Will Emerging Currencies Undermine the Dollar?

The leaders of Russia, China, Kazakhstan, Tajikistan, Kyrghyzstan and Uzbekistan are meeting for two days (June 15-16) in Yakaterinburg, Russia (see map) to create strategies of interdependence that expressly avoid usage of the U.S. Dollar. The reason? Their respective concentrated financial exposure to a recently ridiculously weak currency ($USD) exceeds existing risk tolerance.

There is special word to describe a powerful entity that oppresses and controls less powerful entities: hegemony. Loads of places seem to be fed up with answering to and being financially beholden to America. Leadership from Iran, India, Pakistan and Mongolia will attend and monitor the talks.

It boils down to this: America has fallen into the classic imperialistic trap. When the financial strength of the Roman Empire failed, its foreign outposts and colonies rebelled. At present, there does not appear to be sufficient mental, social or physical space for America in Asia.

Suppose all of those countries decide to abandon the U.S. Dollar in favor of the Renminbi $CNY - the most likely candidate going into the meeting. Within 10 years the U.S. will lose approximately half of its financing (nobody will buy Treasury Bonds). Suppose all of those countries conspire to default on payments and dump existing U.S. dollars and bonds entirely. Will the U.S. launch a land war in Asia? A war of debt enforcement and compulsory capital cooperation is too politically (and morally) unpopular for a free nation to rationally consider.

Check and mate. The power of the dollar and all things associated with it will fall. How quickly that occurs will depend on the course of action established by the participants of a meeting in Yakaterinburg. If an accord is reached and successfully carried out, the new conglomerate will have assets commensurate to a new world power: oil from Iran, gold from Mongolia, manufacturing and man-power from China, technology and agriculture of India, and military prowess of Russia.

Disclosure: The author does not hold a financial position CEW, but that ETF offers exposure to three out of four BRIC currencies (Brazil, Russia, India, China).

Comments

[Dave Wrixon:]

No, the Fed did that all on its own.

Jun 16 07:15 AM

[Dave Wrixon:]

And like most Americans, you seem to have the debt issue arse about face. It is you that are likely to be the defaulting debtors. I think the Chinese would stoically write the debt off, but don't expect too many favors from them going forward.

As for declaring War, you cannot even sort out Afganistan or Iran.

Jun 16 07:20 AM

[Dave Wrixon:]

And looking at the Map, I guess that simply reflects outlandish US claims on the Artic? Or is this just another failure of the US educational system?

Jun 16 07:21 AM

[Drew Arnold:]

Keep in mind, though, that dropping the US dollar would amount in a massive and immediate loss of wealth for those who hold US treasuries. Given China's stake in treasuries, they are extremely unlikely to sign on to any currency agreement that flushes out their own reserves.

Jun 16 01:55 PM

[Tick Talk:]

Drew, -Agreed. That is why the possibility of a 10 year liquidation plan was offered in the article. The psychological impact of an accord by these countries would have immediate implications for the dollar. The actual process of unloading the assets would have long term effects.


On Jun 16 01:55 PM Drew Arnold wrote:

> Keep in mind, though, that dropping the US dollar would amount in
> a massive and immediate loss of wealth for those who hold US treasuries.
> Given China's stake in treasuries, they are extremely unlikely to
> sign on to any currency agreement that flushes out their own reserves.

Jun 16 04:57 PM

[Tick Talk:]

Dave, thanks for chiming in. Let me bring you up to speed. The U.S. has no incentive to default because it can simply have the Federal Reserve print more money to satisfy payment. In effect, the U.S. is indirectly debasing its currency by increasing the medium denominated in its debts. In fact, the tactic just mentioned is the one that prompted the summit. The outcome is the same in either case: As inflation proceeds, all permanent relations between debtors and creditors become so chaotic as to become almost meaningless (example: Post WW1 German retribution payments and the now non-existant mark and more recently, the Argentinian currency crisis).

Regarding wars, right-minded or ill-conceived, and regardless of nations victorious or defeated, they are an integral part of the global economic landscape. It was mentioned because a financially unified EurAsia is the greatest threat to North Atlantic economies ever invented. It is only through a "divide and conquer" strategy that the influence of the North Atlantic nations has succeeded. So it follows history to mention that when finance is frustrated, war ensues.


On Jun 16 07:20 AM Dave Wrixon wrote:

> And like most Americans, you seem to have the debt issue arse about
> face. It is you that are likely to be the defaulting debtors. I think
> the Chinese would stoically write the debt off, but don't expect
> too many favors from them going forward.
>
> As for declaring War, you cannot even sort out Afganistan or Iran.

Jun 16 05:35 PM