U.S. Dollar Crisis Directly Ahead
Today's news out of China is extremely alarming. Even if this was the only danger to the U.S. Dollar, which it isn't, this news alone should set off alarm bells.
(Reuters) - China should prepare for potential U.S. sanctions by increasing use of its own financial messaging network for cross-border transactions in the mainland, Hong Kong and Macau, according to a report from the investment banking unit of Bank of China...
The report said that if the United States were to take the extreme action of cutting off some Chinese banks’ access to dollar settlements, China should also consider stopping using the U.S. dollar as the anchor currency for its foreign exchange controls.
The central bank of the second largest economy in the world says to prepare to ditch the dollar. That is huge!
It also isn't an empty threat.
1) China has spent the last 10 years building the infrastructure to de-dollarize. Without this infrastructure they could only bluff.
2) Russia has mostly de-dollarized, thus proving it that it is possible without crashing the economy.
3) There is a growing customer base of nations locked out of the dollar system such as Iran, Venezuela and Cuba.
4) Europe is preparing to go outside the dollar system due to sanctions in response to Nord Stream 2.
If China de-dollarizes then the U.S. Dollar goes from the reserve currency, to a reserve currency.
Goldman Sachs Group Inc. put a spotlight on the suddenly growing concern over inflation in the U.S. by issuing a bold warning Tuesday that the dollar is in danger of losing its status as the world’s reserve currency.
This is why I have spent so much time writing about our tendency to sanction much of the rest of the world. It has consequences.
But being the reserve currency isn't only about politics. It's also about economics. And that is not good news either.
There's been a strong indicator in the world of finance over the past year or so that the dollar is in trouble. It's an indicator that few people pay attention to, but you should. It's the reason why I'm writing this essay today.
That indicator is gold.
Gold is a very small part of the investment world. So the recent all-time high is only significant because of what reality it reflects.
The virus has unleashed a torrent of forces that are conspiring to fuel relentless demand for the perceived safety from turmoil that gold provides. There’s the fear of further government-ordered lockdowns; and politicians’ decision to push through unprecedented stimulus packages; and central bankers’ decision to print money faster than they ever have before to finance that spending; and the plunge in inflation-adjusted bond yields into negative territory in the U.S.; and the dollar’s sudden decline against the euro and yen; and rising U.S.-China tensions.
The primary economic danger to the US dollar is the trillions upon trillions of dollars the Fed has created, with no oversight, in order to bail out corporate America.
The Fed’s total balance sheet size rose by $6.1 billion to just over $7.01 trillion as of July 22.
It was largely due to continued purchases of Treasuries and mortgage-backed securities aimed at keeping financial market conditions easy. These were nearly offset by a drop in foreign currency swaps with other central banks, which fell to their lowest since mid-March at just under $122 billion.
That powered a $3 trillion increase in the Fed’s total balance sheet between the beginning of March and early June.
Despite the recent lull, analysts at TD Securities said in a note they still expect the total balance sheet to hit $9.4 trillion by year end and $11 trillion by the end of next year.
It seems amazing doesn't it? That the Fed could create so much money that it could endanger the dollar itself, and yet still do nothing for 90% of the population.
All this money printing for the wealthy has a side effect of forcing down interest rates so low that it makes gold an attractive investment, while making Treasuries a bad investment.