to China to bolster Russia’s economy as relations sour with the U.S. and European Union because of the crisis in Ukraine. Today’s accord, signed after more than a decade of talks, will allow state-run gas producer OAO Gazprom (GAZP) to invest $55 billion developing giant gas fields in eastern Siberia and building the pipeline, Putin said.

It’s an “epochal event,” Putin said in Shanghai after the contract was signed. Both countries are satisfied with the price, he said.

Of course countries sell oil and natural gas to each other all the time.  But what makes this deal such a potential problem for the U.S. is the fact that Russia and China are working on cutting the U.S. dollar out of the entire equation.  Just check out the following excerpt from a recent article in a Russian news source…

Russia and China are planning to increase the volume of direct payments in mutual trade in their national currencies, according to a joint statement on a new stage of comprehensive partnership and strategic cooperation signed during high-level talks in Shanghai on Tuesday.

“The sides intend to take new steps to increase the level and expansion of spheres of Russian-Chinese practical cooperation, in particular to establish close cooperation in the financial sphere, including an increase in direct payments in the Russian and Chinese national currencies in trade, investments and loan services,” the statement said.

In my recent article entitled “De-Dollarization: Russia Is On The Verge Of Dealing A Massive Blow To The Petrodollar“, I warned about what could happen if the petrodollar monopoly ends.  In the United States, our current standard of living is extremely dependent on the rest of the world continuing to use our currency to trade with one another.  If Russia starts selling natural gas to China without the U.S. dollar being involved, that would be a monumental blow to the petrodollar.  And if other nations started following the lead of Russia and China, that could result in an avalanche from which the petrodollar may never recover.

And it isn’t just the national governments of Russia and China that are discussing moving away from the U.S. dollar.  For example, the second largest bank in Russia just signed a deal with the Bank of China “to pay each other in domestic currencies”…

VTB, Russia’s second biggest lender, has signed a deal with Bank of China, which includes an agreement to pay each other in domestic currencies.

“Under the agreement, the banks plan to develop their partnership in a number of areas, including cooperation on ruble and renminbi settlements, investment banking, inter-bank lending, trade finance and capital-markets transactions,” says the official VTB statement.

The deal underlines VTB Group’s growing interest in Asian markets and will help grow trade between Russia and China that are already close trading partners, said VTB Bank Management Board Vasily Titov.

You can almost feel the power of the U.S. dollar fading.

A few months ago, when I wrote about how China had announced that it no longer planned to stockpile more U.S. dollars, I speculated that it may be evidence that China planned to start making a big move away from the U.S. dollar.

Well, now China’s intentions have become even more clear.

The Chinese do not plan to allow the United States to indefinitely dominate the globe financially.  In the long run, the Chinese plan to be the ones calling the shots, and that means that the power of the U.S. dollar must decline.

These days, instead of piling up mountains of U.S. currency, China has started accumulating hard assets instead.  In the past, I have written about how China is rapidly stockpiling gold, and it turns out that the Chinese have also been very busy stockpiling oil as well…

China is stockpiling oil for its strategic petroleum reserve at a record pace, intervening on a scale large enough to send a powerful pulse through the world crude market.

The move comes as tensions mount in the South China Sea and the West prepares possible oil sanctions against Russia over the crisis in eastern Ukraine. Analysts believe China is quietly building up buffers against a possible spike in oil prices or disruptions in supply.

The International Energy Agency (IEA) said in its latest monthly report that China imported 6.81m barrels per day (bpd) in April, an all-time high.

Once upon a time, China was extremely dependent on the United States economically.  The same was true with most of the rest of the world.

But now economic power has shifted so dramatically that nations such as Russia and China are realizing that they don’t really need to be dependent on the United States any longer.

