How China is Torpedoing the U.S. Dollar…
The dollar’s been struggling to retain its value - and now it’s about to get worse thanks to China. This report shows you how China is undercutting the dollar and the two best ways for investors to turn this in their favor…
By Sid Riggs
Contributing Editor
Money Morning
In four short months, the dollar’s value has sunk 11.2% on the New York Exchange. In fact, it just recently hit its lowest level of 2009 against six major currencies, including the Euro, the British pound and the Canadian dollar.
And it wasn’t an accident.
Not only has the U.S. Federal Reserve tied an anchor to the dollar’s legs, China has beefed up its own efforts to supplant the dollar as the global currency reserve.
This report pulls the curtain on China’s plan to demolish the dollar for good. It also shows you how to protect your savings – and increase your portfolio - as the dollar struggles on every front.
The Global Currency Game
The United States isn’t the only country with a falling currency. Same is true for India, Brazil, South Africa, Mexico, Singapore, Switzerland and a host of Eastern European countries.
A bloc of Russian banks recommended that its government should devalue the ruble by as much as 30%.
But what’s most amazing about this is that most of these countries are intentionally devaluing their currencies. For the U.S., a lower dollar value means it’s cheaper to pay back U.S. debt.
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For the rest of the countries, a devalued currency makes their goods cheaper overseas. Having cheaper goods means stronger exports. Stronger exports mean manufacturing and more jobs. You get the idea.
It’s a selfish game, and it basically amounts to making an economy seem healthier than it actually is.
Governments across the globe are in a “race to the bottom.” Yet to make matters worse, the U.S. Treasury is creating some deceptions about the buyers of U.S. debt and sidestepping the issue of devaluation, money supply, and inflation.
Which Message from the Treasury Do You Buy?
The U.S. Government wants the public to believe that China, Japan and Europe are still happily buying U.S. debt to fund the American economic turnaround. The only problem is – they’re not.
Treasury numbers out just last month indicated that China and Japan are reducing their exposure to U.S. debt. China, for example, the largest foreign holder of U.S. debt, reduced its investments by $4.4 billion to $763.5 billion in April – its first monthly reduction since February 2008.
That begs the question – which one is it? Is China buying or selling?
The reality is that the Treasury dept changed the way U.S. debt is accounted for when purchased on the open market. U.S. debt selling on the open market can be accounted as having been sold to “foreigners” even if the purchaser was the Federal Reserve – which is exactly what is happening.
A little sleight of hand by Uncle Sam and all of a sudden China and Japan can appear to be buying debt while at the same time selling debt.
China knows a thing or two about cooking the books, and is using this synchronized global currency dive to step in and throw its weight around. Let me show you…
A Yuan-Dominated Trade Empire
China officials have gone on record saying they want to move the global currency peg away from the dollar in favor of currency diversification. But at the same time, neither China’s currency – the yuan – nor any other currency has the liquidity to replace the dollar as the world’s pillar currency.
China’s distaste for the dollar is supported by Brazil, Russia and India – the four countries comprising the BRIC emerging markets. And not coincidentally, China has used them as allies in its ruse.
Instead of buying directly from trading partners, China has been setting up swap agreements where the Chinese yuan is used instead of the dollar to pay for goods and services.
So far, China has set up currency swaps with Argentina, South Korea, Hong Kong, Indonesia, Malaysia and Belarus.
But most alarmingly, China and Russia have agreed to expand use of their currencies in bilateral trade. And China and Brazil are discussing similar trade plans.
And as they build a larger network of swap agreements (close to $200 billion in June alone), China can trade directly with their trading partners without ever having to put their currency on the open market – and with no need to settle in dollars.
Already, the countries that buy and sell goods as part of these swap agreements can use their Chinese yuan to buy goods and services in China and its neighbors who depend on China’s trade network. Think of it as billion-dollar gift certificates that can only be used exclusively for China’s trading partners.
For instance, Brazil could use its yuan to buy goods and services from Indonesia or Malaysia…with no need to settle in dollars.
The dollar would lose enormous credibility and confidence if China can create one of these swap agreements with a major Western economy.
And China will likely continue to extend these swap agreements to as many people as they can until one day, the world wakes up and realizes China has created a global marketplace for their currency without playing by the rules.
No doubt that will greatly hurt the status of the U.S. dollar as the world’s reserve currency.
Protecting Your Wealth When the Dollar Dies
Regardless of China’s actions, the dollar continues to be plagued by economic events. Not only is it losing its value and importance globally, it’s also losing value domestically.
With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that’s spiraling out of control, the dollar is extremely vulnerable.
The Federal Reserve has lowered its benchmark Federal Funds rate to a range of 0.00%-0.25% and has said it will remain there for “an extended period.”
The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.
And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds.
So what should you do? Get out of the dollar. And get into gold.
That’s what China is doing…
The Red Dragon announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years.
One way to stock upis to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE: GLD). Today, GLD itself holds more than 1,000 tons of gold, and has a market capitalization of $33 billion.
Buying stakes in gold miners is also an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy.
In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold. Market Vectors is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.
[Editor's Note: The U.S. Treasury has just approved a new currency experts are calling "Gold Dollars." This new currency can be used just like regular dollars, but is backed by physical gold. Not many investors know about this change yet. This report gives you all the details on "gold dollars," and how you can use this program to your benefit.]
