Latest News & Current Events

While the US is Navel Gazing the world is De-Americanizing

As the US bumbles through its government shut down and a potential debt default looms, the country’s biggest creditors are no doubt getting a little warm under the collar.  Never in the history of the United States has the country failed to meet its financial commitments.

Financial markets do not like uncertainty and in 2011 when Democrats and Republicans in the U.S. Congress could not agree on a budget and spending measures, ratings agencies downgraded the countries AAA credit rating. The three main credit rating agencies have all warned, in varying degrees, that the United States rating could be cut should it hit an expected October 17 deadline when Washington is set to run out of cash, endangering its ability to pay its debt.

But this is not just about the US economy and government employees, federal programs or even government bonds. Emerging market economies have long been calling for better representation in the IMF and World Bank, along with the need to amend a global financial system that favors the US because the US dollar is not just America’s currency, but also the world’s reserve currency.  The booming BRIC (Brazil, Russia, India and China) countries have become more vocal on this front in recent years.

Back in March 2009, China’s central bank governor, Zhou Xiaochuan, called for the creation of a new reserve currency. The goal, he wrote, is to “create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run. Zhou said ”The world needs a new “super-sovereign reserve currency” to replace the current reliance on the dollar.

Now in a not-so-subtle commentary published by China’s official Xinhua News Agency on Oct. 14, China has renewed its call, concluding that “It is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

Key among its proposals: the creation of a new international reserve currency to replace the present reliance on U.S. dollars, a necessary step to prevent American bumbling from further afflicting the world.. “The cyclical stagnation in Washington for a viable bipartisan solution over a federal budget and an approval for raising the debt ceiling has again left many nations’ tremendous dollar assets in jeopardy and the international community highly agonized,” says Xinhua. “The world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites,” it adds.

The Xinhua piece goes beyond just toppling the dollar, stating that “Several cornerstones should be laid to underpin a de-Americanized world.” Along with a greater role for developing-market economies in both the World Bank and International Monetary Fund, “the authority of the United Nations in handling global hot-spot issues has to be recognized. That means no one has the right to wage any form of military action against others without a UN mandate”.

While US politicians continue to stare at their collective navels, these extremely reasonable proposals, in global terms, are gaining steam.  Beijing agreed Tuesday to make London a center for handling investment denominated in China's tightly controlled currency as the two sides set aside a spat over the Dalai Lama to expand financial ties.

Investors in London will be allowed to apply for licenses to invest yuan directly into China, British finance minister George Osborne announced. He said the Chinese central bank set an initial quota for London of 80 billion yuan ($12.7 billion).

Tuesday's announcement put London ahead in the race by global financial centers to gain a share of yuan-denominated business as Beijing gradually expands use of its currency for trade and investment. Hong Kong was the first financial center outside mainland China where trading of yuan was authorized. London banks have traded yuan since early last year.

"Now London is a major global offshore center for the trading of the Chinese currency," Osborne told reporters. Britain and China signed an agreement in June to have their central banks swap 200 billion yuan for 20 billion pounds.

The European Central Bank and Beijing announced a similar agreement this month to swap 350 billion yuan for 45 billion euros. That suggested Frankfurt also might be in to become a center for business denominated in yuan.

In the past the US has been able to thumb its nose at proposals to replace the US Dollar as the global currency, because despite the economic uncertainty, in a downturn people continued to flock to the security of the dollar.  The challenge however in defending a position is to continually thwart attacks and remain focused and vigilant.  In this sense the US is becoming its own worst enemy. While Wall Street, the US Economy and the US Dollar still retain their dominant global positions the DC shenanigans are doing a lot to help knock the country of its pedestal.

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