The U.S. Dollar

Does China Plan To Back The Yuan With Gold And Make It The Primary Global Reserve Currency?

Chinese Renminbi Yuan - Photo by MiLu24What in the world is China up to?  Why are the Chinese hoarding so much gold?  Does China plan to back the yuan with gold and turn it into a global reserve currency?  Could it be possible that China actually intends for the yuan to eventually replace the U.S. dollar as the primary reserve currency of the planet?  Most people in the western world assume that China just wants a “seat at the table” and is content to let the United States run the show.  But that isn’t the case at all.  The truth is that China doesn’t just want to compete with the United States.  Rather, China actually plans to replace the United States as the dominant economic power on the planet.  In fact, China already accounts for more global trade than the United States does.  So what would happen one day if China announced that it was backing the yuan with gold and that it would no longer be using the U.S. dollar in international trade?  It would cause a financial shift so cataclysmic that it is hard to even imagine.  Most of those that write about the “death of the U.S. dollar” usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned.  China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States.  Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative.  But a gold-backed yuan would change all of that very rapidly.

And without a doubt, the Chinese government has already been very busy promoting the use of the yuan in international trade.  In a recent note, John McCormick of RBS Group stated the following…

Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD 5-6 billion daily – double what they were a year ago.

A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.

For China, having a global reserve currency is not just about economics.  It is also about power.

McCormick ended his recent note this way…

China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound.

But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.

Similar sentiments were echoed in a recent article in the Wall Street Journal…

Beijing is undertaking a long, gradual campaign to establish the yuan as a more market-oriented, international currency. China’s State Council, or cabinet, said in a statement this month that the country would draft a plan to allow the yuan to become fully convertible. Meanwhile, the People’s Bank of China is guiding the currency higher and set the median point of its permitted daily trading band last week at the strongest level ever.

We don’t hear much about these sorts of things in the western media, but the convertibility of the Chinese yuan is a very big deal.  Up until recently, the yuan was only directly convertible into dollars and yen.  But now that is rapidly changing.  So far this year, the Chinese government has entered into currency convertibility agreements with Australia and New Zealand.

So instead of having to change yuan into U.S. dollars to trade with Australia and New Zealand, now China can cut U.S. dollars completely out of the process.

But right now there is nothing that really gives the Chinese yuan a significant competitive edge over the U.S. dollar.  If Chinese authorities truly want the yuan to end up replacing the U.S. dollar as the primary reserve currency of the planet, they need to do something that will make the rest of the world want to use it.

And they could do that by backing the yuan with gold.  In fact, there are persistent rumors that China has been busily preparing for that.

For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush, is claiming that China has plans to turn the yuan into “a hard, gold-backed currency” that will have a distinct competitive edge over the rapidly depreciating paper currencies that the rest of the globe is currently using…

The most interesting piece of the puzzle is that the Chinese have emerged as the biggest buyers of gold, mainly off-market. They want the yuan to emerge as a hard, gold-backed currency in a world where everyone else has chosen to inflate and devalue.

The recent bilateral currency deals with Australia, France, Russia and Singapore, and many others, reflect this desire to displace the USD as the world’s reserve currency.

It may be an interesting and long race between the Chinese reaching for convertibility and the Western central banks straining credibility.

Other analysts are also fully convinced that the goal of the Chinese is a gold-backed yuan.  The following is what money manager Stephen Leeb told King World News recently…

Countries have been battling each other in order to cheapen their currencies. The problem with a cheaper currency is that commodities cost more. So China has decided to opt for a higher currency.

The move in the yuan overnight was one of the most significant upticks I have seen. Like I said, the yuan moved to an all-time high. The yuan has advanced roughly 5% against the US dollar in just nine months. China also imported over 200 tons of gold for the most recent month. That is an extraordinary number. At that rate that’s over 2,400 tons of gold per year on an annualized basis.

This simply speeds up the point at which China will be the largest gold holder in the world. China saw gold come down and they didn’t just buy on the dip, instead they bought as much as the market would give them. And, again, you see the yuan going up so that is making the price of gold even cheaper for the Chinese.

It’s only a matter of time before the Chinese back the yuan with gold. This will push the yuan front and center as a key element in terms of being part of the world’s reserve currency basket. China gets the message. They are doing whatever it takes to establish their dominance in the world, particularly in the commodity arena. Their currency is flying and they are importing as much gold as they possibly can.

And without a doubt, China has been hoarding massive amounts of gold.  Everyone agrees on that.  But what nobody knows is exactly how much gold China currently has stockpiled, because China is not telling anybody.

One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could potentially be far higher than that.  When China does finally tell the rest of us how much gold they have, they will probably be just a move or two away from checkmate.

What we do know is that China is importing absolutely enormous amounts of gold right now even though China is also the number one gold producer on the planet.

According to Reuters, more than 223 tons of gold was imported into China from Hong Kong in March.  That smashed the previous record of 114 tons in December.

Overall, Chinese imports of gold from Hong Kong tripled in 2012, and the final number for 2013 is going to absolutely smash what we saw in 2012.

Obviously something is happening.

China is massively hoarding gold at the same time that it is trying to substantially raise the international influence of the yuan.

It doesn’t take a genius to see where all of this is headed.

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy.  Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar.  At that point you could forget about cheap gasoline or cheap Chinese imports.  Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively.  If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living.  Today, most U.S. currency is actually used outside of the United States.  If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.

So keep an eye on China, and look out for any news about the yuan.

It won’t happen next week or next month, but eventually we could see China back the yuan with gold.

When that happens, it is going to be a complete and utter financial disaster for the United States.

 

Petrogold: Are Russia And China Hoarding Gold Because They Plan To Kill The Petrodollar?

Petrogold: Are Russia And China Hoarding Gold Because They Plan To Kill The Petrodollar?Will oil soon be traded in a currency that is thousands of years old?  What would a “gold for oil” system mean for the petrodollar and the U.S. economy?  Are Russia and China hoarding massive amounts of gold because they plan to kill the petrodollar?  Since the 1970s, the U.S. dollar has been the currency that the international community has used to trade oil around the globe.  This has created an overwhelming demand for U.S. dollars and U.S. debt.  But what happens when the rest of the globe starts rejecting the increasingly unstable U.S. dollar and figures out that gold can be used as a currency in international trade?  The truth is that it doesn’t take a lot of imagination to figure that out.  Demand for the U.S. dollar and U.S. debt would fall off the map and there would be a rush into gold unlike anything we have ever seen before.  So are Russia and China accumulating unprecedented amounts of gold right now because they eventually plan to cut the legs out from under the petrodollar and they want to gobble up huge stockpiles of gold before the cat is out of the bag?  Of course they will never admit this publicly, but there are rumblings out there that this is exactly what is happening.

Not that you can really blame any nation that wants to get into gold right now.  News outlets all over the globe are telling us that we are in the midst of a “currency war” as central banks all over the planet race to devalue their currencies.

So why would anyone want to be in paper in such an environment?

And of course the Federal Reserve is one of the biggest offenders.  The Fed has been printing money like it is going out of style, and nobody at the Fed or in the U.S. government really seems too concerned that all of this money printing could be endangering the petrodollar.

But the truth is that the Fed is endangering the petrodollar.  Just read some foreign news stories about the U.S. dollar.  They mock us for our reckless money printing.

In the end, our recklessness will make it very easy for the rest of the world to ditch the U.S. dollar.

