Photo Credit: flickr / ohkylelAlthough receiving relatively little attention from the mainstream media, the Bank of China (BOC) just signed a non-dollar settlement deal with VTB, one of Russia’s largest commercial banks. The agreement will allow VTB and BOC to pay each in their domestic currency, removing the need for the US Dollar to settle the trade. This might not sound like much; but in terms of international trade and finance, it is huge. Since the Bretton-Woods agreement after WWII, nations have used the USD in international business dealings. But reserve currency status does not last forever. The Dollar is losing this position, and it will have serious ramifications for the United States and everyone invested in the dollar.
As an ex bond/FX trader, I understand the benefits the United States receives as a result of the USD enjoying reserve status. There is a natural bid, or demand, for entities to own Dollars. Countries want to store their wealth in an instrument that will retain its value. For almost eighty years, this has been the United States Dollar. But we have squandered this position through our financial irresponsibility. As our sovereign debt approaches twenty trillion Dollars, nations and corporations can be forgiven for wondering if we will ever have the will or the means to pay back this astounding sum of money. They believe we will have to devalue our currency, i.e. print money, to settle what we owe as a country. Therefore, they are starting to look for other vehicles to store their wealth and settle their transactions in.
Even before signing this bilateral deal, China in particular has been one nation that has started to move its assets elsewhere to protect its interests. Vince Miller, senior market strategist at Birch Gold Group, believes that the Chinese are putting a staggering sum of their wealth into gold: “When China last reported their gold holdings in 2008, they had 1,054 tons. Since then, they’ve gone absolutely silent on how much they have, but if you start to add up the numbers – the reported imports flowing into the country each month, the estimated NON-reported imports on top of that, plus what the Chinese can mine in gold from within their borders – we wouldn’t be surprised if some recent reports that put the nation’s current holdings in the 3,000 to 5,000 ton range were accurate.”
As more nations make moves similar to the Chinese, the demand for Dollars will start to slide as this process unfolds. As there is less reserve currency demand, the value of the Dollar will fall. This will have a negative impact on the American consumer, as import prices will rise. The United States will be much more susceptible to economic crises; and the value of our currency will swing much more freely, making it much harder for businesses and individuals to manage their finances. Our standard of living will shrink further than it already has. No country has ever devalued its way to prosperity. Only banana republics try to do this. Americans also will have to pay much more when they travel overseas.
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