And with each passing year, the relationship between Russia and China is becoming stronger.  As Pepe Escobar recently observed, this emerging alliance is causing quite a bit of consternation in Washington…

And no wonder Washington is anxious. That alliance is already a done deal in a variety of ways: through the BRICS group of emerging powers (Brazil, Russia, India, China, and South Africa); at the Shanghai Cooperation Organization, the Asian counterweight to NATO; inside the G20; and via the 120-member-nation Non-Aligned Movement (NAM). Trade and commerce are just part of the future bargain. Synergies in the development of new military technologies beckon as well. After Russia’s Star Wars-style, ultra-sophisticated S-500 air defense anti-missile system comes online in 2018, Beijing is sure to want a version of it. Meanwhile, Russia is about to sell dozens of state-of-the-art Sukhoi Su-35 jet fighters to the Chinese as Beijing and Moscow move to seal an aviation-industrial partnership.

Meanwhile, the relationship that the U.S. has with both nations is quickly going sour.  The crisis in Ukraine has caused relations with Russia to drop to the lowest point since the end of the Cold War, and now China is deeply offended by charges that Chinese military officers have been involved in cyberspying on the United States…

China on Tuesday warned the United States was jeopardizing military ties by charging five Chinese officers with cyberspying and tried to turn the tables on Washington by calling it “the biggest attacker of China’s cyberspace.”

China announced it was suspending cooperation with the United States in a joint cybersecurity task force over Monday’s charges that officers stole trade secrets from major American companies. The Foreign Ministry demanded Washington withdraw the indictment.

The testy exchange marked an escalation in tensions over U.S. complaints that China’s military uses its cyber warfare skills to steal foreign trade secrets to help the country’s vast state-owned industrial sector.

The divide between the East and the West is growing.

But the Obama administration has not figured out that we need the East more than they need us.

Right now, the number one U.S. export is U.S. dollars.  Our massively inflated standard of living is very heavily dependent on the rest of the world using our currency to trade with one another and lending it to us at super low interest rates.

If the rest of the world quits playing our game, our debt-based financial system will quickly fall apart.

Unfortunately, nobody in the Obama administration seems to have much understanding of global economics, and they will probably continue to antagonize Russia and China.

In the end, the consequences for antagonizing them could end up being far greater than any of us ever imagined.

Will Detroit Be The First Major Chinese City In The United States?

ChinaIs Detroit destined to become a Chinese city?  Chinese homebuyers and Chinese businesses are starting to flood into the Motor City, and the governor of Michigan is greatly encouraging this.  In fact, he has formally asked the Obama administration for 50,000 special federal immigration visas to encourage even more immigration from China and elsewhere.  So will Detroit be the first major city in the United States to be dominated by China?  It could happen.  Once upon a time, Detroit was the greatest manufacturing city in the history of the world and it had the highest per capita income in the entire country.  But now it is a rotting, decaying, bankrupt hellhole that is in desperate need of a savior, and Michigan Governor Rick Snyder appears to be fully convinced that China can be that savior.

To Snyder, encouraging foreigners to invest money and buy up properties won’t cost the state government much, but it could potentially have great benefits…

Under a plan to be unveiled Thursday, Gov. Rick Snyder will request 50,000 special federal immigration visas over the next five years to attract foreign professionals who are willing to work and live in the city.

Mr. Snyder, in an interview Wednesday, said that “this is one way for the federal government to step up to provide significant value without cost that could have a huge impact on the city’s future.”

At a news conference announcing his plan, Snyder was not shy about declaring his intentions…

“Let’s send a message to the entire world: Detroit, Michigan, is open to the world.“

In other words, Snyder wants China to save Detroit since nobody in this country is going to.

Snyder has also taken a couple of additional steps to encourage immigration and foreign investment, including opening up something called “an Office for New Americans”…

Opening an Office for New Americans to attract and help immigrants better adjust to life in Michigan, and designating the state as an Employer Based or EB-5 center to expedite visas and permits for immigrants who want to open business in the state with investments of at least $500,000 and 10 employees.

In essence, Snyder has done just about everything except roll out the welcome mat for the Chinese.

But this is nothing new for Governor Snyder.  In fact, he has been making overtures to China for years…

Snyder, who was a businessman before starting his political career, believes that automobiles can no longer change the fate of Detroit. He said that he has learned from the history of the United States that what has made the nation great is immigrants.

In the early 1990s, Snyder went to China to develop the automobile market. After he was elected as the governor of Michigan, he made at least one trip to China every year, with the aim of recruiting talent.