At some point, it will happen.  In fact, there are persistent rumors that Russia and China actually intend to make it happen.

Many believe that this is the reason both nations have been hoarding so much gold recently.

Just check out how much gold Russia has been accumulating.  The following is from a recent Bloomberg article…

When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.

Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.

“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.

And Russia’s gold hoarding appears to have accelerated last year.  According to one recent report, Russia added 3.2 million ounces of gold to their reserves in 2012 alone.

But of even greater concern is China.  Nobody really knows how much gold China has, because they do not tell us, but all indications point to the fact that Chinese gold hoarding has gone into overdrive.  The following is from a Zero Hedge article from a few months ago…

Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn’t provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.

As I wrote about the other day, nobody produces more gold than China does, and nobody imports more gold than China does.

Everyone agrees that China seems to have an insatiable appetite for gold, but nobody can agree on exactly how much gold they actually have.  One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could even be much higher than that.  Nobody really knows.

So what are Russia and China up to?

Well, for a long time both nations have expressed displeasure with the fact that the U.S. dollar is the de facto currency of the world.  Leaders from both nations have suggested the possibility of adopting a new global reserve currency, but up to this point no real contenders have emerged to dethrone the U.S. dollar.

So for now, the U.S. dollar reigns supreme in international trade.  Sadly, even though most Americans greatly benefit from the petrodollar, most of them do not even know what it is.  For those that do not fully understand the petrodollar, the following is a good explanation of the petrodollar from a recent 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.

And all of this has worked out very nicely for the United States.  It has created a massive demand for U.S. dollars and U.S. debt.

But what would happen if the rest of the world rejected the petrodollar system and adopted a “petrogold” system instead?

A recent article by Jim Willie discussed how a petrogold system might work…

The crux of the non-US$ trade vehicle devised as a USDollar alternative will be the Gold Trade Note. It will enable peer-to-peer payments to be completed from direct account transfers independent of currency, and most importantly, not done through the narrow pipes and channels controlled by the bankers with their omnipresent SWIFT code system among the world of banks. The Gold Trade Note will act much like a Letter of Credit, serve as a short-term bill, and maybe even push aside the near 0% short-term USTreasury Bills that litter the banking landscape. Any bond or bill earning almost no interest is veritable clutter. The zero bound USTreasurys open the door in a big way for replacement by a better vehicle. The new trade notes will involve posted gold as collateral, whose entire system for trade usage will bear a massive gold core that also will include silver and platinum, maybe other precious metals. The idea is to avoid the FOREX systems, to avoid the USDollar, and to avoid the banks as much as possible in a peer-to-peer system that can be executed between parties holding Blackberry devices or simple PC to complete the payments on transactions. If Gold is ignored by the corrupt bankers, then Gold will be the center of the new trade system and the solution in providing a globally accepted USDollar alternative.

And Russia and China would greatly benefit from a petrogold system.

Today, Russia is the number one oil exporter on the planet.

China is the number two consumer of oil in the world, and at this point they are actually importing more oil from Saudi Arabia than the United States is.

Does it make sense that they should remain locked into a system that forces them to use U.S. dollars for all of their oil transactions?

And now Russia even has the number one oil company in the world.  The following is from a recent article by Marin Katusa…

Exxon Mobil is no longer the world’s number-one oil producer. As of yesterday, that title belongs to Putin Oil Corp – oh, whoops. I mean the title belongs to Rosneft, Russia’s state-controlled oil company.

Rosneft is buying TNK-BP, which is a vertically integrated oil company co-owned by British oil firm BP and a group of Russian billionaires known as AAR. One of the top-ten privately owned oil producers in the world, in 2010 TNK-BP churned out 1.74 million barrels of oil equivalent per day from its assets in Russia and Ukraine and processed almost half that amount through its refineries.

With TNK-BP in its hands, Rosneft will be in charge of more than 4 million barrels of oil production a day. And who is in charge of Rosneft? None other than Vladimir Putin, Russia’s resource-full president.

And Russian gas giant Gazprom supplies a huge percentage of the natural gas that Europe uses…

Gazprom, the Russian state gas company, already has Europe wrapped around its little finger. Russia supplies 34% of Europe’s gas needs, and when the under-construction South Stream pipeline starts operating, that percentage will increase. As if those developments weren’t enough, yesterday Gazprom offered the highest bid to obtain a stake in the massive Leviathan gas field off Israel’s coast.

Gazprom in control of Europe’s gas, Rosneft in control of its oil. A red hand stretching out from Russia to strangle the supremacy of the West and pave the way for a new world order– one with Russia at the helm.

Russia and China have a tremendous amount of leverage when it comes to energy.  What if they got together with a bunch of oil producing nations in the Middle East and decided to set up a system where oil is traded for gold?  Would not much of the rest of the world go along with such a system?

Of course if that happened the U.S. financial system would crash.  We would no longer be able to export our inflation to the rest of the globe and prices would rise dramatically.  Demand for U.S. government debt would go through the floor and interest rates on that debt and on everything else in our economy would skyrocket.  Economic activity would grind to a standstill and the financial markets would collapse.

And that would just be for starters.

Most Americans simply don’t understand that Russia and China have the power to collapse the U.S. economy by going to a gold for oil system.  All they have to do is pull the trigger.

The other day I wrote an article entitled “Show This To Anyone That Believes That ‘Things Are Getting Better’ In America” which discussed all of the reasons why the U.S. economy is already collapsing.  But as bad as things are now, this is nothing compared to what things will be like when the petrodollar dies.

So pay keen attention to anything in the news about Russia or China suggesting that oil should be traded for gold.  When Russia and China pull the trigger, things will get messy very quickly.

Gold

The Giant Currency Superstorm That Is Coming To The Shores Of America When The Dollar Dies

By recklessly printing, borrowing and spending money, our authorities are absolutely shredding confidence in the U.S. dollar.  The rest of the world is watching this nonsense, and at some point they are going to give up on the U.S. dollar and throw their hands up in the air.  When that happens, it is going to be absolutely catastrophic for the U.S. economy.  Right now, we export a lot of our inflation.  Each year, we buy far more from the rest of the world than they buy from us, and so the rest of the world ends up with giant piles of U.S. dollars.  This works out pretty well for them, because the U.S. dollar is the primary reserve currency of the world and is used in international trade far more than any other currency is.  Back in 1999, the percentage of foreign exchange reserves in U.S. dollars peaked at 71 percent, and since then it has slid back to 62.2 percent.  But that is still an overwhelming amount.  We can print, borrow and spend like crazy because the rest of the world is there to soak up our excess dollars because they need them to trade with one another.  But what will happen someday if the rest of the world decides to reject the U.S. dollar?  At that point we would see a tsunami of U.S. dollars come flooding back to this country.  Just take a moment and think of the worst superstorm that you can possibly imagine, and then replace every drop of rain with a dollar bill.  The giant currency superstorm that will eventually hit this nation will be far worse than that.

Most Americans don’t realize that there are far more dollars in use in the rest of the world than in the United States itself.  The following is from a scholarly article by Linda Goldberg…

The dollar is a major form of cash currency around the world. The majority of dollar banknotes are estimated to be held outside the US. More than 70% of hundred-dollar notes and nearly 60% of twenty- and fifty-dollar notes are held abroad, while two-thirds of all US banknotes have been in circulation outside the country since 1990

For decades we have been exporting gigantic quantities of our currency.

So what would happen if that process suddenly reversed and massive piles of dollars started coming back into the country?

