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Russia and China Quit the Dollar   November 24th, 2010
Slowly but surely, the dollar is losing       

 
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One of the consequences of the ongoing mismanagement of our currency is the devaluation of the dollar and the risk of it losing reserve currency status. We moved further in that direction today as China and Russia announced they would no longer use the dollar for bilateral trade.

China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday...

"About trade settlement, we have decided to use our own currencies," Putin said at a joint news conference with Wen in St. Petersburg.

The two countries were accustomed to using other currencies, especially the dollar, for bilateral trade. Since the financial crisis, however, high-ranking officials on both sides began to explore other possibilities.


What this means is that, previously, if Russia wanted to buy something from China, Russia would first convert their money into foreign currency--usually dollars--and then pay China in dollars. The reverse was also true.

Now, China and Russia will deal with each other in their own currencies.

This is not the end of the dollar, but it's a move in that direction. An increasing number of people and countries are losing faith in the long-term strength of the dollar. As long as the dollar was stable--and expected to stay that way--it made sense for Russia and China (and other countries) to demand payment in that stable currency. But in the absence of perceived strength and stability there is very little other countries gain by using the dollar.

This is the kind of thing that will slowly (at first) chip away at the dollar. Now that China and Russia have made this decision, I suspect it's likely they'll both start making similar arrangements with other countries. Once other countries are forced to deal with China and Russia in their own currencies rather than dollars, that's one less reason for those countries to purchase and hold a large number of dollars.

One of the reasons countries have held dollars (and why the dollar is a reserve currency) is because it has been a relatively stable store of value. The other reason is because countries have needed dollars to buy stuff from other countries. But now the dollar's value isn't nearly as stable and countries are beginning to conduct international business in their own currencies. This is going to lead further and further away from the dollar being a reserve currency.

As Americans, why should we care?

Because the fact that other countries have needed dollars to do business with each other has allowed us to print more dollars ourselves, use them to buy things from foreign countries, and then those foreign countries have used the dollars amongst themselves in commercial transactions. So for many years we've been able to literally print dollars and buy real, tangible stuff with it--and it hasn't been inflationary for us because the dollars have largely stayed overseas as those foreign countries use the dollars to trade amongst themselves. To borrow a line from an 80's song, we've been able to get "money for nothing and our (imported) stuff for free."

But as countries like China and Russia start to avoid the dollar for their own international trading, they aren't going to need as many dollars. That means that the dollars we've printed over the decades that used to stay overseas will start finding their way back to the U.S. and become inflationary. It also means that we won't be able to just print dollars and export them overseas, which means we won't be able to buy as much stuff from other countries. It also means there will be fewer dollars for foreign countries to loan back to our government to fund the federal deficit.

The decision by Russia and China to abandon the dollar in their bilateral trades is significant--not just because of the $50 billion in annual commerce between the countries that will no longer be conducted in dollars, but because this may very well start the ball rolling for other countries to abandon the dollar in their bilateral trading as well.

The reckless policies of the Obama Administration and the Federal Reserve are going to have serious negative effects on our economy and our currency if they aren't stopped very soon.

NOTE: Interestingly, the only mention of this I've seen in the major American mainstream media is a very short blurb on FoxNews. This is major news and it's amazing it isn't receiving prominent coverage.

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