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De-Dollarizing The World Will Be A Rough Road

Posted by Dirk Watters on

Is the dollar's reign almost over?

According to international bankers and traders, currency experts, economists and political analysts, the dollar faces an uphill battle for survival.

Some of these forces aligned against the dollar’s continued role in the world include:

  • The role the dollar plays in preventing growth in emerging market economies
  • A huge shift in the global oil trade
  • China new regional and global financial system
  • Growing political and cultural split between Europe and America

Each of these causes are a blend of factors that are directly or indirectly pushing the dollar off the global financial stage…

Dollar destroys growth

About 80% of all transactions in the world are made in dollars…

But the dollar is actually hurting growth in nations around the world.

Many don’t even want to use dollars, but they have to.

Here’s why…

Say you’re Brazil and you want to buy Chinese goods...

To do so, you have to change your Brazilian reals into US dollars to buy them, and then the Chinese will have to change those dollars back into yuan.

The dollar is used twice for just one transaction.

You would think that as the leading currency, the U.S. dollar would be the engine of growth around the world.

And yet, the more we print, the less likely real economic growth will occur…anywhere.

That’s because with the Federal Reserve printing trillions of new “stimulus” dollars since the financial crisis of 2008-09, inflation, not growth has been the result.

Thus, nations have to print more of their own currency to keep up with the dollar supply to buy goods and services on the global market…

This brings inflation and stifles growth, causing recessions.

In short, the US has been exporting inflation and economic decline to the world for almost a decade.

The global oil market shifts to China

The US now leads the world in oil and natural gas reserves and production.

In many ways, that’s a very good thing…

But there’s a downside.

We still import 25% of our total petroleum used, but that’s near the 40-year low.

As US oil imports from Saudi Arabia fall, that demand must be found elsewhere.

No wonder Saudi Arabia is desperate to woo China, the word’s largest consumer of crude oil.

China is happy to buy oil from the Saudis, but not in dollars - only yuan.

In fact, China will compel the Saudis to accept yuan as payment for oil sales.

Saudi Arabia will agree to a new “petroyuan”, which will end the dollar-energy power nexus the whole world has known since 1975.

In fact, oil futures are now sold in yuan.

What will follow?

As other OPEC suppliers follow the Saudis’ lead, demand for dollars on the world market to buy oil will fall, as will the agreement to store cash reserves in US treasury bonds.

Breaking oil’s link to the dollar – and the US bond market - will put the dollar’s future in doubt.

The financial center of gravity is shifting to China

But buying oil in China’s currency - the yuan - is only the beginning of the dollar’s woes with China…

The yuan itself isn’t a debt obligation the way the dollar is...

It’s a gold-back currency.

Whoever holds yuan will be able to convert it to gold upon request.

That’s a very big deal…

What nation doesn’t want a gold-backed currency over a debt-racked one backed by nothing?

But wait, there’s more…

As the world leader in making stuff, in oil imports and the world’s largest consumer market…

China is a main business hub for Asian and European businesses alike.

And now that they’re offering the world a yuan that’s good as gold…

With an economy that’s growing at twice the rate of America’s…

The financial center of gravity is not in London or New York…

It’s in Hong Kong and Beijing.

The U.S. dollar’s political baggage

For many US allies, the election of 2016 came as a shock and posed difficult choices…

They’re at odds with a US that is anti-globalization…

And requires them to pay their share of the defense burden.

Plus, new US immigration laws and the push to re-make trade agreements has caused the rift between the US and Europe to grow.

Our trading partners are moving away from not only US foreign policy…

But from the dollar as well.

This separation isn’t a “maybe, possibly, someday” scenario…

Europe is rushing to deepen their relationship with China well beyond their current levels.

De-dollarizing the world will be a rough road

Even a gold-backed yuan and petroyuan won’t mean smooth sailing…

It will pose severe challenges to a Chinese system that is unprepared, untested and unfamiliar with managing trillions of dollars’ worth of global trade…

Much less managing a global currency.

China has yet to show the world it can do all of these things.

Will the world be as open, free and peaceful as it has been under US control?

No one knows for sure…

Given their tight grip on political expression and capital controls...

A China-centric financial world may make people yearn for the ‘good ol’ dollar days.’

As these scenarios unfold, both the global geopolitical and financial systems will face uncertainty and instability unlike anything in the past 60 years.

In other words, the transition to a de-dollarized world will not to be a smooth one.

Expect precious metal values to rise...and rise...and rise.

In the mean time…

Challenges to US power and influence, such as the North Korean nuclear crisis, the Iranian nuclear dispute and others are likely to occur more often.

And depending on what those outcomes, the death of the dollar may be sooner – and much more violent – than anyone imagined…

With world-changing consequences.

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