Let’s start with some assumptions:
1. the world’s leading power usually has the reserve currency (Brittain and the pound – America and the dollar)
2. America currently has the world’s reserve currency because of the depth and breadth of her financial markets (it certainly isn’t because of the inherent strength of the fiat US dollar)
3. the Euro is just another fiat currency with the same problems that the US dollar has (unfunded welfare state that will be funded via monetary debasement)
4. China would like to be the next leading power in the world
Now let’s explore how China could provide the world with a reserve currency.
China doesn’t have the depth and breadth in its financial markets to provide a reserve fiat currency for the world. The world doesn’t trust China’s markets enough yet and there are still questions about the health of China’s banking system and about obsolete and useless state-owned industries being kept alive by the government(as the USSR did before its collapse).
So what could China do to quickly provide the next reserve currency for the world?
Back the yuan with gold both internally and internationally.
I believe that backing the Chinese yuan with gold would catapult the yuan to reserve status almost overnight. It would be the only non-fiat currency in the world and lots of smart money would start moving into the yuan and yuan-backed assets.
China will need LOTS of gold to back her currency. I have read analysts who maintain that China couldn’t obtain enough gold off the open market without causing gold to go to thousands of dollars an ounce. I understand that argument but I’m not willing to write off the Chinese that glibly – they are long-term thinkers and inscrutable business people. Underestimating them is probably a less-than-intelligent thing to do. (I also see occasional references to LARGE amounts of gold that got ‘lost’ during WWII – could this gold show up in China or some other country as backing for their currency?)
Are there any signs that China is moving towards a gold backed currency?
Not directly although the Chinese government is encouraging its people to buy silver and gold.
The government has been opening up the gold markets for the last few years making it easier for people to buy. Some of the Chinese banks are now able to sell gold to their clients and there are a few markets for trading gold.
Widespread ownership of gold by its citizens will provide another layer of depth and trust to a Chinese currency that is backed by gold. Remember that Americans had silver and gold money in their pockets when the US dollar was backed by those metals.
Summary: at this point it is just speculation that China will back her currency with silver and gold but it makes strategic sense to me that she will at some point – If China was angry at the US (because we bombed Iran where China has completed several MAJOR petroleum contracts perhaps?) she could take a multi-pronged economic attack on America:
1. start dumping the $800B in US treasury bonds that they hold as part of their currency reserves
2. stop buying additional US treasury bonds (the US needs $2B per day to fund its bloated society and a big chunk of this money has been coming from China)
3. announce to the world that the Chinese yuan will be backed by silver and gold on an international level
This type of action, I believe, would put the final nails in the coffin of the US fiat dollar and would probably hasten the collapse of the US empire.
China doesn’t want to lose the American consumer as a customer until internal demand from her own citizens (or from an Asian trade bloc) can replace us Americans. When that occurs Americans should be very afraid …
