The hegemony of the US dollar is slowly coming to an end as China shifts its golden strategy. China opts to displace the dominating role of the US dollar.
On March 31 in Paris a special meeting, named “Nanjing II,” was held. People’s Bank of China Governor, Zhou Xiaochuan, was there and made a major presentation on, among other points, broader use of the IMF special basket of five major world currencies, the Special Drawing Rights or SDR’s.
The invited were a very select few. The list included German Finance Minister Wolfgang Schaeuble, UK Chancellor of the Exchequer George Osborne, IMF Managing Director Christine Lagarde discussed the world’s financial architecture together with China. Apparently and significantly, there was no senior US official present.
On the Paris talks, Bloomberg reported: “China wants a much more closely managed system, where private-sector decisions can be managed by governments,” said Edwin Truman, a former Federal Reserve and US Treasury official.
“The French have always favored international monetary reform, so they’re natural allies to the Chinese on this issue.”
A China Youth Daily journalist present in Paris noted, “Zhou Xiaochuan pointed out that the international monetary and financial system is currently undergoing structural adjustment, the world economy is facing many challenges…” According to the journalist Zhou went on to declare that China’s aim as current President of the G20 talks is to “promote the wider use of the SDR.”
For most of us, that sounds about as exciting as watching Johnson grass grow in the Texas plains. However, behind that seemingly minor technical move, as is becoming clearer by the day, is a grand Chinese strategy, if it succeeds or not, a grand strategy to displace the dominating role of the US dollar as world central bank reserve currency. China and others want an end to the tyranny of a broken dollar system that finances endless wars on other peoples’ borrowed money with no need to ever pay it back. The strategy is to end the domination of the dollar as the currency for most world trade in goods and services. That’s no small beer.
Despite the wreck of the US economy and the astronomical $19 trillion public debt of Washington, the dollar still makes up 64% of all central bank reserves. The largest holder of US debt is the Peoples Republic of China, with Japan a close second. As long as the dollar is “king currency,” Washington can run endless budget deficits knowing well that countries like China have no serious alternative to invest its foreign currency trade profits but in US Government or government-guaranteed debt. In effect, as I have pointed out, that has meant that China has de facto financed the military actions of Washington that act to go against Chinese or Russian sovereign interests, to finance countless US State Department Color Revolutions from Tibet to Hong Kong, from Libya to Ukraine, to finance ISIS in the Middle East and on and on and on…
If we look more closely at all the steps of the Beijing government since the global financial crisis of 2008 and especially since their creation of the Asian Infrastructure Investment Bank, the BRICS New Development Bank, the bilateral national currency energy agreements with Russia bypassing the dollar, it becomes clear that Zhou and the Beijing leadership have a long-term strategy.
As British economist David Marsh pointed out in reference to the recent Paris Nanjing II remarks of Zhou, “China is embarking, pragmatically but steadily, towards enshrining a multi-currency reserve system at the heart of the world’s financial order.”
Since China’s admission into the IMF select group of SDR currencies last November, the multi-currency system, which China calls “4+1,” would consist of the euro, sterling, yen and renminbi (the 4), co-existing with the dollar. These are the five constituents of the SDR.
To strengthen the recognition of the SDR, Zhou’s Peoples’ Bank of China has begun to publish its foreign reserves total – the world’s biggest – in SDRs as well as dollars.
A golden future
Yet the Chinese alternative to the domination of the US dollar is about far more than paper SDR currency basket promotion. China is clearly aiming at the re-establishment of an international gold standard, presumably one not based on the bankrupt Bretton Woods Dollar-Gold exchange that President Richard Nixon unilaterally ended in August, 1971 when he told the world they would have to swallow paper dollars in the future and could no longer redeem them for gold. At that point global inflation, measured in dollar terms, began to soar in what future economic historians will no doubt dub The Greatest Inflation.
By one estimate, the dollars in worldwide circulation rose by some 2,500% between 1970 and 2000. Since then the rise has clearly brought it well over 3,000%. Without a legal requirement to back its dollar printing by a pre-determined fixed amount of gold, all restraints were off in a global dollar inflation. So long as the world is forced to get dollars to settle accounts for oil, grain, other commodities, Washington can write endless checks with little fear of them bouncing, stamped “insufficient funds.”
Combined with the fact that over that same time span since 1971 there has been a silent coup of the Wall Street banks to hijack any and all semblance of representative democracy and Constitution-based rules, we have the mad money machine, much like the German poet Goethe’s 18th Century fable, Sorcerers’ Apprentice, or in German, Der Zauberlehrling. Dollar creation is out of control.
Since 2015 China is moving very clearly to replace London and New York and the western gold futures price-setting exchanges. As I noted in a longer analysis in this space in August, 2015, China, together with Russia, is making major strides to back their currencies with gold, to make them “as good as gold,” while currencies like the debt-bloated Euro or the debt-bloated bankrupt dollar zone, struggle.
In May 2015, China announced it had set up a state-run Gold Investment Fund. The aim was to create a pool, initially of $16 billion making it the world’s largest physical gold fund, to support gold mining projects along the new high-speed railway lines of President Xi’s New Economic Silk Road or One Road, One Belt as it is called. As China expressed it, the aim is to enable the Eurasian countries along the Silk Road to increase the gold backing of their currencies. The countries along the Silk Road and within the BRICS happen to contain most of the world’s people and natural and human resources utterly independent of any the West has to offer.
In May 2015, China’s Shanghai Gold Exchange formally established the “Silk Road Gold Fund.” The two main investors in the new fund were China’s two largest gold mining companies – Shandong Gold Group who bought 35% of the shares and Shaanxi Gold Group with 25%. The fund will invest in gold mining projects along the route of the Eurasian Silk Road railways, including in the vast under-explored parts of the Russian Federation.
A little-known fact is that no longer is South Africa the world’s gold king. It is a mere number 7 in annual gold production. China is Number One and Russia Number Two.
On May 11, just before creation of China’s new gold fund, China National Gold Group Corporation signed an agreement with the Russian gold mining group, Polyus Gold, Russia’s largest gold mining group, and one of the top ten in the world. The two companies will explore the gold resources of what is to date Russia’as largest gold deposit at Natalka in the far eastern part of Magadan’s Kolyma District.
Recently, the Chinese government and its state enterprises have also shifted strategy. Today, as of March 2016 official data, China holds more than $3.2 trillion in foreign currency reserves at the Peoples’ bank of China, of which it is believed approximately 60% or almost $2 trillion are dollar assets such as US Treasury bonds or quasi-government bonds such as Fannie Mae or Freddie Mac mortgage bonds. Instead of investing all its dollar earnings from trade surpluses into increasingly inflated and worthless US government debt, China has launched a global asset buying strategy.
Now it happens that prime on the Beijing foreign asset “to buy” shopping list are gold mines around the world. Despite a recent slight rise in the gold price since January, gold is still at 5 year-lows and many quality proven mining companies are cash-starved and forced into bankruptcy. Gold is truly at the beginning of a renaissance.
The beauty of gold is not only what countless gold bugs maintain, a hedge against inflation. It is the most beautiful of all precious metals. The Greek philosopher Plato, in his work The Republic, identified five types of regimes possible – Aristocracy, Timocracy, Oligarchy, Democracy, and Tyranny, with Tyranny the lowest most vile. He then lists Aristocracy, or rule by Philosopher Kings with “golden souls” as the highest form of rule, benevolent and with the highest integrity. Gold has worth in its own right throughout mankind’s history. China and Russia and other nations of Eurasia today are reviving gold to its rightful place. That’s very cool.