It is frightening to think about.

Well, I guess the key is to get the rest of the world to continue to have confidence in the U.S. dollar so that will never happen, right?

Unfortunately, there are lots of signs that the rest of the world is accelerating their move away from the U.S. dollar.

For example, it was recently announced that the BRICS countries are developing their own version of the World Bank…

The BRICS (Brazil, Russia, India, China and South Africa) bloc has begun planning its own development bank and a new bailout fund which would be created by pooling together an estimated $240 billion in foreign exchange reserves, according to diplomatic sources. To get a sense of how significant the proposed fund would be, the fund would be larger than the combined Gross Domestic Product (GDP) of about 150 countries, according to Russia and India Report.

And as I noted in a previous article, over the past few years there have been a whole host of new international currency agreements that encourage the use of national currencies over the U.S. dollar.  The following are just a few examples…

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)

Will this movement soon become a stampede away from the U.S. dollar?

That is a very important question.

But you don’t hear anything about this in the U.S. media and our politicians are not talking about this at all.

Meanwhile, our “leaders” seem to be doing everything that they can to destroy confidence in the U.S. dollar.  The Federal Reserve is printing money like there is no tomorrow, and the federal government continues to run up trillion dollar deficits year after year.

They do not seem to understand that they are systematically destroying the U.S. financial system.

Other world leaders get it.  For example, Russian President Vladimir Putin once said the following…

“Unreasonable expansion of the budget deficit, accumulation of the national debt – are as destructive as an adventurous stock market game.
During the time of the Soviet Union the role of the state in economy was made absolute, which eventually lead to the total non-competitiveness of the economy. That lesson cost us very dearly. I am sure no one would want history to repeat itself.”

Wow.

Why can’t most of our politicians see how destructive debt is?

What the federal government continues to do is absolutely insane.  The national debt increased by more than 24 billion dollars on the day after Thanksgiving this year.  But utter disaster has not struck yet, and most Americans are not really that concerned about the debt.  So things just keep rolling along.

And of course our national debt of $16,309,738,056,362.44 is nothing when compared to the future liabilities that our federal government is facing.  Just check out what a recent article in the Wall Street Journal had to say about all this…

The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

Other economists paint an even gloomier picture.  According to economist Niall Ferguson, the U.S. government is facing future unfunded liabilities of 238 trillion dollars.

So where are we going to get all that money?

Well, why don’t we just print more money than ever before so that the U.S. government can borrow and spend more money than ever before?

Don’t laugh.  That is actually what some of the top economists in the country are actually recommending.

The most famous economic journalist in the entire country, Paul Krugman of the New York Times, is boldly proclaiming that the solution to all of our problems is to print, borrow and spend a lot more money.  He insists that there is no reason to fear that the giant mountain of debt that we are accumulating will someday collapse the system…

For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.

But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.

Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.

Of course what he is prescribing is complete and utter madness.

At some point this con game is going to collapse and the rest of the world is going to say a big, fat, resounding “NO” to the U.S. dollar.

Why should they continue to use a currency that is becoming extremely unstable and that is constantly being manipulated?

And when the rest of the world rejects the U.S. dollar, the value of the dollar will drop like a rock because there will be far less global demand for it.

In addition, if the rest of the world is not using the U.S. dollar for trade any longer, other nations will cease to soak up our excess currency and huge mountains of our currency that are floating around out there will start flooding back to our shores.

At that point we will be looking at inflation unlike anything we have ever seen before.  The era of cheap imports will be over and we will pay far more for everything from oil to the foreign-made plastic trinkets that we buy at Wal-Mart.

Most Americans don’t even know what a “reserve currency” is, but when the U.S. dollar loses reserve currency status it is going to unleash a nightmare that most economists cannot even imagine.

So enjoy this holiday season while you can.  There are still lots and lots of cheap imports filling the shelves of our stores.

Once the coming giant currency superstorm strikes, we will dearly wish for the good old days of 2012.

Yes, the U.S. dollar is alive and ticking for now.  But at the pace that our authorities are abusing it, I would not say that things are looking good for a long and healthy lifespan.

QE3: Helicopter Ben Bernanke Unleashes An All-Out Attack On The U.S. Dollar

You can’t accuse Federal Reserve Chairman Ben Bernanke of not living up to his nickname.  Back in 2002, Bernanke delivered a speech entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here” in which he referenced a statement by economist Milton Friedman about fighting deflation by dropping money from a helicopter.  Well, it might be time for a new nickname for Bernanke because what he did today was a lot more than drop money from a helicopter.  Today the Federal Reserve announced that QE3 will begin on Friday, but it is going to be much different from QE1 and QE2.  Both of those rounds of quantitative easing were of limited duration.  This time, the quantitative easing is going to be open-ended.  The Fed is going to buy 40 billion dollars worth of mortgage-backed securities per month until they have decided that the economy is in good enough shape to stop.  For those that get confused by terms like “quantitative easing” and “mortgage-backed securities”, what the Federal Reserve is essentially saying is this: “We’re going to print a bunch of money and buy stuff for as long as we feel it is necessary.”  In addition, the Federal Reserve has promised to keep interest rates at ultra-low levels all the way through mid-2015.  The course that the Federal Reserve has set us on is utter insanity.  Ben Bernanke can rain money down on us all he wants, but it is not going to do much at all to help the real economy.  However, it will definitely hasten the destruction of the U.S. dollar.

And the Federal Reserve is apparently very eager to get QE3 going.  Purchases of mortgage-backed securities are going to start on Friday.

In the coming months, hundreds of billions of dollars that the Federal Reserve has zapped into existence out of nothing will be injected into our financial system.

So what will happen to all of this new money?

If banks and financial institutions use that money to make loans then it could have somewhat of a positive impact on the economy in the short-term.

However, the truth is that it isn’t as if banks are hurting for cash to loan out.  In fact, right now banks are already sitting on $1.6 trillion in excess reserves.  Just like with the first two rounds of quantitative easing, a lot of the money from QE3 will likely end up being put on the shelf.

But the stock market loved the news because they know that the previous two rounds of quantitative easing have been great for the financial markets.  On Thursday, the stock market soared to levels not seen since December 2007.

There is much rejoicing on Wall Street right now.

And this stock market bounce is great for Bernanke’s good buddy Barack Obama.

Obama nominated Bernanke to a second term as Fed Chairman, and this might be Bernanke’s way of paying him back.

But of course the Fed is supposed to be “above politics” so that would never happen, right?

The Federal Reserve essentially “crossed the Rubicon” today.  No longer will quantitative easing be considered an “emergency measure”.  Rather, it will now be considered just another “tool” that the Fed uses in the normal course of business.

Considering how vulnerable the U.S. dollar already is, announcing an “open-ended” round of quantitative easing is utter foolishness.  According to the Fed, when you add the 40 billion dollars of new mortgage-backed security purchases per month to all of the other “easing” measures the Fed is continuing to do, the grand total is going to come to about 85 billion dollars a month.  The following is from the statement that the Fed released earlier today….

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

So what does all of this mean?

I really like how one analyst put it when he described this announcement as a “I’m gonna ease till your eyes bleed kinda statement“.

The Fed also promised to keep interest rates at “exceptionally low levels” until mid-2015….

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

It seems that whenever the U.S. economy gets into trouble, Bernanke and his friends at the Fed only have one prescription and it goes something like this….

“Print more money and promise to keep interest rates near zero even longer.”