He hopes that well-educated Chinese people can revitalize the Motor City in the new era. And as he desired, after Detroit announced its bankruptcy in 2013, the Chinese began to take the dying city by storm.

Rich Chinese men see Detroit as a rare opportunity for investment outside their home country.

In 2013, without any field investigation, Dongdu International Group of Shanghai — whose assets total 5 billion yuan (US$800 million) — spent US$13.6 million to buy the David Stott building and the Detroit Free Press building at auctions in September.

And when we talk about the Chinese domination of Detroit, this is not something that is just future tense.  This is something that is already happening right now.  For example, the following is an excerpt from a CNBC article that discussed how Chinese companies are already aggressively “putting down roots in Detroit”…

Dozens of companies from China are putting down roots in Detroit, part of the country’s steady push into the American auto industry.

Chinese-owned companies are investing in American businesses and new vehicle technology, selling everything from seat belts to shock absorbers in retail stores, and hiring experienced engineers and designers in an effort to soak up the talent and expertise of domestic automakers and their suppliers.

 

The transformation that has taken place in that region of the country is absolutely remarkable.

48 percent of the manufacturing jobs in the state of Michigan were lost between December 2000 and December 2010.  Our trade deficit with China was largely responsible for that.

And now we are relying on China to come in and salvage the ruins of our gutted economic infrastructure.

Not only that, but the Chinese are also eagerly buying up homes at extremely depressed prices all over Detroit.

According to CNN, Detroit is already number four on the list of the top 10 destinations for Chinese homebuyers.  In many cases, Chinese buyers are scooping up properties without even looking at them first.  Just check out what one Detroit real estate broker told Quartz last July…

“I have people calling and saying, ‘I’m serious—I wanna buy 100, 200 properties,’” she tells Quartz, noting that one of her colleagues recently sold 30 properties to a Chinese buyer. “They say ‘We don’t need to see them. Just pick the good ones.’”

And they aren’t just interested in Detroit.  As I have written about previously, one Chinese company known as “Sino-Michigan Properties LLC” actually had plans to buy 200 acres of land near the little town of Milan, Michigan and turn it into a “China City” with artificial lakes, a Chinese cultural center and hundreds of housing units for Chinese citizens.  For much more on how Chinese buyers are gobbling up real estate all over the nation, please see my previous article entitled “The Chinese Are Acquiring Large Chunks Of Land In Communities All Over America“.

All of this is just another indication of how rapidly the global economic landscape is changing.

Since the late 19th Century, the United States has been the most dominant economic power in the world.

But now that reign is ending.

Just recently, a new study released by the World Bank indicated that China is now the largest economy in the world in terms of purchasing power…

A report out of the World Bank shows rapidly expanding China is poised to overtake the once invincible United States as the world’s largest economy by the end of 2014.

The International Comparison Program looks at exchange rates to reveal purchasing power of different currencies and found that yuan in China will soon pack more punch than the mighty dollar.

Meanwhile, Chinese officials bashed the report as flawed, likely for fear of losing its status as a developing nation and the pollution-spewing perks that come with it.

And a couple of years ago China passed the United States and become the leader in global trade.

As the Chinese economy continues to rise and the U.S. economy continues to decline, the shift in global power is going to become even more dramatic.

Yes, let us hope for the best for our failing economy, but you also might want to teach your kids to speak Chinese just in case.

Russia And China Stand In Agreement On Ukraine – And That Is Very Bad News For The United States

Vladimir_Putin_with_Zhang_DeguangSo much for “isolating” Russia.  The Chinese government is publicly siding with Russia on the crisis in Ukraine, and that is very bad news for the United States.  Not only does it mean that the U.S. is essentially powerless to do anything about the situation in Ukraine, it also means that Russia and China are starting to understand how much economic leverage that they really have.  Yes, the Obama administration can threaten to slap “sanctions” on Russia or threaten to kick Russia “out of the G8“, but those actions would not actually hurt too much.  On the other hand, Russia and China hold approximately 25 percent of all foreign-owned U.S. debt, and if they started massively dumping U.S. debt it could rapidly create a nightmare scenario.  In addition, it is important to remember that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world.  And China now imports more oil than anyone else on the planet does, including the United States.  If Russia and China got together and decided to kill the petrodollar, they could do it almost overnight.  So when it comes to Ukraine, it is definitely not the United States that has the leverage.

