In the next month China and Japan (China’s main trading partner)
will no longer use the U.S. dollar as the only currency in trade with
each other. They will use the Yuan and the Yen directly with each other.
This will see the dollar removed from a large chunk of the world’s
trade - in itself, not a very large percentage, but a significant one.
It’s the start of a trend that is set to grow. We’ve no doubt that China
is tailoring its trade with all its trading partners to use the dollar
only so far as it is required to deal with the U.S. and other
dollar-dependent nations. Oil from Russia utilizes the Yuan and Rouble,
and Australia has arranged a similar deal.

The purpose of foreign exchange and gold reserves is to provide
‘global money’ (which includes gold) for potential rainy days. China
will therefore build up reserves in all the currencies that it will
trade in. All this will take place at the expense of the dollar.
Currently the U.S. dollar is used in around 76% of the world’s trade.
More importantly for the dollar, its use as a reserve currency (it
currently comprises 63% of global reserves) will diminish in line with
the growth of Yuan/other currencies.

To explain the process more clearly, when a Chinese company buys
goods from Japan, it sells Yuan and buys dollars in its place, for
delivery to the Japanese supplier. The Japanese supplier then sells the
dollars for Yen. This brings many risks to the transaction because both
the Yen and the Yuan are constantly moving against the dollar and the
dollar is driven by its own economy and pressures. By going direct,
these risks and extra costs are eliminated. Likewise the influence of
the U.S. over global trade is diminished, for this trade will no longer
require the vast amount of trade to go ‘via New York’. It also reflects
the changing power and influence of the US.

Earlier this month, we produced an article that discussed the
purchase of Iranian oil in the Yuan and Indian Rupee. U.S. influence and
power over world oil supplies has been complete because of the sole use
of the U.S. dollar in the oil price. But when Iran dropped the dollar
from its oil sales, this power was undermined. The U.S. tried to bring
India and China on board in punishing Iran over its nuclear
developments—but had extremely limited success. The U.S. then used the
SWIFT system of banking alongside its own banking system to block
Iranian oil sales and their payments. China and India used their own
currencies and clearing systems to bypass these blockades. As we pointed
out in the earlier article, this was not simply a financial development
but a shift in power to the East. The Iran story highlights the
importance of the development of the Yuan’s growing use.

China’s viewpoint is not to challenge or attack the U.S. but to
develop systems that will be in its own interests and independent of
outside political or financial influences. Unhappily for the U.S. this
is leading to the decline in U.S. power, both politically and
financially. With China and the emerging world accounting for over half
of the world’s population, the potential growth here will mean an
eventual huge curtailment in U.S. power and influence. The agreement
with Japan marks a major step forward in this process.

 

Present monetary system

Since the Second World War and through the Bretton Woods system to
today’s monetary system, the dollar and the U.S., with its power and
wealth, has ensured its continued success, sometimes against basic
fundamental reasoning - such as the ability of the U.S. to just print
dollar to cover its trade deficits on an ongoing basis, a sort of tax on
the rest of the world. Indeed, the dollar, with its link to oil, is the
tree-trunk of world money with all other currencies acting almost as
branches growing out of that tree. The steps being taken by China now is
another tree (currently a sapling) growing alongside it and eventually
no longer dependent on it. The worry is that this new tree is sapping
the old tree of its strength. We are certain that China will do all in
its power to ensure it minimizes the influence the U.S. has over its
financial system.

The dangerous period for the two trees is when the new sapling is
not strong enough to stand alone and the old tree is ailing. This is the
time when support is needed for both. That support has to be
independent of both for it to give effective support. That support must
convince all in the monetary world that it will give enough inherent
strength to shore up the weaknesses of both. But at the same time this
support must be a common denominator throughout the financial world.

If the transition of power and through changes is smooth, then a
new shape to the world’s money will be easily accepted. But in all of
man’s history, such transitions have been far from smooth or peaceful;
they’ve been marred by confrontation and breakdown and usually both. We
see this future for the monetary world in the face of these
developments. With the debt debacles on both sides of the Atlantic, the
developed world’s monetary system is vulnerable to such pressures as
never before. The monetary system now faces structural pressures that
are bound to lead to turmoil and deeper crises, not simply inside
nations, but ones that will shake up global foreign exchanges and breed
more and more uncertainty. The last few years of financial crises in the
developed world will seem tame by comparison. The separate interests of
the developed world and the emerging world will emphasize the
uncertainty and lack of confidence that will hang like a cloud over the
world’s changing money systems.   

—Internet