Of course a lot of Republicans are quite disturbed that QE3 was announced with just a couple of months remaining in a very heated election battle.

Even big news organizations such as CNBC are commenting on this….

Though the Fed is ostensibly politically independent, the decision comes at a ticklish time with the presidential election less than two months away.

And without a doubt the mainstream media will be proclaiming this to be “good news” for the economy in the short-term.

But is QE3 really going to help the average person on the street?

Well, first let’s take a look at employment.  We are told that one of the primary reasons for QE3 is jobs.

But did QE1 and QE2 create jobs?

The answer is clearly no.

As you can see from the chart below, the percentage of working age Americans with a job fell dramatically during the last recession and has not bounced back since that time despite all of the quantitative easing that has been done already….

So why try the same thing again when it did not work the first two times?

But what more quantitative easing is likely to do is to pump up stock market values because a lot of the money from QE3 is going to end up being put into stocks and other investments.

This is going to help the wealthy get even wealthier, and it is going to make the “wealth gap” between the rich and the poor even larger in America.

QE3 is also probably going to cause commodity prices to rise just like QE1 and QE2 did.

That means that you will be paying more for gasoline, food and other basic necessities.

So there may not be more jobs, but at least you will get the privilege of paying more for things.

The inflation that QE3 will cause will be particularly cruel for those on fixed incomes such as retirees.

None of the extra money from QE3 is going to go into their pockets, but they will have to pay more to heat their homes and fill up their shopping carts.

And the “exceptionally low interest rate” policy of the Federal Reserve is absolutely devastating for those that have saved for retirement and that are relying on interest income for their living expenses.

In short, quantitative easing is very good for the wealthy and it is very bad for the average man and woman on the street.

But what else would you expect from the Federal Reserve?

It is imperative that we educate the American people about the Federal Reserve and about how they are destroying our economy.  For much more on this, please see my previous article entitled “10 Things That Every American Should Know About The Federal Reserve“.

Perhaps the biggest danger from QE3 is that it could greatly hasten the day when the U.S. dollar ceases to be the reserve currency of the world.

The rest of the world is not stupid.  They see that the Federal Reserve is now firing up the printing presses whenever they feel like it.  They can see the games that we are playing with our currency.

Why should the rest of the world continue to use the U.S. dollar to trade with one another when the United States is constantly debasing it and playing games with its value?

As I wrote about the other day, China and Russia have been calling for a new reserve currency for the world for several years.  They have been leading the charge to conduct international trade in currencies other than the U.S. dollar, and I have documented many of the major international agreements to move away from the U.S. dollar that have been made in the last couple of years.

The status of the U.S. dollar in the world has already been steadily slipping, and now Helicopter Ben Bernanke pulls this kind of nonsense.

We are handing the rest of the world an excuse to abandon the U.S. dollar on a silver platter.

And when the rest of the globe rejects the U.S. dollar as a reserve currency, the dollar will crash, the cost of living will increase dramatically, our standard of living will go way down and we will never fully recover from it.

So if you think that things are “bad” now, just wait until that happens.

The U.S. dollar is one of the best things that the U.S. economy still has going for it, and Helicopter Ben Bernanke is doing his best to absolutely destroy that.

What is your opinion of QE3?  Please feel free to post a comment with your thoughts below….

China And Russia Are Ruthlessly Cutting The Legs Out From Under The U.S. Dollar

The mainstream media in the United States is almost totally ignoring one of the most important trends in global economics.  This trend is going to cause the value of the U.S. dollar to fall dramatically and it is going to cause the cost of living in the United States to go way up.  Right now, the U.S. dollar is the primary reserve currency of the world.  Even though that status has been chipped away at in recent years, U.S. dollars still make up more than 60 percent of all foreign currency reserves in the world.  Most international trade (including the buying and selling of oil) is conducted in U.S. dollars, and this gives the United States a tremendous economic advantage.  Since so much trade is done in dollars, there is a constant demand for more dollars all over the globe from countries that need them for trading purposes.  So the Federal Reserve is able to flood our financial system with dollars without it causing a tremendous amount of inflation because the rest of the world ends up soaking up a lot of those dollars.  But now that is changing.  China and Russia have been spearheading a movement to shift away from using the U.S. dollar in international trade.  At the moment, the shift is happening gradually, but at some point a tipping point will come (for example if Saudi Arabia were to declare that it will no longer take U.S. dollars for oil) and the entire global financial system is going to change.  When that tipping point comes the global demand for U.S. dollars is going to absolutely plummet and nightmarish inflation will come to the United States.  If such a scenario sounds far out to you, then you have not been paying attention.  In fact, China and Russia have been working very hard to move us toward exactly such a scenario.

China and Russia are not the “buddies” of the United States.  The truth is that they are both ruthless competitors of the United States and leaders from both nations have been calling for a new global currency for years.

They don’t like that the United States has a built-in advantage of having the reserve currency of the world, and over the past several years both countries have been busy making international agreements that seek to chip away at that advantage.

Just the other day, China and Germany agreed to start conducting an increasing amount of trade with each other in their own currencies.

You would think that a major currency agreement between the 2nd and 4th largest economies on the face of the planet would make headlines all over the United States.

Instead, the silence in the U.S. media was deafening.

At least there were some reports in the international media about this.  The following is from a Reuters article about this very important deal….

Germany and China plan to conduct an increasing amount of their trade in euros and yuan, the two nations said in a joint statement after talks between Chancellor Angela Merkel and Chinese Premier Wen Jiabao in Beijing on Thursday.

“Both sides intend to support financial institutions and companies of both countries in the use of the renminbi and euro in bilateral trade and investments,” said the text of the statement.

By itself, this deal would not be that alarming.

However, the truth is that both Russia and China have been making deals like this all over the globe in recent years.  I detailed 11 more major agreements like the one that China and Germany just made in this article: “11 International Agreements That Are Nails In The Coffin Of The Petrodollar“.

In that article I listed a few of the things that will likely happen when the petrodollar dies….

-Oil will cost a lot more.

-Everything will cost a lot more.

-There will be a lot less foreign demand for U.S. government debt.

-Interest rates on U.S. government debt will rise.

-Interest rates on just about everything in the U.S. economy will rise.

So enjoy going to “the dollar store” while you can.

It will turn into the “five and ten dollar store” soon enough.

Okay, so if you are China and Russia and you are working hard to undermine the dollar, how do you get prepared for the fiat currency crisis that your hard work will eventually create?

You guessed it.  You hoard gold and other precious metals.

And that is exactly what China and Russia has been doing.

A recent MarketWatch article detailed the massive hoarding of gold that Russia has been doing….

I can’t imagine it means anything cheerful that Vladimir Putin, the Russian czar, is stockpiling gold as fast as he can get his hands on it.

According to the World Gold Council, Russia has more than doubled its gold reserves in the past five years. Putin has taken advantage of the financial crisis to build the world’s fifth-biggest gold pile in a handful of years, and is buying about half a billion dollars’ worth every month.

Of course Russia is not alone in hoarding gold.  According to Zero Hedge, China has quietly been importing gigantic mountains of gold….

In July, Chinese gold imports from HK, after two months of declines, have picked up once more and hit a 3-month high of 75.8 tons. While it is notable that this number is double the 38.1 tons imported a year prior, and that year-to-date imports are now a record 458.6 tons, well over four times greater than the seven month total in 2011 which was 103.9 tons, what is far more important is that in the first seven months of 2012 alone China has imported nearly as much gold as the total holdings of the hedge fund at the heart of the Eurozone, elsewhere known simply as the European Central Bank, and just as importantly considering the import run-rate has hardly slowed down in August, which data we will have in a few weeks, it is now safe to say that in 2012 alone China has imported more gold than the ECB’s entire official 502.1 tons of holdings.