If China and the rest of the world abandoned Russia over Ukraine, that would be one thing.  But that is not happening at all.  In fact, China has chosen to publicly stand with Russia on this issue.  The following is from a Sky News article entitled “Russia And China ‘In Agreement’ Over Ukraine“…

Russian foreign minister Sergei Lavrov discussed Ukraine by telephone with his Chinese counterpart, Wang Yi, on Monday, and claimed they had “broadly coinciding points of view” on the situation there, according to a ministry statement.

And Chinese state news agency Xinhua is publicly rebuking the West for their handling of the Ukrainian crisis…

China’s state news agency Xinhua accused western powers of adopting a Cold War- like mindset towards Russia, trying to isolate Moscow at a time when much needed mediation is need to reach a diplomatic solution to the crisis in Crimea.

“Based on the fact that Russia and Ukraine have deep cultural, historical and economic connections, it is time for Western powers to abandon their Cold War thinking. Stop trying to exclude Russia from the political crisis they failed to mediate, and respect Russia’s unique role in mapping out the future of Ukraine,” Xinhua wrote in an opinion piece.

Apparently clueless as to how the geopolitical chips are falling, the Obama administration is busy planning all sorts of ways that it can punish Russia…

Behind the scenes, Obama administration officials are preparing a series of possible battle plans for a potential economic assault on Russia in response to its invasion of Ukraine, an administration source close to the issue told The Daily Beast. Among the possible targets for these financial attacks: everyone from high-ranking Russian military officials to government leaders to top businessmen to Russian-speaking separatists in Ukraine. It’s all part of the work to prepare an executive order now under consideration at the Obama administration’s highest levels.

Does the Obama administration really want to start an “economic war” with Russia and potentially against China as well?

Considering how much money we owe them, and considering the fact that we desperately need them to continue to use the petrodollar, we stand to lose far more than they do.

This is one of the reasons why I have always insisted that the national debt was a national security issue.  By going into so much debt, we have given other nations such as Russia and China a tremendous amount of leverage over us.

Unfortunately, the debtmongers in Washington D.C. never have listened to common sense.

When it comes to Ukraine, there are other economic considerations as well.

For example, about 25 percent of the natural gas that Europe uses comes from Russia, and Ukraine only has about four months of natural gas supplies stockpiled.

If Russia cut off the natural gas, that would create some huge problems.  Fortunately, winter is just about over or the Russians would have even more leverage.

In addition, Ukraine is one of the leading exporters of wheat and corn on the planet, and a disruption in the growing of those crops could make the emerging global food crisis even worse.

But of course the biggest concern is that the Ukraine crisis could ultimately spark a global war.

Unfortunately, there is a treaty that requires the United States to defend Ukraine if it is attacked…

President Bill Clinton, along with the British, signed in 1994 a nearly forgotten agreement to protect Ukraine’s borders. Ukraine now is appealing to the countries that signed the agreement.

As the British Daily Mail points out, it means that, technically, if Russia were to invade Ukraine, it would be difficult for the U.S. and Britain to avoid going to war.

Given that the late Russian president, Boris Yeltsin also signed it, it was apparent that it wasn’t expected that the Russians would take the action that Putin now is undertaking.

And top Ukrainian politicians are now asking western nations to come to the aid of Ukraine militarily…

Ukraine’s former prime minister Yulia Tymoshenko has appealed for the West to adopt ‘strongest means’ to intervene in Russia’s occupation of Crimea if diplomacy fails.

In an interview with CNN’s Christiane Amanpour, Tymoshenko, freed last week after the riots throughout the nation, said if Russia is allowed to ‘take away’ Crimea, life will change ‘practically everywhere in the world.’

She added: ‘Then we have to accept… an aggressor, can violate all the international agreements, take away territories, whenever she likes.’

