I believe the answer is no for many reasons.
- I do not believe the world will ever again have a global hegemon quite like the US in the post World War 2 era. With the advent of the internet, the informational playing field is being leveled. The US once had a monopoly on how to spread debt and death around the world. That playbook served the American empire very well over the past decades, but the world has watched and learned. The nations of the world that did not benefit from the current paradigm will not enable it much more. The recent example of Vladamir Putin acting as a peace maker against the Nobel Peace Prize winner for more war in Syria.
- We are heading for massive decentralization of power and the elimination of counter party risk. Power will devolve to the most local and responsive level. A fracturing of the global super power will allow regional actors to exhibit more regional influence, but it would take years for any one currency to begin to try to supplant the role of the current US Dollar.
- The collapse of the dollar will dramatically affect how people deal with risk. The Yuan is fundamentally no different than the dollar. It is a fiat, debt based currency, they will be subject to the same contagion.
- China also has to deal with the political and social reality of a global economy collapsing. China has been able to maintain political dissent through years of economic growth. Once there is a economic crisis, they will have to deal with a loss of control and increasing dissent. Any threat to the government would make that currency worth less on the international market.
- China would need to run massive trade deficits to properly fill the role as a reserve currency. China has throughout history been a very ambitious nation and historically runs massive trade surpluses. I do not believe it is in their culture to spend more than they make, unlike the consumeristic Americans.
- China has major demographic challenges including an aging population and the scar of the 1 child policy. The US was a young and growing nation when it became the World Reserve Currency. For a country as large as China, it is doubtful they will pursue a policy of growth.
- The US Dollar gained massive support for the world’s reserve currency on not only the backs of the generational spurt of the baby boomers, but in an era of extremely cheap energy and relative peace. The future will have much more expensive energy as the abundance of huge oil finds diminish like the staggering losses of Mexico’s largest field Cantarell. The US Dollar was the beneficiary of the world living in a denial which will stand in stark contrast to a harsh new reality coming.
- Another problem preventing the Chinese from having the world’s reserve currency is it’s image problem. Like it or not, other nations of the world are not going to embrace a currency with Mao on it. Mao is the largest mass murder of and estimated 80 million Chinese. While the Chinese populace have been indoctrinated to accept this, the rest of the world will not.
- This also touches on another factor that will prevent the Chinese from the global acceptance the US Dollar reached as the world’s reserve currency, who wants to really become Chinese? America was an idea that the world aspired to. China is not. It is a closed culture, that despite their tremendous work ethic, is not one that little kids grow up and want to be. The US had Hollywood sell the idea of America to the world and the corporations to profit off of a global aspiration to work with or become American. America has destroyed its image and has been a terrible role model. The rightful collapse of that power does not automatically transfer all of that power to the best supporting actor. China is asking the world to “de-Americanize” but that does not easily translate into the world becoming Chinese.
- America was once the largest oil producer in the world. When it went in decline they took the US off of the gold standard and supplanted it with the petro dollar. Where by they drove up the price of oil through planned oil shocks and had the Arabs recycle those dollars in to the American bond market. Oil producers have been straining under the weight of that agreement. Those that try to get out of it, find themselves attacked like Iraq and Libya. With the collapse of the dollar, it is doubtful that any major oil producer would fall for such a scheme of another fiat currency for their precious resource.
So the US Dollar will collapse and China may come out relatively stronger with its manufacturing, alliances and reserves, but I don’t believe it is wise to buy the Yuan or that it will become the world’s reserve currency.
What I do think will become the next world’s reserve currency is gold. Zerohedge loves to show the chart of the average life span of the world’s reserve currency. What they don’t show, is that all of those currencies were backed by gold. When those nations lost the supply of new gold through colonialism or debased currency, their currency and empires collapsed. The Chinese are importing gold like there is no tomorrow and might very well use their gold to prop up their currency, but in the aftermath of a global currency and economic collapse, humanity will no longer stomach ghosts of money and want the real thing.
Despite this logical progression, I would not own Chinese currency or even gold. While the majority of the world stores their wealth in counter party risk, debt based, generational ponzi scheme assets, smart money is buying gold simply because it is real wealth without counter party risk.
The smartest people are buying silver, because it has many more reason to be bullish than gold.
- Silver is the second most versatile commodity with over 10,000 uses in high value products in technology, medicine and energy.
- It has a 2,500 year history as money and in many languages silver and money are synonymous. With the collapse of the current economic order, silver will once again fill it’s natural role as money.
The biggest reason why people should be buying silver, while the rest of the smart money is buying gold, is the natural ratio between Gold and Silver. While I believe Gold will be a tremendous beneficiary of real purchasing power, silver will have magnitudes more. The current gold to silver ratio is 1:60 in dollar terms $1,200:$20, but it only is mined at a 1:9 ratio. This means that silver is a lot more rare than the market is currently pricing it at. Silver would need to go up 500% relative to gold to get to some sort of reality. But there are more factors to say that silver is going to do far better than that relative to gold.
Silver is being used as an industrial metal a since it is used in such small quantities on an individual basis, the major stockpiles have literally been destroyed. To the point that the best estimates I have seen is that since gold has historically been treasured and silver destroyed, there is currently less physical silver above ground than there is gold. When the economic facade collapses and all of the cards are shown, silver could reasonably reach a 1:1 ratio with gold. Silver is a once in a humanity opportunity ahead of the single largest transfer of wealth the world has ever seen.