Tuesday, October 06, 2009

The demise of the dollar.

Robert Fisk is reporting in this morning's Independent that China, Russia, Japan and France have been having secret meetings to end the world's oil trading in dollars and move towards trading in a basket of currencies, "including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar."

In what would be the greatest shake up of the modern financial system since the Bretton Woods agreement after the Second World War, this is dynamite and an indication that the world might soon have to accept that it is working with a new financial map.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.
This is a serious challenge to American control of the Middle East. Indeed, the only thing which makes me think China will have to tread slowly here is that China is so heavily invested in the dollar at the moment, having spent billions over the past decade buying up dollar assets.

But it does look as if serious moves are afoot to move international transactions away from the dollar and towards the Euro and other currencies.

The last person to announce that he wasn't going to trade in the dollar in oil transactions, but would instead move to the Euro, was Saddam. Within months US and UK tanks were rolling into Baghdad.

But Chinese banking officials say that things have gone too far to now be reversed:
"The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."
I'm not sure that I agree with the "Chinese financial sources" who think that Obama will be too busy fixing the US economy to concentrate on this. I think this will take up rather a lot of his attention.

But, should this come to pass in nine years time, it would be wrong for those on the right to lay the blame for this at the door of Obama. It will have been the credit crunch which occurred on George Bush's watch which laid the financial foundations for this to even be considered a possibility.


The Independents leading article talks of why it is important to China that this process be carried out carefully and without a rush:
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.
They are simply, as I suspected, too heavily invested in the dollar to risk any action which might devalue it.

Click title for full article.


daveawayfromhome said...

"it would be wrong for those on the right to lay the blame for this at the door of Obama. It will have been the credit crunch which occurred on George Bush's watch which laid the financial foundations for this to even be considered a possibility."

Wrong it would be, indeed, but that has never before stopped them, so I doubt it'll have any effect now.

Kel said...

You are right, of course, Dave. Being wrong never stops those buggers.

constant gina said...

This is our future in the U.S. until our leadership puts the future of the dollar over the political careers.

Kel said...


It's also come about because of the bullying of the Republicans and their demands that they can do whatever they want and the rest of the world has to simply go along with it or be deemed irrelevant.

That, understandably, leads to resentment. Which is what I suspect is fuelling a lot of this.

nunya said...

Gold is up again also. I'm not a "goldbug" them people's is real busy these days.

We've been enjoying a high standard of living for a long time. On borrowed time (and borrowed money). The party's over.

nunya said...

A Change Coming to the World Monetary System?

Posted by Luis de Sousa on October 6, 2009 - 11:53pm in The Oil Drum: Europe

Kel said...


This story certainly suggests there are tough times ahead for the dollar.