On the other side, deposed Ukrainian President Viktor Yanukovych has formally requested that Russia militarily intervene in his nation…

Russia’s U.N. envoy said Monday that ousted Ukrainian President Viktor Yanukovych asked Russia to send troops to “establish legitimacy, peace, law and order, stability, and defending the people of Ukraine.” Russian Ambassador Vitaly Churkin read a letter from Yanukovych at the U.N. Security Council meeting.

“Ukraine is on the brink of civil war. In the country, there is chaos and anarchy. The life, the security and the rights of people, particularly in the southeast part in Crimea are being threatened. So under the influence of Western countries, there are open acts of terrorism and violence. People are being persecuted for language and political reasons,” the letter said. “So in this regard, I would call on the President of Russia, Mr. Putin, asking him to use the armed forces of the Russian Federation to establish legitimacy, peace, law and order, stability, and defending the people of Ukraine.”

And it is very important to note that Yanukovych would have never issued this letter if the Russian government has not asked him to.

So the stage is set.

Russia has already grabbed Crimea, and it is eyeing other territories in eastern Ukraine.

China is publicly backing Russia, and collectively they have a tremendous amount of economic leverage.

The Obama administration is barking loudly about what Russia has done, but the reality is that the U.S. has very little economic leverage at this point.

What the U.S. does have is the strongest military on the entire planet, but let us hope and pray that Obama does not decide to get the U.S. military involved in Ukraine.  That would be absolutely disastrous.

In the end, the U.S. has no good options in Ukraine.  The Obama administration helped aid and organize the violent revolution that overthrew the Ukrainian government, and now we have a giant mess.

Nobody is quite sure what comes next, but one thing is certain…

The relationship between the United States and Russia will never, ever be the same again.

China Starts To Make A Power Move Against The U.S. Dollar

US Dollars - Photo by selbstfotografiertIn 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.

Money - Photo by Pen Waggener

20 Early Warning Signs That We Are Approaching A Global Economic Meltdown

Earth From SpaceHave you been paying attention to what has been happening in Argentina, Venezuela, Brazil, Ukraine, Turkey and China?  If you are like most Americans, you have not been.  Most Americans don’t seem to really care too much about what is happening in the rest of the world, but they should.  In major cities all over the globe right now, there is looting, violence, shortages of basic supplies, and runs on the banks.  We are not at a “global crisis” stage yet, but things are getting worse with each passing day.  For a while, I have felt that 2014 would turn out to be a major “turning point” for the global economy, and so far that is exactly what it is turning out to be.  The following are 20 early warning signs that we are rapidly approaching a global economic meltdown…

#1 The looting, violence and economic chaos that is happening in Argentina right now is a perfect example of what can happen when you print too much money…

For Dominga Kanaza, it wasn’t just the soaring inflation or the weeklong blackouts or even the looting that frayed her nerves.

It was all of them combined.

At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches — just enough to sell soda to passersby on a sweltering summer day.

#2 The value of the Argentine Peso is absolutely collapsing.

#3 Widespread shortages, looting and accelerating inflation are also causing huge problems in Venezuela…

Economic mismanagement in Venezuela has reached such a level that it risks inciting a violent popular reaction. Venezuela is experiencing declining export revenues, accelerating inflation and widespread shortages of basic consumer goods. At the same time, the Maduro administration has foreclosed peaceful options for Venezuelans to bring about a change in its current policies.

President Maduro, who came to power in a highly-contested election last April, has reacted to the economic crisis with interventionist and increasingly authoritarian measures. His recent orders to slash prices of goods sold in private businesses resulted in episodes of looting, which suggests a latent potential for violence. He has put the armed forces on the street to enforce his economic decrees, exposing them to popular discontent.

#4 In a stunning decision, the Venezuelan government has just announced that it has devalued the Bolivar by more than 40 percent.

#5 Brazilian stocks declined sharply on Thursday.  There is a tremendous amount of concern that the economic meltdown that is happening in Argentina is going to spill over into Brazil.

#6 Ukraine is rapidly coming apart at the seams…

A tense ceasefire was announced in Kiev on the fifth day of violence, with radical protesters and riot police holding their position. Opposition leaders are negotiating with the government, but doubts remain that they will be able to stop the rioters.

