The Fall Of The Dollar Based Monetary System: Russia Puts The Avalanche In Motion

It is truly astonishing how much trust people have in the establishment. Almost everyone believes that central planners are focused on defending the best outcome for society. In the same respect, almost everyone nowadays believes that “things are contained.”

Looking under the hood, it appears that several worrisome trends are going on. Examining those trends, one can only conclude that they are building up momentum. But make no mistake, momentum, in this case, is not in the right direction.

We are talking about our monetary system, one of the most invisible and misunderstood concepts related to money and markets. The dollar hegemony, which has held for more than 4 decades, is showing serious cracks. At the center of this trend is Russia. Do not confuse cause and effect. Although mainstream media tries to paint a different picture of things, sharp observers understand that Russia is simply the trigger that will, very likely, set an avalanche in motion. The outcome, in this context, is the fall of the dollar as a world reserve currency.

Trends that are breaking the backbone of the dollar based monetary system

We have detected three different trends by analyzing the events and announcements in the last couple of months. Do not confuse ongoing with imminent. These trends are so fundamental in nature that it takes a long time till they have run their course; so don’t expect an immediate fall of the dollar (although we should never exclude anything).

Trend 1: Russia and China are becoming very strong allies

Both Russia and China have been growing fast in the last decade, at least economically. Combining the forces of both countries is really a global economic powerhouse, with several unique strengths, in particular in natural resources, energy, aerospace and defence. The world simply cannot ignore this, and the US cannot simply eliminate this duo by tactics and diplomacy.

As several sources have reported lately, one of which being RT, Russia and China have been growing economically closer towards each other.

Russia’s trade turnover with China is $88.8 billion per year and it is expected to be boosted to $100 billion by 2015. China promised to invest about $20 billion into domestic projects in Russia, mainly focusing on infrastructure. In turn Moscow decided to renew sales of Sukhoi Su-35 fighter jets. In the next 25 years Russia will export more than 700 million tons of oil to China as part of the $270 billion deal between Rosneft, Russia’s state-owned oil company, and China’s National Petroleum Company. Russia’s top natural gas producer Gazprom plans to start supplying China with 38 billion cubic meters of gas per year by 2018, which is around a quarter of Russia’s exports to Europe. Also Moscow and Beijing are thinking of abandoning the dollar as the payment currency in regional deals.

 

Trend 2: BRICS countries are forming a new block, also monetary

With a very strong core being formed by Russia and China, the BRICS have economic power and are able to operate more independantly than ever before. Together, they are able to change the global order with the United States as the hegemonic power.

Peter Birle, head of research at the Ibero-American Institute (IAI) in Berlin, says: “”The BRICS countries are a group of nations unsatisfied with the international order. The importance of BRICS could rise if Russia remains permanently excluded from the G8.” According to Birle, the five emerging countries seek to permanently upend the power constellations established in 1945 and relativize the US position. “All these countries view themselves as emerging powers with a great future ahead of them,” he said at the 15th Stuttgarter Schlossgespräch, an annual conference involving a panel of international social science, culture and politicis expert. This year’s talks focused on the relationship between Brazil and Europe.

From DW in Germany:

Rousseff’s predecessor Luiz Inacio Lula da Silva, in office from 2003 to 2011, had established a counterweight to the political dominance of the US in Latin America by expanding the so-called south-south cooperation. Growing trade among emerging markets resulted in China replacing the US as the primary buyer of Brazilian products in 2009. Since 2012, the Chinese have also been Brazil’s most important import partner.

For Rousseff, the political and strategic cooperation with China is even more important than the growing trade between the two countries. Brazil views the participation of Chinese President Xi Jinping at the BRICS summit in Fortaleza as an absolute priority. His official visit is the first of a Chinese head of state in Brazil and in the region. After the BRICS summit, a meeting is planned with the heads of state of the Community of Latin American and Caribbean States (Celac).

The Ukraine crisis is accelerating the strategic orientation of Brazil toward Asia and Africa. It appears the greater Moscow’s isolation, the better the coordination among the BRICS members. Neither Brazil nor China, India or South Africa have commented on the events in Kyiv or Crimea. The principle of nonintervention has clearly welded the otherwise heterogeneous countries together.

China plans to set up a stable long term partnership with Brazil and other Latin American countries for oil and natural gas projects. China’s Foreign Affairs Minister, Wang Yi said recently that “Cooperation with Brazil and other Latin American countries has great potential as China imports a large amount of oil and natural gas, for which demand is  long term.”