And all over the world Chinese companies are buying up gold producers.  China National Gold Group Corporation has put in a $3.9 billion bid to buy African Barrick Gold PLC, but that is only one example.

A recent Fox Business article listed a bunch of other similar transactions that have taken place recently….

Zijin Mining Group Co. (2899.HK), China’s second-largest gold producer by output, said last week that its subsidiary has acquired more than 50% of Kalgoorlie’s Norton Gold Fields (NGF.AU).

That deal gives it a foothold in the Australian market, the world’s second-largest source of gold output after China itself. In 2011, Zijin bought 60% of Kazakhstan-based miner Altynken, which has access to a gold mine in Kyrgyzstan.

Since 2008, Chinese companies have completed 10 US$20-million-plus acquisitions of Australian gold assets, worth a combined $1.6 billion, according to Dealogic. Half were initiated since last year.

In November, Shandong Gold-Mining Co. (600547.SH) launched a bid to acquire Brazilian gold miner Jaguar Mining Inc. (JAG.T) for $1 billion.

You would have to be blind to not see what is happening.

Other big names have been hoarding gold as well.  In a previous article I detailed how George Soros, John Paulson and central banks all over the planet have been hungrily accumulating gold.

So what does all of this mean for the price of gold?

That’s right – it is likely to keep heading up.

In fact, Citi analyst Tom Fitzpatrick believes that the price of gold will likely hit $2500 within 6 months.

Personally, I believe that there will be times when precious metals both fall and rise in price dramatically.  It is going to be a wild ride.  But in the long-term I believe that all precious metals will be going up as fiat currencies such as the U.S. dollar fail.

Sadly, most Americans have no idea just how incredibly vulnerable the U.S. dollar really is.

The following is an excerpt from a recent piece by investigative journalist Bob Woodward.  It shows just how worried our leaders are about a crash of U.S. Treasuries….

Another possible outcome, Geithner said, was perhaps worse. “Suppose we have an auction and no one shows up?”

The cascading impact would be unknowable. The world could decide to dump U.S. Treasuries. Prices would plummet, interest rates would skyrocket. The one pillar of stability, the United States, the rock in the global economy, could collapse.

What happens someday if the rest of the world decides to reject our currency and our debt?

Right now we are able to trade our dollars for the things that we “need” such as oil from the Middle East and cheap plastic consumer products from China.

But what happens if the Federal Reserve keeps printing and printing and printing and the rest of the world eventually decides that the U.S. dollar is not even worth the paper it is printed on?

The truth is that the amount of printing the Federal Reserve has been doing and the amount of borrowing the federal government has been doing are both completely and totally unsustainable.

At this point, Moody’s is threatening to cut the credit rating of the federal government if a deal is not reached soon to reduce our debt to GDP ratio.

And Moody’s is not the only one concerned about our exploding debt.

German Finance Minister Wolfgang Schaeuble recently stated that he believes that “there is great uncertainty about the course American politics will take in dealing the U.S. government’s debts, which are much too high”.

Just because the economy is relatively stable right now does not mean that it is always going to be that way.

If we keep debasing our currency like this, at some point the rest of the world is going to decide that China and Russia have been right all along and that we need a new global reserve currency.

That day is coming.  It might not come tomorrow or next week or next month but it is definitely coming.

Once the U.S. dollar loses reserve currency status, that will be a major turning point in the history of our country.  We will never fully recover from that, and we will never get back to the same level of prosperity that we are enjoying today.

So enjoy spending those dollars while you can.  The party is almost over.

11 International Agreements That Are Nails In The Coffin Of The Petrodollar

Is the petrodollar dead?  Well, not yet, but the nails are being hammered into the coffin even as you read this.  For decades, most of the nations of the world have used the U.S. dollar to buy oil and to trade with each other.  In essence, the U.S. dollar has been acting as a true global currency.  Virtually every country on the face of the earth has needed big piles of U.S. dollars for international trade.  This has ensured a huge demand for U.S. dollars and U.S. government debt.  This demand for dollars has kept prices and interest rates low, and it has given the U.S. government an incredible amount of power and leverage around the globe.  Right now, U.S. dollars make up more than 60 percent of all foreign currency reserves in the world.  But times are changing.  Over the past couple of years there has been a whole bunch of international agreements that have made the U.S. dollar less important in international trade.  The mainstream media in the United States has been strangely quiet about all of these agreements, but the truth is that they are setting the stage for a fundamental shift in the way that trade is conducted around the globe.  When the petrodollar dies, it is going to have an absolutely devastating impact on the U.S. economy.  Sadly, most Americans are totally clueless regarding what is about to happen to the dollar.

One of the reasons the Federal Reserve has been able to get away with flooding the financial system with U.S. dollars is because the rest of the world has been soaking a lot of those dollars up.  The rest of the world has needed giant piles of dollars to trade with, but what is going to happen when they don’t need dollars anymore?

Could we see a tsunami of inflation as demand for the dollar plummets like a rock?

The power of the U.S. dollar has been one of the few things holding up our economy.  Once that leg gets kicked out from under us we are going to be in a whole lot of trouble.

The following are 11 international agreements that are nails in the coffin of the petrodollar….

#1 China And Russia

China and Russia have decided to start using their own currencies when trading with each other.  The following is from a China Daily article about this important agreement….

China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.

Chinese experts said the move reflected closer relations between Beijing and Moscow and is not aimed at challenging the dollar, but to protect their domestic economies.

“About trade settlement, we have decided to use our own currencies,” Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.

#2 China And Brazil

Did you know that Brazil conducts more trade with China than with anyone else?

The largest economy in South America has just agreed to a huge currency swap deal with the largest economy in Asia.  The following is from a recent BBC article….

China and Brazil have agreed a currency swap deal in a bid to safeguard against any global financial crisis and strengthen their trade ties.

It will allow their respective central banks to exchange local currencies worth up to 60bn reais or 190bn yuan ($30bn; £19bn).

The amount can be used to shore up reserves in times of crisis or put towards boosting bilateral trade.

#3 China And Australia

Did you know that Australia conducts more trade with China than with anyone else?

Australia also recently agreed to a huge currency swap deal with China.  The following is from a recent Financial Express article….

The central banks of China and Australia signed a A$30 billion ($31.2 billion) currency-swap agreement to ensure the availability of capital between the trading partners, the Reserve Bank of Australia said.

“The main purposes of the swap agreement are to support trade and investment between Australia and China, particularly in local-currency terms, and to strengthen bilateral financial cooperation,” the RBA said in a statement on its website. “The agreement reflects the increasing opportunities available to settle trade between the two countries in Chinese renminbi and to make RMB-denominated investments.”

China has been expanding currency-swap accords as it promotes the international use of the yuan, and the accord with Australia follows similar deals with nations including South Korea, Turkey and Kazakhstan. China is Australia’s biggest trading partner and accounts for about a quarter of the nation’s merchandise sales abroad.

#4 China And Japan

The second and third largest economies on the entire planet have decided that they should start moving toward using their own currencies when trading with each other.  This agreement was incredibly important but it was almost totally ignored by the U.S. media.

