Currency war now? Well, it's been going on for decades.

China knows too well that a currency war has been underway for decades. The dollar has lost 97% of its value since the Fed came into existence. Now under the guise of QE, America is redoubling its money-printing press. America has been able to do this thanks to its "exorbitant privilege" as issuer of the world's leading currency which defines the majority of world trade, investments, and financial transactions.

Pending the maturity of her financial system, China has no choice but to put a large aprt of her hard-earned surplus into US treasuries. Alternative investment channels in China are not yet fully developed and "security" beats everything else. This situation is referred to as China's "dollar trap" by Paul Krugman and "China's tribute to the American empire" by Niall Ferguson, who points out that China's largesse was used to fund George Bush's tax cuts and the War on Iraq.

Now the situation is beginning to change. China's economy is set to exceed that of the United States within a decade. The Middle Kingdom is regarded as the largest trade partner by 124 countries, compared to 76 as regards the U.S..Click here This is because China remains at the center of the world's supply and production chain, supported by most of the World's busiest container ports at her eastern seaboard. Moreover, commensurate with her coming status as the world's largest economy, China wants the RMB to become fully convertible and attain the status of a global reserve currency at least alongside with the greenback, sooner rather than later.

See my Paper "Is the Renminbi the New Dollar? Chinese Monetary Policy and the Global Reserve Currency System" published by the Chartered Insurance Institute centenary publication in April 2012 here

Hence the RMB is fast being promoted in currency swaps worldwide and more RMB-denominated financial instruments are being issued. A new Shanghai Free Trade Zone and another in Qianhai near Hong Kong have just been set up to experiment with the liberalization of China's financial system and the free convertibility of the RMB. The aim is to come up with a robust model of financial liberalization and RMB full convertibility on the capital account which can be rolled not nationwide after three years.

Meanwhile, China (along with Russia and some of the Middle East energy producers) is buying a little less US treasuries, and instead, accumulating more gold, and acquiring hard assets such as commodities, resources and stakes in global companies. The G20 are also aware of the U.S. currency vulnerability and are promoting the Special Drawing Rights of the IMF in order to keep the world's financial and economic order on an even keel.

(James Richards, "Currency Wars - The Making of the Next Financial Crisis", Portfolio/Penguin, New York, 2011, Chapter 11 - Endgame - Paper, Gold or Chaos. The looming "dollar crisis of all times" is also the central theme of a series of presentations "The Hidden Secrets of Money" by GoldSilver.com here )

While there are talks about tapering of QE, it remains questionable whether America would be able or willing to turn off the spigot. In addition, Abe's Japan openly commits itself to a loose monetary policy to devalue the yen in order to jump-start its economy.

So beneath the apparent quiet, a currency war is already playing out The two main protagonists are the United States and China as the two superpowers are locking horns in various theaters during an epic transition of global power.

Comments

[Ground Zero Memorial]

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