Leveraging America’s Gold Reserves to Create a Monetary Transformation
Longtime reader Stefan Brunotte asked the following questions back on June 21:
“With the switch towards the RMB commencing, what time frame do you see for the depegging of the RMB to the USD? What do you believe has to happen before the Chinese are ready to take the full leap?”
We will use Mr. Brunette’s questions as the springboard for this article.
The obvious answer I have based on the title of this post is that China will not have to take action. It is possible that the Trump Administration will end the international reserve status of the dollar as a method of protecting America’s domestic economy from outside influence. That is how it could be sold.
The same externalized logic was used in Nixon’s statements back in 1971 when he closed the dollar/gold window and said that “America will not be held hostage by outside influences”, or something along those lines.
Each interest rate increase will strengthen the dollar and create dollar demand which will in turn cause a domestic slowdown in exports and job creation. Outside the country a strengthening dollar will put further downward pressure on emerging markets like China as capital outflows increase.
China might not be able to take the first action upon further analysis. The amount of USD denominated debt they hold puts them in a corner. A full and fast implementation of the SDR system with use of substitution accounts could eliminate this problem for Beijing, but this is unlikely as America would put up obstacles to a full implementation.
There will be a use for the SDR regarding sovereign debt, capital flows and reducing foreign exchange reserve accumulation, but the next moves are likely to involve the US Treasury taking action to remove the dollars reserve status.
The benefits of the US taking this action based on their decision and on their schedule will be huge. It gives them control over the process and transition of the dollars role. It will assist it setting them up for further monetary negotiations from a position of strength as the rest of the world scrambles to address to the new reality.
There is talk of Trump supporting the dollar with some form of gold standard which would strengthen their position. Contrary to the theories of the alternative media, America still has the largest gold reserves in the world and can leverage those reserves to fundamentally change how the international monetary system functions.
It would force other nations to adapt and would even force the IMF to add gold to the SDR composition, which in turn would assist in the exchange of other nations USD reserves for SDR quotas through the substitution account process.
The timing of this action by Trump and gang will align with the geopolitical strategies which are unfolding to manipulate and gain influence over and around the Eurasian continent. It will catch markets by surprise and will be the spark that starts exchange rate arrangement discussions.
America will even demand that China has to strengthen the RMB under new arrangements to assist in the rebalancing of the monetary system. Where most think that it is the rest of the world which will take action against America, it will be America that takes action against the rest of the world. It is a complete script reversal from what we have been anticipating.
Am I correct? We’ll see one way or another, but it does make a weird sort of sense and fits a pattern of American dominance. – JC
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JC Collins can be contacted at email@example.com