According to Bloomberg, it is anticipated that this agreement will strengthen ties between these two Asian giants….

Japan and China will promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Japanese government said.

Japan will also apply to buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct yen- yuan settlement should reduce currency risks and trading costs, the Japanese and Chinese governments said.

China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier.

#5 India And Japan

It is not just China making these kinds of currency agreements.  According to Reuters, India and Japan have also agreed to a very large currency swap deal….

India and Japan have agreed to a $15 billion currency swap line, Japan’s Prime Minister Yoshihiko Noda said on Wednesday, in a positive move for the troubled Indian rupee, Asia’s worst-performing currency this year.

#6 “Junk For Oil”: How India And China Are Buying Oil From Iran

Iran is still selling lots of oil.  They just aren’t exchanging that oil for U.S. dollars as much these days.

So how is Iran selling their oil without using dollars?

A Bloomberg article recently detailed what countries such as China and India are exchanging for Iranian oil….

Iran and its leading oil buyers, China and India, are finding ways to skirt U.S. and European Union financial sanctions on the Islamic republic by agreeing to trade oil for local currencies and goods including wheat, soybean meal and consumer products.

India, the second-biggest importer of Iran’s oil, has set up a rupee account at a state-owned bank to settle as much as much as 45 percent of its bill, according to Indian officials. China, Iran’s largest oil customer, already settles some of its oil debts through barter, Mahmoud Bahmani, Iran’s central bank governor, said Feb. 28. Iran also has sought to trade oil for wheat from Pakistan and Russia, according to media reports from the two countries.

#7 Iran And Russia

According to Bloomberg, Iran and Russia have decided to discard the U.S. dollar and use their own currencies when trading with each other….

Iran and Russia replaced the U.S. dollar with their national currencies in bilateral trade, Iran’s state-run Fars news agency reported, citing Seyed Reza Sajjadi, the Iranian ambassador in Moscow.

The proposal to switch to the ruble and the rial was raised by Russian President Dmitry Medvedev at a meeting with his Iranian counterpart, Mahmoud Ahmadinejad, in Astana, Kazakhstan, of the Shanghai Cooperation Organization, the ambassador said.

#8 China And Chile

China and Chile recently signed a new agreement that will dramatically expand trade between the two nations and that is also likely to lead to significant currency swaps between the two countries….

The following is from a recent report that described this new agreement between China and Chile….

Wen called on the two nations to expand trade in goods, promote trade in services and mutual investment, and double bilateral trade in three years.

The Chinese leader also said the two countries should enhance cooperation in mining, expand farm product trade, and promote cooperation in farm product production and processing and agricultural technology.

China would like to be actively engaged in Chile’s infrastructure construction and work with Chile to promote the development of transportation networks in Latin America, said Wen.

Meanwhile, Wen suggested that the two sides launch currency swaps and expand settlement in China’s renminbi.

#9 China And The United Arab Emirates

According to CNN, China and the United Arab Emirates recently agreed to a very large currency swap deal….

In January, Chinese Premier Wen Jiabao visited the United Arab Emirates and signed a $5.5 billion currency swap deal to boost trade and investments between the two countries.

#10 China And Africa

Did you know that China is now Africa’s biggest trading partner?

For many years the U.S. dollar was dominant in Africa, but now that is changing.  A report from Africa’s largest bank, Standard Bank, says the following….

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

#11 Brazil, Russia, India, China And South Africa

The BRICS (Brazil, Russia, India, China and South Africa) continue to become a larger factor in the global economy.

A recent agreement between those nations sets the stage for them to increasingly use their own national currencies when trading with each other rather than the U.S. dollar.  The following is from a news source in India….

The five major emerging economies of BRICS — Brazil, Russia, India, China and South Africa — are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

So what does all of this mean?

It means that the days of the U.S. dollar being the de facto reserve currency of the world are numbered.

So why is this important?

In a previous article, I quoted an outstanding article by Marin Katusa that detailed many of the important benefits that the petrodollar system has had for the U.S. economy….

The “petrodollar” system was a brilliant political and economic move. It forced the world’s oil money to flow through the US Federal Reserve, creating ever-growing international demand for both US dollars and US debt, while essentially letting the US pretty much own the world’s oil for free, since oil’s value is denominated in a currency that America controls and prints. The petrodollar system spread beyond oil: the majority of international trade is done in US dollars. That means that from Russia to China, Brazil to South Korea, every country aims to maximize the US-dollar surplus garnered from its export trade to buy oil.

The US has reaped many rewards. As oil usage increased in the 1980s, demand for the US dollar rose with it, lifting the US economy to new heights. But even without economic success at home the US dollar would have soared, because the petrodollar system created consistent international demand for US dollars, which in turn gained in value. A strong US dollar allowed Americans to buy imported goods at a massive discount – the petrodollar system essentially creating a subsidy for US consumers at the expense of the rest of the world. Here, finally, the US hit on a downside: The availability of cheap imports hit the US manufacturing industry hard, and the disappearance of manufacturing jobs remains one of the biggest challenges in resurrecting the US economy today.

So what happens when the petrodollar dies?

The following are some of the things we are likely to see….

-Oil will cost a lot more.

-Everything will cost a lot more.

-There will be a lot less foreign demand for U.S. government debt.

-Interest rates on U.S. government debt will rise.

-Interest rates on just about everything in the U.S. economy will rise.

And that is just for starters.

As I wrote about earlier today, the Federal Reserve is not going to save us.  Ben Bernanke is not somehow going to pull a rabbit out of a hat that will magically make everything okay.  Fundamental changes to the global financial system are happening right now that are impossible for Bernanke to stop.

We should have never gone into so much debt.  Up until now we have gotten away with it, but when demand for U.S. dollars and U.S. debt dries up we are going to experience a massive amount of pain.

Keep your eyes and ears open for more news stories like the ones referenced above.  The end of the petrodollar is going to be a very significant landmark on the road toward the total collapse of the U.S. economy.

So what do you think the fate of the U.S. dollar is going to be in the years ahead?

Please feel free to post a comment with your thoughts below….

10 Reasons Why The Reign Of The Dollar As The World Reserve Currency Is About To Come To An End

The U.S. dollar has probably been the closest thing to a true global currency that the world has ever seen.  For decades, the use of the U.S. dollar has been absolutely dominant in international trade.  This has had tremendous benefits for the U.S. financial system and for U.S. consumers, and it has given the U.S. government tremendous power and influence around the globe.  Today, more than 60 percent of all foreign currency reserves in the world are in U.S. dollars.  But there are big changes on the horizon.  The mainstream media in the United States has been strangely silent about this, but some of the biggest economies on earth have been making agreements with each other to move away from using the U.S. dollar in international trade.  There are also some oil producing nations which have begun selling oil in currencies other than the U.S. dollar, which is a major threat to the petrodollar system which has been in place for nearly four decades.  And big international institutions such as the UN and the IMF have even been issuing official reports about the need to move away form the U.S. dollar and toward a new global reserve currency.  So the reign of the U.S. dollar as the world reserve currency is definitely being threatened, and the coming shift in international trade is going to have massive implications for the U.S. economy.

A lot of this is being fueled by China.  China has the second largest economy on the face of the earth, and the size of the Chinese economy is projected to pass the size of the U.S. economy by 2016.  In fact, one economist is even projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

So China is sitting there and wondering why the U.S. dollar should continue to be so preeminent if the Chinese economy is about to become the number one economy on the planet.