#7 It appears that a bank run has begun in China…

As China’s CNR reports, depositors in some of Yancheng City’s largest farmers’ co-operative mutual fund societies (“banks”) have been unable to withdraw “hundreds of millions” in deposits in the last few weeks. “Everyone wants to borrow and no one wants to save,” warned one ‘salesperson’, “and loan repayments are difficult to recover.” There is “no money” and the doors are locked.

#8 Art Cashin of UBS is warning that credit markets in China “may be broken“.  For much more on this, please see my recent article entitled “The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?”

#9 News that China’s manufacturing sector is contracting shook up financial markets on Thursday…

Wall Street was rattled by a key reading on China’s manufacturing which dropped below the key 50 level in January, according to HSBC. A reading below 50 on the HSBC flash manufacturing PMI suggests economic contraction.

#10 Japanese stocks experienced their biggest drop in 7 months on Thursday.

#11 The value of the Turkish Lira is absolutely collapsing.

#12 The unemployment rate in France has risen for 9 quarters in a row and recently soared to a new 16 year high.

#13 In Italy, the unemployment rate has soared to a brand new all-time record high of 12.7 percent.

#14 The unemployment rate in Spain is sitting at an all-time record high of 26.7 percent.

#15 This year, the Baltic Dry Index experienced the largest two week post-holiday decline that we have ever seen.

#16 Chipmaker Intel recently announced that it plans to eliminate 5,000 jobs over the coming year.

#17 CNBC is reporting that U.S. retailers just experienced “the worst holiday season since 2008“.

#18 A recent CNBC article stated that U.S. consumers should expect a “tsunami” of store closings in the retail industry…

Get ready for the next era in retail—one that will be characterized by far fewer shops and smaller stores.

On Tuesday, Sears said that it will shutter its flagship store in downtown Chicago in April. It’s the latest of about 300 store closures in the U.S. that Sears has made since 2010. The news follows announcements earlier this month of multiple store closings from major department stores J.C. Penney and Macy’s.

Further signs of cuts in the industry came Wednesday, when Target said that it will eliminate 475 jobs worldwide, including some at its Minnesota headquarters, and not fill 700 empty positions.

#19 The U.S. Congress is facing another deadline to raise the debt ceiling in February.

#20 The Dow fell by more than 170 points on Thursday.  It is becoming increasingly likely that “the peak of the market” is now in the rear view mirror.

And I have not even mentioned the extreme drought that has caused the U.S. cattle herd to drop to a 61 year low or the nuclear radiation from Fukushima that is washing up on the west coast.

In light of everything above, is there anyone out there that still wants to claim that “everything is going to be okay” for the global economy?

Sadly, most Americans are not even aware of most of these things.

All over the country today, the number one news headline is about Justin Bieber.  The mainstream media is absolutely obsessed with celebrity scandals, and so is a very large percentage of the U.S. population.

A great economic storm is rapidly approaching, and most people don’t even seem to notice the storm clouds that are gathering on the horizon.

In the end, perhaps we will get what we deserve as a nation.

The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?

Bubble - Photo by Jeff KubinaDid you know that financial institutions all over the world are warning that we could see a “mega default” on a very prominent high-yield investment product in China on January 31st?  We are being told that this could lead to a cascading collapse of the shadow banking system in China which could potentially result in “sky-high interest rates” and “a precipitous plunge in credit“.  In other words, it could be a “Lehman Brothers moment” for Asia.  And since the global financial system is more interconnected today than ever before, that would be very bad news for the United States as well.  Since Lehman Brothers collapsed in 2008, the level of private domestic credit in China has risen from $9 trillion to an astounding $23 trillion.  That is an increase of $14 trillion in just a little bit more than 5 years.  Much of that “hot money” has flowed into stocks, bonds and real estate in the United States.  So what do you think is going to happen when that bubble collapses?

The bubble of private debt that we have seen inflate in China since the Lehman crisis is unlike anything that the world has ever seen.  Never before has so much private debt been accumulated in such a short period of time.  All of this debt has helped fuel tremendous economic growth in China, but now a whole bunch of Chinese companies are realizing that they have gotten in way, way over their heads.  In fact, it is being projected that Chinese companies will pay out the equivalent of approximately a trillion dollars in interest payments this year alone.  That is more than twice the amount that the U.S. government will pay in interest in 2014.

