China is getting much more vocal about its concern over nearly $2 trillion in dollar-denominated currency reserves. The dollar’s status as the global reserve currency is being called into serious question. Although it is taboo to come out and state directly that the dollar will soon be replaced, many economists carefully walk the fine line by pointing out unsustainable trade deficits, unfunded government liabilities, and ballooning national debt. They speak of a currency “basket” being a more desirable alternative to being exposed to any one singly.
Why is China so shaky in regards to its confidence in the dollar? After all, the U.S. Dollar Index shows signs of “strengthening.” Nevertheless, China has repeatedly “warned” the U.S. about its waning appetite for more zeroes. The U.S. retorts back weakly with accusations of China being a currency manipulator. And recently it has come to light that China’s gold reserves have nearly doubled since 2003. China is also quietly making trade with some partners in Renmibi (Yuan) rather than U.S. dollars. If China were a smaller country with closer ties to the United States, this would certainly put it in hot water. Other countries have tried to ditch the dollar in foreign trade as well. This has, shall we say, been more than frowned upon. Why? The dollar is essentially backed by oil. Oil is the one commodity that developed countries need to run modernized economies. After buy brics online the dollar’s break with gold, it needed some sort of legitimacy and relevance in the global marketplace.
To sustain dollar dominance, there were agreements made with the large oil producing nations to accept only U.S. dollars in exchange for their oil, thus creating an artificial demand for the greenback. This served to sustain it and kept it stable and useful in other trade as well. The current experimental break from trade in dollars by China is monumental. The buying up of gold by China and Russia is a telling sign. India has always prized gold. BRIC (Brazil, Russia, India, and China) makes up the world’s emerging markets, accounting for about 40% of world population. Should these countries pile into gold in a significant way (which they are currently in the process of), the yellow metal will exceed all expectations. In recent G-20 meetings, both Russia and China have proposed new global reserve currencies.