Yesterday (November 24, 2010), another brick was taken out of the dollar's fundament. China and Russia announced they were quitting the dollar and instead going to trade in renminbi and rubels from now on. The announcement couldn't be less pungent. It was made by both countries' top officials, Premier Jiabao and Premier Putin, not just their finance ministers or some lower ranked politicians. All of this on the Eve of the Thanksgiving Day, a day very special to America.
What are the implications? In the short-run, we may notice less than one would expect. Short-term traders and speculators rely heavily on Bloomberg, CNBC et al., and this event won't make their top headlines or get extensive TV coverage. This won't shake the markets. 90% of market participants are in denial and blinded. Gold, for instance, virtually didn't react.
At the time of this writing, it has been about 8 hours since the announcement which was extensively covered in the Chinese and the Russian media as well as the financial blogosphere. The author of this article has even managed to make a YouTube video about it. Yet, there is no mention of it on any of the top financial media outlets, despite this being probably among the top 3 news for the dollar this year in terms of importance. All you hear about are the great Thanksgiving sales numbers, the "soaring stock market" and the PIIGS. All is good in America.
Once questioned about it, U.S. officials will downplay the importance of the settlement. But the world shakers are watching closely. Earlier this year, Brazil and China announced similar plans: they want to trade in real and renmimbi instead of dollars. This was labeled as 'Idle Talk' by some commentators. Well, here's the action. And it won't be the last one.
So, who's next? It won't be Japan. But what about other South American countries? What about Africa? And, the biggest problem, what about the Middle East? If anybody has a tradition of not fearing write-offs in pursuit of higher goals, it is the Middle East.
They say a butterfly can set off a storm. But these were two elephants thumping and making the earth shake. At the same time, the Fed has very quietly become the biggest holder of U.S. debt. Right. Not China. Not Japan. Ben.
Somebody is getting upset with the dollar. When more and more countries join the crowd and gradually start refusing it, the times when America was buying up the world's production with suitcases of freshly printed greenbacks will be over. And stuff will become expensive. What this may cause on the Main Street, is the topic of a (hyperbole) video called "The Day the Dollar Died" now circulating on YouTube (I am in no way associated with nor do I know the makers, the "National Inflation Association"). Ironically, the video came out virtually the same hour when the news about the China-Russia deal surfaced. What timing.
Disclosure: Long gold