Over the past few years, China and other emerging powers such as Russia have been been quietly making agreements to move away from the U.S. dollar in international trade.  The supremacy of the U.S. dollar is not nearly as solid as most Americans believe that it is.

As the U.S. economy continues to fade, it is going to be really hard to argue that the U.S. dollar should continue to function as the primary reserve currency of the world.  Things are rapidly changing, and most Americans have no idea where these trends are taking us.

The following are 10 reasons why the reign of the dollar as the world reserve currency is about to come to an end….

#1 China And Japan Are Dumping the U.S. Dollar In Bilateral Trade

A few months ago, the second largest economy on earth (China) and the third largest economy on earth (Japan) struck a deal which will promote the use of their own currencies (rather than the U.S. dollar) when trading with each other.  This was an incredibly important agreement that was virtually totally ignored by the U.S. media.  The following is from a BBC report about that agreement….

China and Japan have unveiled plans to promote direct exchange of their currencies in a bid to cut costs for companies and boost bilateral trade.

The deal will allow firms to convert the Chinese and Japanese currencies directly into each other.

Currently businesses in both countries need to buy US dollars before converting them into the desired currency, adding extra costs.

#2 The BRICS (Brazil, Russia, India, China, South Africa) Plan To Start Using Their Own Currencies When Trading With Each Other

The BRICS continue to flex their muscles.  A new agreement will promote the use of their own national currencies when trading with each other rather than the U.S. dollar.  The following is from a news source in India….

The five major emerging economies of BRICS — Brazil, Russia, India, China and South Africa — are set to inject greater economic momentum into their grouping by signing two pacts for promoting intra-BRICS trade at the fourth summit of their leaders here Thursday.

The two agreements that will enable credit facility in local currency for businesses of BRICS countries will be signed in the presence of the leaders of the five countries, Sudhir Vyas, secretary (economic relations) in the external affairs ministry, told reporters here.

The pacts are expected to scale up intra-BRICS trade which has been growing at the rate of 28 percent over the last few years, but at $230 billion, remains much below the potential of the five economic powerhouses.

#3 The Russia/China Currency Agreement

Russia and China have been using their own national currencies when trading with each other for more than a year now.  Leaders from both Russia and China have been strongly advocating for a new global reserve currency for several years, and both nations seem determined to break the power that the U.S. dollar has over international trade.

#4 The Growing Use Of Chinese Currency In Africa

Who do you think is Africa’s biggest trading partner?

It isn’t the United States.

In 2009, China became Africa’s biggest trading partner, and China is now aggressively seeking to expand the use of Chinese currency on that continent.

A report from Africa’s largest bank, Standard Bank, recently stated the following….

“We expect at least $100 billion (about R768 billion) in Sino-African trade – more than the total bilateral trade between China and Africa in 2010 – to be settled in the renminbi by 2015.”

China seems absolutely determined to change the way that international trade is done.  At this point, approximately 70,000 Chinese companies are using Chinese currency in cross-border transactions.

#5 The China/United Arab Emirates Deal

China and the United Arab Emirates have agreed to ditch the U.S. dollar and use their own currencies in oil transactions with each other.

The UAE is a fairly small player, but this is definitely a threat to the petrodollar system.  What will happen to the petrodollar if other oil producing countries in the Middle East follow suit?

#6 Iran

Iran has been one of the most aggressive nations when it comes to moving away from the U.S. dollar in international trade.  For example, it has been reported that India will begin to use gold to buy oil from Iran.

Tensions between the U.S. and Iran are not likely to go away any time soon, and Iran is likely to continue to do what it can to inflict pain on the United States in the financial world.

#7 The China/Saudi Arabia Relationship

Who imports the most oil from Saudi Arabia?

It is not the United States.

Rather, it is China.

As I wrote about the other day, China imported 1.39 million barrels of oil per day from Saudi Arabia in February, which was a 39 percent increase from one year earlier.

Saudi Arabia and China have teamed up to construct a massive new oil refinery in Saudi Arabia, and leaders from both nations have been working to aggressively expand trade between the two nations.

So how long is Saudi Arabia going to stick with the petrodollar if China is their most important customer?

That is a very important question.

#8 The United Nations Has Been Pushing For A New World Reserve Currency

The United Nations has been issuing reports that openly call for an alternative to the U.S. dollar as the reserve currency of the world.

In particular, one UN report envisions “a new global reserve system” in which the U.S. no longer has dominance….

“A new global reserve system could be created, one that no longer relies on the United States dollar as the single major reserve currency.”

#9 The IMF Has Been Pushing For A New World Reserve Currency

The International Monetary Fund has also published a series of reports calling for the U.S. dollar to be replaced as the reserve currency of the world.

In particular, one IMF paper entitled “Reserve Accumulation and International Monetary Stability” that was published a while back actually proposed that a future global currency be named the “Bancor” and that a future global central bank could be put in charge of issuing it….

“A global currency, bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value that is not tied exclusively to the conditions of any particular economy. As trade and finance continue to grow rapidly and global integration increases, the importance of this broader perspective is expected to continue growing.”

#10 Most Of The Rest Of The World Hates The United States

Global sentiment toward the United States has dramatically shifted, and this should not be underestimated.

Decades ago, we were one of the most loved nations on earth.

Now we are one of the most hated.

If you doubt this, just do some international traveling.

Even in Europe (where we are supposed to have friends), Americans are treated like dirt.  Many American travelers have resorted to wearing Canadian pins so that they will not be treated like garbage while traveling over there.

If the rest of the world still loved us, they would probably be glad to continue using the U.S. dollar.  But because we are now so unpopular, that gives other nations even more incentive to dump the dollar in international trade.

So what will happen if the reign of the U.S. dollar as the world reserve currency comes to an end?

Well, some of the potential effects were described in a recent article by Michael Payne….

“The demise of the dollar will also bring radical changes to the American lifestyle. When this economic tsunami hits America, it will make the 2008 recession and its aftermath look like no more than a slight bump in the road. It will bring very undesirable changes to the American lifestyle through massive inflation, high interest rates on mortgages and cars, and substantial increases in the cost of food, clothing and gasoline; it will have a detrimental effect on every aspect of our lives.”

Most Americans don’t realize how low the price of gasoline in the United States is compared to much of the rest of the world.

There are areas in Europe where they pay about twice what we do for gasoline.  Yes, taxes have a lot to do with that, but the fact that the U.S. dollar is used for almost all oil transactions also plays a significant role.

Today, America consumes nearly a quarter of the world’s oil.  Our entire economy is based upon our ability to cheaply transport goods and services over vast distances.

So what happens if the price of gasoline doubles or triples from where it is at now?

In addition, if the reign of the U.S. dollar as global reserve currency ends, the U.S. government is going to have a much harder time financing its debt.

Right now, there is a huge demand for U.S. dollars and for U.S. government debt since countries around the world have to keep huge reserves of U.S. currency lying around for the sake of international trade.

But what if that all changed?

What if the appetite for U.S. dollars and U.S. debt dried up dramatically?

That is something to think about.

At the moment, the global financial system is centered on the United States.

But that will not always be the case.

The things talked about in this article will not happen overnight, but it is important to note that these changes are picking up steam.

Under the right conditions, a shift in momentum can become a landslide or an avalanche.

Clearly, the conditions are right for a significant move away from the U.S. dollar in international trade.

So when will this major shift occur?

Only time will tell.