Over the past several years, the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England have all been criticized for creating too much money.  But the truth is that what has been happening in China surpasses all of their efforts combined.  You can see an incredible chart which graphically illustrates this point right here.  As the Telegraph pointed out a while back, the Chinese have essentially “replicated the entire U.S. commercial banking system” in just five years…

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire U.S. commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

As with all other things in the financial world, what goes up must eventually come down.

And right now January 31st is shaping up to be a particularly important day for the Chinese financial system.  The following is from a Reuters article…

The trust firm responsible for a troubled high-yield investment product sold through China’s largest banks has warned investors they may not be repaid when the 3 billion-yuan ($496 million)product matures on Jan. 31, state media reported on Friday.

Investors are closely watching the case to see if it will shatter assumptions that the government and state-owned banks will always protect investors from losses on risky off-balance-sheet investment products sold through a murky shadow banking system.

If there is a major default on January 31st, the effects could ripple throughout the entire Chinese financial system very rapidly.  A recent Forbes article explained why this is the case…

A WMP default, whether relating to Liansheng or Zhenfu, could devastate the Chinese banking system and the larger economy as well.  In short, China’s growth since the end of 2008 has been dependent on ultra-loose credit first channeled through state banks, like ICBC and Construction Bank, and then through the WMPs, which permitted the state banks to avoid credit risk.  Any disruption in the flow of cash from investors to dodgy borrowers through WMPs would rock China with sky-high interest rates or a precipitous plunge in credit, probably both.  The result?  The best outcome would be decades of misery, what we saw in Japan after its bubble burst in the early 1990s.

The big underlying problem is the fact that private debt and the money supply have both been growing far too rapidly in China.  According to Forbes, M2 in China increased by 13.6 percent last year…

And at the same time China’s money supply and credit are still expanding.  Last year, the closely watched M2 increased by only 13.6%, down from 2012’s 13.8% growth.  Optimists say China is getting its credit addiction under control, but that’s not correct.  In fact, credit expanded by at least 20% last year as money poured into new channels not measured by traditional statistics.

Overall, M2 in China is up by about 1000 percent since 1999.  That is absolutely insane.

And of course China is not the only place in the world where financial trouble signs are erupting.  Things in Europe just keep getting worse, and we have just learned that the largest bank in Germany just suffered ” a surprise fourth-quarter loss”…

Deutsche Bank shares tumbled on Monday following a surprise fourth-quarter loss due to a steep drop in debt trading revenues and heavy litigation and restructuring costs that prompted the bank to warn of a challenging 2014.

Germany’s biggest bank said revenue at its important debt-trading division, fell 31 percent in the quarter, a much bigger drop than at U.S. rivals, which have also suffered from sluggish fixed-income trading.

If current trends continue, many other big banks will soon be experiencing a “bond headache” as well.  At this point, Treasury Bond sentiment is about the lowest that it has been in about 20 years.  Investors overwhelmingly believe that yields are heading higher.

If that does indeed turn out to be the case, interest rates throughout our economy are going to be rising, economic activity will start slowing down significantly and it could set up the “nightmare scenario” that I keep talking about.

But I am not the only one talking about it.

In fact, the World Economic Forum is warning about the exact same thing…

Fiscal crises triggered by ballooning debt levels in advanced economies pose the biggest threat to the global economy in 2014, a report by the World Economic Forum has warned.

Ahead of next week’s WEF annual meeting in Davos, Switzerland, the forum’s annual assessment of global dangers said high levels of debt in advanced economies, including Japan and America, could lead to an investor backlash.

This would create a “vicious cycle” of ballooning interest payments, rising debt piles and investor doubt that would force interest rates up further.

So will a default event in China on January 31st be the next “Lehman Brothers moment” or will it be something else?

In the end, it doesn’t really matter.  The truth is that what has been going on in the global financial system is completely and totally unsustainable, and it is inevitable that it is all going to come horribly crashing down at some point during the next few years.

It is just a matter of time.

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