In the run-up to the 2012 US presidential election, one political hopeful—investor Donald Trump—waged a “Maybe I will; maybe I won't” run for the highest political office in the US. In the end, he did not formally declare his candidacy, but did repeatedly state that one of his prime issues would be to deal with the arrogance of the Chinese. He repeatedly accused them of waging economic war on the US by manipulating currencies. (Not exactly a practice of which the US could claim innocence.)
It's no secret that the US is in a serious economic decline, and, as most countries do when they reach this stage, it is pulling all the rabbits out of the magician's hat that might possibly provide any delay whatever to the inevitable crash.
As we have stated in the past, one of those rabbits was for the Federal Reserve to lease to the bullion banks the gold that it held in its vaults. The bullion banks would then sell that gold. The Chinese government has been a significant, but not the exclusive recipient of that gold.
Meanwhile, the Federal Reserve has kept the gold on its books as an asset. It is known that a significant volume of the Fed's gold has been leased, but there is no official figure as to the total. Is it 25%? 50%? 100%? No one is saying, and, incredibly, it is not a major issue at present. Not even economists seem to be treating the leasing with great significance.
The leasing could mean one of three things:
1. The Fed is profiting from a sensible loan. It receives a 1% annual interest payment from the bullion banks for the leases. However, it is safe to assume that the Fed's ability to call in the gold is minimal, as the gold is now long gone from the bullion banks and is unlikely to ever return. Based upon recent US government /bank dealings the banks will most likely be forgiven for the failure to return the gold it has leased, if the issue ever comes to light.
2. The Fed knows that the gold is forever gone but believes that it will never need it in any case, as gold has lost its historical value. The US will continue its stance that gold is a barbarous relic. It will either maintain its policy of fiat currency in the form of a paper dollar or, possibly in the future, switch to an entirely electronic dollar.
3. The Fed is aware that the US is reaching its economic endgame, and giving the gold to its friends is merely a part of the winding-down. Historically, as major economies come to an end, a fire-sale of sorts invariably comes into play. Assets are liquidated to buy a bit more time, with the understanding that a final crash cannot be avoided.
It is highly unlikely that the first premise is the correct one, as the Fed must surely know that once the gold has been offered for sale, it would not be coming back. The second premise may be correct, if the folks at the Fed believe that the other major powers of the world are wasting their time by increasing their gold holdings—that fiat currency is here to stay and gold backing will be as unnecessary in the future as it is now. The third premise may be equally likely, but only time will tell.
So, is there a point at which the loss of America's true wealth becomes an issue? And, bear in mind, the Fed did not sell the gold. At a time when the US is broke, it, in essence gave it to the bullion banks. (The interest received is nominal.)
Certainly, at some point when it might be most effective, China may choose to announce that it has bought a major amount of gold from the bullion banks and actually state that amount. This would serve to put Americans on notice that their government has, quite literally, sold them out.
However, such a brash “in your face” tactic is not, generally speaking, the Chinese manner. Whilst the US government has become known as having the international approach of a schoolyard bully, thumbing its nose at other countries, the Chinese have a history of achieving their ends through subtler means. It is unlikely, therefore, that we will see any announcement that they are taking over as possessing the world's dominant money.
With regard to world trade, the Chinese quietly learned to provide products that were attractive to westerners, and to produce them less expensively. They did not announce that they wished to take over the American market, but, one day, Americans woke to realise that much of what was offered for sale in Wal-Mart was labelled “Made in China.”
And, so it may be with world currency. Under the understanding that fiat currencies are in jeopardy worldwide, China has not been idle in providing gold backing for the yuan.
And they are not alone. Russia, India, and other countries have been building their stocks of gold. Additionally, there have been numerous meetings throughout the Second and Third Worlds to prepare for the meltdown of the dollar, to assure that its replacement will not be yet another American fiat currency, but a more viable contender as a possibility for a default currency.
Not long ago, the yuan was forbidden to be used internationally. Now, it is just the opposite. Even first world countries, such as Australia and the UK, are now working with the Chinese to establish trade relationships based upon the yuan. Clearly, the writing is on the wall.
As we postulated one year ago, the Chinese may need to go one step farther. The US now holds great power over international monetary transactions through its control of the SWIFT system in Brussels. Although there has been not the slightest whiff of public news on this topic, it is entirely possible that China and its closest partners would, at an opportune point, announce the implementation of their own SWIFT system—offering two systems that the world's players could then choose between.
It would be likely that the US would refuse to recognise the system. If so, China and its partners would need to say, “It is not meant to replace your existing system, but to interface with it. If you choose to trade with our bloc, you will need to accept the interface.” If this were to happen, it would be a Mexican standoff of sorts, which the Chinese would win, as they could hold out longer than their opponents.
If this were an American development, it would not be unlikely that the US would insist that the new default currency have their name on it—the dollar. But, Chinese reason does not follow this path. Just as they have not demanded that Wal-Mart be rebranded, “Chimart,” they tend to be concerned with the actual control, not the appearance of control. Therefore, Americans are unlikely to ever have to use a “Chinese dollar.”
One final note to the reader: Should the above come to pass, the stranglehold that the US presently has on the world's banks is likely to break. Unless China sees a benefit to itself in allowing the US to strong-arm its banks with such efforts as FATCA, the US would no longer have the potential power to use SWIFT as an enforcement lever. Further, the resentment that exists toward the US, worldwide, for the bullying of FATCA, would attract them to align with China in their SWIFT system, eliminating the need to comply with this and other draconian demands.
I don't think I can overstress the importance of a possible alternate SWIFT system. Although, to my knowledge, no one is talking about it at all at present, it has the potential to make a major, major impact on the US ability to dictate its draconian rules to the world.
With a second SWIFT system in place, combined with the end of the US dollar as the world's default currency, the US dominance over international financial reporting may well end.
Editor's Note: You absolutely want to be internationalized before the US dollar loses its privileged role as the world's premier reserve currency and an alternative SWIFT system emerges. At that point, it is likely that desperate measures like overt capital controls will be imposed. Fortunately, there are strategies to internationalizing your savings that are within reach for people of modest means. To accomplish just that, International Man has outlined a low-cost strategy for storing physical gold in Singapore in private vaults—which completely disconnects your savings from the United States. You can see that strategy (for free) here.