10 Reasons Why China Will NOT Be The Next Reserve Currency

China-Yuan-US-Dollar-54969I was recently asked if China would supplant the US as the world’s reserve currency.  

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.

Reserve Currency StatusWhat 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.
Zerohedge gold Reserve Currency
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.

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13 comments to 10 Reasons Why China Will NOT Be The Next Reserve Currency

  • Andrew

    “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.” I agree. The videos of the apache helicopters mowing down human beings did an enormous amount of damage as well.

  • Rainmaker

    CD, I agree with you, for the most part, however, there is a lot that can happen (and is happening) with respect to reserve currency status. As you stated above, I agree, the RMB probably will not supplant the USD as the reserve currency. However, I doubt that the USD will continue as the reserve as that process of change is also upon us, as we speak. So something will supplant the USD dollar, and that change is occurring as we speak. We hear use of the term “Basket of Currencies”, and/or something like that. Most likely a basket of currencies, precious metals, oil and other commodities. Or a kind of bourse/barter system will come into play (already in play) whereby there will be an exchange of commodities/goods/services that will at the end of the day (or end of the month) and any deficiencies in the trades will be evened up with commodities (metals, oil, LP gas etc.) or promises to even up at a later date (securitization). I use the analogy that there are a whole bunch of producing nations that are tired of being “beggar thy neighbor” ed to death and want a seat at the table instead of being thrown the scraps. All this is occurring as we speak.

    I believe you are correct in your assumption that eventually we will revert to decentralization. I hope that happens in my lifetime, certainly I hope it in my children’s lifetime, but a lot is going to happen along the way. There is going to be a lot of push back and payback. There is going to be a lot of pain before we get to that point. More than a lot. More that we can comprehend.

    Gold will play a major part, for sure. Probably will reign supreme again, as it always does so cyclically. Silver will probably be what it has always been, a more volatile and better performer than Gold. Hopefully in a moon shot kind of way.

    Rambling, I guess I have to get to the point. IMHO, I don’t think any of this was an accident. Certainly not what happened to Western society over time; no way no how we got where we are and morphed into our current social constructs by chance. The big question is, what happens in the meantime? While some have made it to Acceptance (and what do you do once you get there?) The majority of society is still in Denial (or not even yet to that point and may not ever get there). We still have the Anger phase to get through, and that’s going to be something none of us can even begin to imagine. Its kinda like being on the Niagra River in a barrel……………….see you on the other side.

    • M1yman

      Rainmaker,

      I believe I can help, somewhat. Once you reach ‘Acceptance’ you ACT. If you’re not ready to ACT, you (re-)EDUCATE, quickly, then ACT. It’s that simple. (Hint: Buy Silver, Now!)

      As far as an ‘accident?’ No way. Since 1913, default (and the end of the West) was preordained. Thank Herbert Hoover. Everything else becomes academic and insignificant. Default is coming: Buy silver! Result: Survive, prosper.

      Best wishes and best of luck!!

  • jane

    I agreed with your analysis until you got to Mao. Mao didn’t cause the famine. His idea turned out to be a bad one, but still it was based on goodness. He had no way knowing that China would get hit with the worse drought in centuries. What happened was very sad, but with or without the “Great Leap Forward, many would have died.
    As for the “The Cultural Revolution”, we really do not have enough information on number of deaths. Also, supposedly Mao said himself that it went too far. Back in the 70′s, I was hearing things differently. Now anything I heard back then has been blacked out. Now it seems to me,everything is coming from people who didn’t like him. Remember after he died his enemies took control and arrested those who were still loyal to Mao’s ideas. We simply do not have the kind of information needed to make those kind of accusations. I really enjoy reading you emails. You may find out one day, Mao was not a bad person for his time.

    • Rainmaker

      Not only was Mao misunderstood, so what Josef Stalin. I heard that Stalin once even said that the Holodomor went too far. And Pol Pot was not that bad either, I mean, no one really understood what Pol Pot was trying to affect, and how his version of Utopia would benefit society.

    • robert

      That is right. It is just like so many bad things about Saddam were said even though he was installed by US intelligence. Saddam was also an ally during the Iran Iraq war and the wmds he supposedly had were sold to him by US defence contractors. I am not saying that any dictator is righteous but we have to question the decades of propaganda that was fed to us by corporate controlled media and elite dominated educational system before the Internet. Mao was much better than his predecessor Chiang Kai Shek who was funded by Anglo American opium gangs and was a ruthless totalitarian dictator. War criminal Winston Churchill was no better than Stalin or Mao. Not only that, there are more people in American prisons today than ever were in russia or the Soviet Union.

  • The Truth

    If anyone wants to know the order God puts gold and silver just look at Vs 8. He always puts Silver before Gold. Because in Hebrew Silver is Money!

    Haggai 2:
    6:For thus saith the LORD of hosts; Yet once, it is a little while, and I will shake the heavens, and the earth, and the sea, and the dry land;
    Heb 12:26,27 Exod 19:18
    7:And I will shake all nations, and the desire of all nations shall come: and I will fill this house with glory, saith the LORD of hosts.
    8:The silver is mine, and the gold is mine, saith the LORD of hosts.

  • Fernando Trouw

    For how long will you keep the group open to the public???

  • Kevin John Salazar

    Excellent points you have made. However the truth is that most people around the world prefer the USD. I will not be purchasing silver or gold either. When you own stocks and commodities, they are already of intrinsic value regardless of which paper is dominant. That being said, I will hold my American stocks, British bonds, German automobile, and keep my United States Dollars in reserve.

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