To facilitate the increased trade between emerging countries, it should not come as a surprise that those countries are working on their own monetary system. The BRICS countries have made significant progress in setting up structures that would serve as an alternative to the International Monetary Fund and the World Bank, dominated by the U.S. and the EU (source):

A currency reserve pool, as a replacement for the IMF, and a BRICS development bank, as a replacement for the World Bank, will begin operating as soon as in 2015, Russian Ambassador at Large Vadim Lukov has said.

In addition, the BRICS countries have already agreed on the amount of authorized capital for the new institutions: $100 billion each. “Talks are under way on the distribution of the initial capital of $50 billion between the partners and on the location for the headquarters of the bank. Each of the BRICS countries has expressed a considerable interest in having the headquarters on its territory,” Lukov said.

 

Trend 3: Yuan is gaining trust on a global level, bypassing the dollar

Very recently, Germany started trading bonds backed by the Chinese currency, the Yuan. Frankfurt is joining London, Singapore and Hong Kong in the fast-moving market for bonds denominated in the Chinese currency.

From DW in Germany:

Germany’s KfW development bank announced it was issuing a two-year bond with the volume of 1 billion renminbi at the Frankfurt Stock Exchange. The development underpins Frankfurt’s bid to become a key offshore center for facilitating trade transactions and investments in renminbi.

China first authorized the sale of bonds denominated in yuan in 2007. They are called “Dim Sum” bonds after the bite-sized delicacies in Chinese cuisine. But they have become a huge boost to the popularity of the currency. The Society for Worldwide Interbank Financial Telecommunication says the renminbi is now among the top ten most-used currencies for global trade payments, overtaking the Swiss Franc to occupy position seven in February.

Furthermore, some analysts observe that the Yuan IS already a reserve currency. That conclusion is based on the fact that at least 40 central banks have invested in the yuan. Twenty-three countries have publicly declared their holdings in yuan, in either the onshore or offshore markets, yet the real number of participating central banks could be far more than that, said Jukka Pihlman, Standard Chartered’s Singapore-based global head of central banks and sovereign wealth funds.

According to SCMP, Pihlman, former advisor to the International Monetary Fund advising central banks on asset-management issues, said at least 17 central banks had invested in yuan assets without declaring they had done so.

Also, as reported by Testosteronpit, Germany and China closed an agreement which spelled out how the two central banks would cooperate on the clearing and settlement of payments denominated in renminbi – to get away from the dollar’s hegemony as payments currency and as reserve currency.

This “renminbi clearing solution will be an important step for China to internationalize the renminbi and ditch its reliance on the dollar. It will be located in Frankfurt; that the city is “home to two central banks,” Bundesbank Executive Board Member Joachim Nagel pointed out.

As a world payments currency, the renminbi is still minuscule but growing in leaps and bounds: in February, customer initiated and institutional payments, inbound and outbound, denominated in RMB accounted for only 1.42% of all traffic, but it set a new record,according to SWIFT.

It was “a major step forward in intensifying Germany’s economic relations with China,” said Bundesbank Executive Board Member Carl-Ludwig Thiele.

 

Saudi Arabia has the power to make or break

As we pointed out in Signs of A Cracking Dollar Hegemony, confidence is the basis of the dollar based world reserve currency. Each sign of loss of confidence will be critical in the deterioration of the dollar’s leading role.

According to Ron Paul, we should particularly watch for the relationship between the US and Saudi Arabia. The Saudis, with their unprecedented language towards the US, could become a turning point. As soon as we hear US officials talking about the “need” to transform the monarchy in Saudi Arabia into a “democracy” it could really mark the end game.

This view was recently confirmed by Jim Rickards, who explained it as follows:

Saudi Arabia feels stepped in the back by what the US President did in December 2013. He sort of annotated Iran as a regional power, green lighted Iran’s nuclear ambitions. So there were some concessions from both sides, and Iran got tens of billions of dollars which they really needed. That is why Saudi Arabia feels betrayed. The petrodollar from Nixon and Kissinger, going back to the 70ies, was that “we would protect your national security and they would support the dollar by pricing oil in dollars.” Everyone needs oil, which means everyone needs dollars. If Saudi Arabia changes that, for instance by allowing euro’s or yuan, that pulls the rug out of the dollar, in part. Russia wants to get away from the dollar, they said so (the currency in Crimea right now is the Ruble), and China has said the same thing. They are both building up their gold reserves as a hedge. So if we are inflating the dollar (which equals taking wealth from China through inflation), their gold would be more valuable, which is their hedge position. All these points are important straws in the wind: they all weaken the dollar.

Gold, being the antidote against the falling dollar, is a must have for every investor who is serious about his future. Ideally, as we have said for a long time, precious metals should be held in physical form outside the banking system.

 

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