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China and the declining dollar

by Princella D. Smith, Israel Hayom Newspaper     Israel Hayom Princella Cartoon

According to several long-time economists’ recent analyses, the future of the U.S. dollar as the world’s reserve currency is in big trouble.

The Wall Street Daily recently reported that the U.S. Treasury Department has agreed to give China direct access to its auctions. This deal would allow China to purchase Treasury bills without having to place bidsthrough primary dealers, bypassing Wall Street.

In the whole of its 237-year history, the U.S. has never allowed a foreign government such unmediated access to its markets.

Though the deal isn’t illegal, it poses a major problem to U.S. economic sovereignty: China holds over $1.2 trillion in U.S. Treasury bills. At this rate, China will soon own 50 cents on every dollar of the U.S. debt. Couple this issue with the overall decline of the U.S. dollar, and it calls into question whether the U.S. will long remain a sovereign nation.

International Monetary Fund records show that the share of U.S. dollar holdings in global foreign exchange reserves has dropped to 61.9 percent and that its percentage of the total world money supply has plunged from nearly 90% in 1952 to about 15% today.

Floyd Brown, chief political analyst of Capitol Hill Daily, feels that the dollar faces impending, if not immediate, doom.

“Today America is like the fourth-generation heirs of a fabulous fortune,” he said. “We may be making all the wrong moves, but our fortune is large, so it takes time for our spendthrift ways and boneheaded policies to erode the legacy bequeathed to us by our forebears.”

The deal with China coincided with reports this week that American billionaires Warren Buffett, John Paulson and George Soros have all dumped U.S. stocks. offered a rationale for the billionaires’ actions in an interview with Robert Wiedemer, an economist and author of the New York Times best-selling book “Aftershock”: “Wiedemer’s explanation starts with the reckless strategy of the Federal Reserve to print a massive amount of money out of thin air in an attempt to stimulate the economy.”

“These funds haven’t made it into the markets and the economy yet. But it is a mathematical certainty that once the dam breaks, and this money passes through the reserves and hits the markets, inflation will surge,” Wiedemer said.

“Once you hit 10% inflation, 10-year Treasury bonds lose about half their value. And by 20%, any value is all but gone. Interest rates will increase dramatically at this point, and that will cause real estate values to collapse. And the stock market will collapse as a consequence of these other problems.”

Phillip Coggan, author of the bestselling book “Paper Promises: Debt, Money and the New World Order,” and a columnist for The Economist, is less alarmist on the issue, stating that he doubts “the dollar is going to disappear as a reserve currency anytime soon.” He made it clear that he doesn’t see it reigning supreme either, though.

Asked if he felt that with China being such a creditor to the U.S., it gives the Chinese more leverage in replacing the dollar as the world currency, Coggan answered: “I think if that happens, it will only happen very, very slowly. If you think about [the British] sterling, which was the dominant trading power in the early 20th century, the U.S. took over from it after the First World War. But sterling was still being used as reserve currency all the way into the 1950s. So I don’t think the dollar is going to disappear as a reserve currency anytime soon.

“So I suggest two possible ways it could go. One is that you could have more than one reserve currency, so the [Chinese] renminbi and the dollar could be virtually equal. … The other one would be that the Chinese are slow to adapt to that world; they don’t like free markets very much. And so they might do a deal with the U.S. akin to the one that existed after the Second World War, where countries fixed their exchange rates against each other.

“So we might have a kind of managed exchange rate system where the Chinese agree to let the currency rise by a certain amount per year and the U.S. agrees to limit the size of its deficits. And that’s not going to happen tomorrow. But if you ever had a crisis in the Treasury bond market then you might end up with that kind of deal in the future.”

One thing is certain: China is definitely telegraphing an interest in handicapping the U.S. economy as evidenced by cyber attacks on Wall Street. We have lost millions of manufacturing jobs to China since it joined the World Trade Organization in 2001, and China’s actions become bolder yearly as its own pending economic collapse has come into question. The average American should be prepared. The world should be prepared.

Princella D. Smith was a communications staffer to former House Speaker Newt Gingrich and a communications director on Capitol Hill. She is a graduate student at the Lauder School of Government, Diplomacy and Strategy at the Interdisciplinary Center in Herzliya.