Comment by Karine on 18 October 2009:
I am just waiting for China to call the Banknote on America’s reckless borrowing .. Unofficially we are already owned by China. So no whining or moaning ecause bthose at the helm created this mess to begin with ..
I don’t see any victims only stupid volunteers. In the end there is no such thing than easy money. The rest of the world looks down on us and who could blame them .. We don’t even have a Healthcare System .. Well the Chinese do have one .. Hmmmmmmmmmmmmmmmmmmm
If you’re smart – start learning Chinese better sooner than later … Its coming folks ….
Comment by UPU on 18 October 2009:
Wow! What a whiner u are!
So, the rest of the world should continue to subsidise American to have a good life? It’s wrong people try to avoid in the future your pulling them into your deep cesspool?
By the way, if the BRIC nations and Japan plus some other EU countries are “undermining” American Dollar? Why did u single out China? Are U Sino-phobic? Anti-Chinese?
Comment by J.C on 19 October 2009:
In the 1990’s American corporations convinced American media that changing China from despotic rule to democracy necessitate investing in that country. In fact they only wanted to serve their own greediness.
China is maybe communist but not imbecile, they open a free way to American companies so they make big money.In the same time to ask for transfer of technology.They not only pump many western technology, but they also spied on U.S.
One after the other, U.S companies were of shoring to china and less and less American works while big U.S companies make a fortune. We are now at the end of the road.Its time to get those jobs back.
Comment by Kwok on 19 October 2009:
Cheaper dollar does not help Uncle Sam to pay back its debt. Uncle Sam need a stronger dollar to keep printing money to pay back debt.
Comment by CSS Ajax Galleries on 20 October 2009:
YEs world is moving toward the Gold and dollar is going down. China is the NExt superpower
Comment by Mohammad Tariq on 20 October 2009:
All the world including American people are discomforting with the USA whole system (not only economic) back-up by Zionists. China is moving forward day by day to become a Super power. (Mohammadi.Tariq@gmail.com)
Comment by dan Johnson on 20 October 2009:
The Chinese economy is unsustainable and will require hugh inputs of raw materials from abroad which will be politically risky and open to shifting third world government actions. The Chinese will have to have military power to keep its supply lines open and the possibility of this is very low in any area but Asia. Even in Asia the anti Chinese feelings will limit the growrh of susutainable resources in the medium term.
The hugh income disparity and population in China will implode and environmental and social disruptions will lead to replacement of the current model with an extreme totalitarian backlash.
The yuan will be a bubble that grows large but will be full of air that will sucked out by commodity prices.
Comment by Rich L on 25 October 2009:
The funny thing is that the Yuan is pegged to the US Dollar, and is performing exactly the same way as the dollar is. Yet you seem to believe that the Chinese have a distaste for the dollar. All that’s going on is that local politics in ALL countries trump international concerns. The Chinese wish to retain strong employment, thus peg their currency to the USD, while loudly complaining about its value. The end result is that Chinese goods are more competitive in the world markets. As to the value of the Yuan, the Chinese government retains the peg that benefits their people. The Russians are sellers of gold, the Chinese have bought many more US Dollars than gold, and hard-pressed US consumers are sellers of physical metal.
Comment by Dr.G.G.Rajan on 28 October 2009:
Present economic situation of US and other similar countries indicates, there is no substitute for intelligent governance and mere borrowing from countries (in the form of oil or other commodities ) without any tangible production activities will lead to bankruptcy and economic disaster. US$ was taken as the standard currency since years. With it’s declining worth of dollar, the scenario may change.Inability to pay the wages due to recession, man power retrenchment, unemployment, lack of production / productivity and squandering resources on hi-fi items will doom the economy further and under these conditions US may not be able to survive as a super power and the developing countries may soon overtake US and command International Economy.
Comment by Sasimann on 30 October 2009:
What happens if the US and World decides that China is not cooperating by revaluing its currency,and the US goes in for
a devaluation of the Dollar to increase its manufacturing and employment.China as the largest holder of US securities will suffer the most unless it removes its currency’s peg to the Dollar.Inflation will arise intolerably in both US and China.For this reason it makes sense for China to let its currency float,
minimising the damage to the world economy.It looks as if China or the rest of the world will survive.
If China remains on top it will corner all the world’s resources,increase prices and make living hell for the rest of the world.Its high time the other countries got together and
fixed the Chinese currency Yuan.
If the WTO can dictate the terms of trade in the world it should also get the power to fix the value of world currencies like the Yuan which China does not allow to change,fearing unemplyment and unrest.
Maybe sometime later all trade will be done on a barter basis
without any country piling up huge assets like China has done.
Comment by David Spence on 31 October 2009:
I understand that there is $651 TRILLION evaportating now, that was wrongly ‘created’ by banks and other financial gangsters, and that will cause DEflation for about 10-15 years. So how does that affect the dollar when all these foreigners figure out that the dollar is the best investment? There IS no other option available currently, for the dollar. Of course, if the Man of Sin is to create a one world currency, this would be an ideal entrance, yes?
Comment by shailendra kumar on 5 November 2009:
If not stopped to china from devaluation of dollar, will prove diaster not only for U.S, But also for the rest of world. In this mess up situation, can world bank & UNO take the any action ? it is hard to think that once again we will be very soon to step into the great deprssion.