Leading article: The end of the dollar spells the rise of a new order This radical proposal is a reflection of a changing economic world Tuesday, 6 October 2009 http://www.independent.co.uk/opinio...r-spells-the-rise-of-a-new-order-1798200.html Last autumn's global financial crisis set off an economic earthquake. And we are still feeling the tremors. The latest sign of the ground shifting beneath our feet is our report today of plans by Gulf states, China, Russia, France and Japan to end their practice of conducting oil deals in US dollars, switching instead to a diverse basket of currencies. It is not hard to see the motivation for oil exporters to move away from the dollar. The value of the US currency has fallen sharply since last year's meltdown. And fears are growing, in the light of a spiralling US government deficit, that a further depreciation is likely. They do not want to sell their wares in return for a currency with an uncertain future. It is also easy to see why China would like a world trading system that is underpinned by other currencies as well as the dollar. For the past decade Beijing has been recycling the proceeds of its giant national trade surplus into purchases of US government bonds and other dollar-denominated assets. China too stands to make a significant loss if the value of the dollar falls. For China, however, the timing is much more sensitive. Beijing needs to reduce its dollar holdings, but if it does so too quickly it will bring about the very devaluation it fears. This explains why Chinese officials appear to want this transition to take place gradually over the next decade. But the significance of this development goes much further. Since the end of the Second World War the dollar has been the bedrock of world trade. The pre-eminence of the American currency flowed naturally from the economic dominance of the US. Virtually everyone traded with America so it made sense to use their currency. But the US is not the dominant power that it once was. The financial crisis has left it hobbled with significant government and household debts and sharply reduced prospects for growth. Developing nations such as China, Brazil and India, on the other hand, have weathered the economic storm significantly better. So while this latest proposal is born of financial calculation, it is also a reflection of a new economic world order. We should not be sentimental for the dollar. It makes economic sense for world trade to be conducted in a variety of currencies. Relying on one only has the advantage of clarity, but it also creates instability if the economy that underpins it faces uncertain prospects. Yet we need to understand that exchange rate volatility is a symptom, rather than a cause, of what truly ails the world economy. The biggest driver of global economic instability in recent years has been the determination of China to boost its export sector at all costs. Beijing's persistently large trade surpluses and manipulation to prevent its own currency from appreciating have effectively forced Western nations into running persistently large trade deficits. It was this pressure that blew up various asset bubbles that burst with such disastrous effect last year. A gradual move away from the dollar makes sense. But without a commitment from world governments â both in the rich and developing world â to reduce these destabilising global trade imbalances we will enter an uncertain new era; and one that could yet make us pine for the days of the dominant greenback.
Hey an article - that seems to be an economic editorial - and yet it also seems informed and fair? So rare these days.
Ah yes, and the "it's different this time" crowd that believes that once the US goes (and it will) all other economies will be just fine. Just like last time. You fools that are hoping the US dies out will probably get your wish. And then you'll see what hell is really like. We all will.
That news report puts a deadline on when the dollar will be gone. This means that at the latest the dollar will be gone by 2018. But probably sooner. The article just came out and look at the spike in PMs.
I understand your cynicism Ivanovich. A more plausible scenario (one that I subscribe to) is that there is a gradual wealth transfer from the US to Asian countries. There doesn't need to be a US collapse (although it could happen), however US living standards may still drop relative to Asian living standards, if for example, in the coming 10 years the US Dollar drops by 50% against all other currencies. This gradual US Dollar depreciation could happen without the quick and nasty "collapse" that some people look for. For example: http://www.youtube.com/watch?v=0-ZZFmKFk1s A 5% depreciation in 14 years would result in the US Dollar falling by 50% from current levels, and would result in an improved US Balance Sheet.
If true, its a game changer. Commodities priced in Dollars puts incredible buy pressure on the greenback, against other pairs. This translates to a HUGE monetary float the Treasury can print (daily), just to offset dollar appreciation from international commodity buys. Some 85 Million barrels of oil are consumed, per day. Most of those, priced in USD. That's 4.2 Billion USD PER DAY, in net inflows for the dollar (@50$ oil). Or, 127 BILLION, per month. Or 1.2 TRILLION PER YEAR. The Treasury just prints that, its absorbed by the market @ net neutral exchange rate. What's even more disturbing, is that Japan, China, France, and Russia are doing it. They're really going to trash the dollar. This is FUCKED. Ron Paul and Schiff were right. They're going to do it.
Peil, I think the article came out at about 7.20pm ET, about 1 hour before Bylosellhi made the first post in this thread. For example, see http://peakoiljournal.com/topic/drudge-red-alert-arabs-plot-to-drop-dollar-10162.html While I agree that gold is higher in the past 4 hours, I don't think the traction was an immediate "spike".
"This time it's different" because we are at the end of a credit bubble! It means that at best we can hope for 0% growth for 5-10 years until a miracle technology is introduced (probably green), and until debt levels are back down again. When those 2 factors, debt levels are safe again, and technologies that can create economic prosperity are unleashed, we will have growth again. Until then, it will be a hard ride. And of course China is 100x the opponent the Soviet Union was. Last credit bust was the 1970s. Huge news about dropping the USD if it's true, wow..
As long as China keeps the bulk of its foreign reserves in USD, they'll pay for oil with dollars, and the producers will happily accept them.