Bernanke Says That Any Criticism Of The Federal Reserve Is Based On “Misconceptions”

Federal Reserve Chairman Ben Bernanke is taking his show on the road in at attempt to help Americans feel better about the Federal Reserve.  During a visit to the Fort Bliss headquarters of the Army’s 1st Armored Division this week, Bernanke held a town hall meeting during which he took questions from some of the soldiers.  Bernanke tried to sound as compassionate as possible as he assured the soldiers that the Federal Reserve is looking out for the American people and is doing everything that it can to help create jobs.  At one point, Bernanke even made the following statement: “For a lot of people, I know, it doesn’t feel like the recession ever ended.”  That probably helped a lot of people feel better.  A few probably even had a good cry.  But what Bernanke did not explain to the troops is that the Federal Reserve is very much responsible for the fact that unemployment is rampant, for the fact that the U.S. dollar is rapidly being devalued and for the fact that we have accumulated the largest national debt in the history of the world.

Ben Bernanke keeps insisting that the Federal Reserve has two main jobs (fighting inflation and keeping unemployment low) and that it is working incredibly hard to accomplish that dual mandate.  During his visit with the soldiers he told them that the Fed is very determined to create more jobs for the American people….

“We at the Federal Reserve have been focusing intently on supporting job creation.”

Well, if we are to judge the Federal Reserve by how well it has accomplished its “dual mandate”, then the Federal Reserve has been an abysmal failure.

Since the Federal Reserve was created, the U.S. dollar has lost well over 95 percent of its value to inflation.

Is that something Bernanke should be proud of?

Of course not.

Okay, so the Fed has failed when it comes to keeping inflation under control.

What about jobs?

Well, the first decade of this century was the worst decade for job creation that the United States has seen since the Great Depression.

The sad truth is that a total of zero jobs were created last decade.  The following is a quote from a recent article in Washington Monthly….

“If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009—nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs.”

So what kind of a grade should we give the Federal Reserve for the job that it has done?

How about a big fat F?

The Federal Reserve has been a failure of epic proportions.  It greatly contributed to the Great Depression (even Bernanke admits this), it created the conditions for the financial bubbles that greatly contributed to the financial crisis of 2008, and it has brought us to the verge of yet another gigantic financial crisis.

But Ben Bernanke believes that all of us that are criticizing the Fed are just ignorant.  He thinks that we just don’t understand the Fed properly.  During a recent question and answer session, Bernanke stated the following….

“I think that the concerns about the Fed are based on misconceptions”

Oh, if only the rest of us understood how the Fed works and how they really care about the American people.  Then everything would be okay.

Not.

During that same session, Bernanke insisted that the Federal Reserve only has the purest motives….

“Our motives are strictly to do what is in the best interest of the broad public and I believe that our efforts to stabilize the financial system, which were ultimately proved successful, were very much in the interest of the broad public”

According to Bernanke, those that work at the Fed are unselfish guardians of our monetary system who are fighting for truth, justice and the American way of life.

Okay, perhaps I am exaggerating just a bit, but you get the point.

Bernanke is trying very hard to convince all of us that the Federal Reserve is just misunderstood and that we should just trust what the “experts” are doing.

So what will the plan be if the financial crisis in Europe blows up?

Well, during his visit to Fort Bliss one of the soldiers actually asked him about that.  The following is his answer….

“Although the Fed would obviously do all that we could to maintain stability and to keep monetary policy as easy as necessary to try to minimize the damage, I don’t think we would be able to escape the consequences of a blow-up in Europe”

Oh, he would keep monetary policy “as easy as necessary”.

Isn’t that lovely – I bet that will be great for the value of the U.S. dollar.

Bernanke also told the soldiers that he believes that happy days are ahead for the U.S. economy….

“I do believe we will return to a healthier growth rate. I don’t see any reason why we couldn’t”

So we should just trust Bernanke, right?

He has never been wrong before, right?

Well, let’s check the record….

In 2005, Bernanke said that we shouldn’t worry because housing prices had never declined on a nationwide basis before and he said that he believed that the U.S. would continue to experience close to “full employment”….

“We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

In 2005, Bernanke also said that he believed that derivatives were perfectly safe and posed no danger to financial markets….

“With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

In 2006, Bernanke said that housing prices would probably keep rising….

“Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

In 2007, Bernanke insisted that there was not a problem with subprime mortgages….

“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”

In 2008, Bernanke said that a recession was not coming….

“The Federal Reserve is not currently forecasting a recession.”

A few months before Fannie Mae and Freddie Mac collapsed, Bernanke insisted that they were totally secure….

“The GSEs are adequately capitalized. They are in no danger of failing.”

For many more examples that demonstrate the absolutely nightmarish track record of Federal Reserve Chairman Ben Bernanke, please see the following articles….

*”Say What? 30 Ben Bernanke Quotes That Are So Stupid That You Won’t Know Whether To Laugh Or Cry”

*”Is Ben Bernanke A Liar, A Lunatic Or Is He Just Completely And Totally Incompetent?”

But after being wrong over and over and over, Barack Obama still nominated Ben Bernanke for another term as Chairman of the Fed.

It is hard to put how stupid that was into words.

Look, if someone wrecked your car again and again would you keep handing that person your keys?

It just doesn’t make any sense.

Bernanke made another statement during his visit with the troops this week that was really bizarre….

“The Federal Reserve is not perfect … but at this point, if you look around the world, you see no alternative”

He has got to be kidding, right?

Of course there are no other alternatives for us to look at!  Only a handful of nations on earth do not have a central bank at this point.  Iran, North Korea and a handful of others don’t have a central bank dominated by the international banking community but basically everyone else does.

Just because nearly every nation on earth has a central bank does not mean that there are not alternatives to the Federal Reserve system.  I detailed a plan the other day that would transition us away from the Federal Reserve system.

It most certainly can be done.

But right now, most of our politicians are standing up for a system that allows private central bankers to spend trillions of dollars bailing out their friends while the rest of us suffer.

The other day, an article by U.S. Senator Bernie Sanders appeared in the Huffington Post that detailed what was learned during a very limited audit of transactions conducted by the Federal Reserve during the recent financial crisis.

According to Senator Sanders, the Federal Reserve made 16 trillion dollars in secret loans to big corporations, Wall Street banks, foreign nations and wealthy individuals during the financial crisis….

“…we learned that the Federal Reserve provided a jaw-dropping $16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world.”

Senator Sanders also says that the audit revealed that many of those running the Fed are from the same institutions that the Fed has been bailing out….

“The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.”

Wait – isn’t there a huge conflict of interest problem there?

Of course there is.

But neither major political party is making a stink about it.

Sadly, Senator Sanders says that the audit found that there was “instance after instance” where individuals used their positions at the Fed to benefit their own firms….

“The GAO has detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.”

Wow – you would think that this scandal would have been reported on the front page of every major newspaper from coast to coast.

But that didn’t happen.

In fact, both major political parties continue to insist that there is nothing wrong with the Federal Reserve and that the Fed is doing a wonderful job.

It really is sickening.

Look, we need to educate the American people about the Federal Reserve and we need to make control over our currency a major issue in the 2012 campaign.

The American people should demand that the issuing of all United States currency be immediately returned to Congress as the U.S. Constitution requires.

The American people should demand that no more debt-based Federal Reserve Notes be issued and that from now on only debt-free United States money be issued.

The Federal Reserve has a track record of nearly 100 years of failure.

It is time for it to be shut down.

The choice, America, is up to you.

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