Trump Shift to China: Dollar Protection Strategy?

US Deficit Spending Has Been Supported By Heavy Foreign Buying of US Treasuries.

Will Recent Dumping of US Treasuries by China and Other Nations Continue?

Do Chinese De-Dollarization Initiatives and a Proposed Gold Payments System with the BRICS Presage Game Over for the Dollar?

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Trump Meets With Chinese Premiere While Missiles Rain on Syria

While the United State was launching a missile strike on Syria, President Trump was eating chocolate cake with Chinese Chinese President Xi Jinping. Later the Trump administration announced that the United States will not label China a currency manipulator. While China remains on the U.S. currency manipulator watch list along with Japan (the largest holder of US Treasury Securities), Germany, South Korea, Taiwan and Switzerland, the label will not apply to it.

The decision to not label China a currency manipulator, despite Trump’s campaign promise to do so probably goes far beyond getting China to help with North Korea and perhaps reflects an enticement to buy and hold US Treasuries.

Game Over for the Dollar Predictions May be Premature

Two reasons China is probably not going solo with its BRICS partners down the yellow brick gold road:

1. Massive trade with the west and $1 trillion in holdings of U.S. Treasuries
2. They love credit too.

History of the Dollar as the World’s Reserve Currency

1944 US Dollar selected as word’s reserve currency at Bretton Woods New Hampshire.
1971 Nixon close gold window. (should have been GAME OVER here for the dollar, but wasn’t)
1971-present-deficit spending explodes
1972 Nixon visits China-“opens China” drive wedge between Russia and China.
1973-74 Petro dollar creation.
2009-2014/15 Federal Reserve Quantitative Easing/Zero Interest Rates
2013- De-dollarization begins.

In October 2013, China called for the world to “de-Americanize” because “the destinies of others are in the hands of a hypocritical nation that have to be terminated”.
2014-2016 China buys gold, sells US.Treasury Bonds

Why its not Over Yet For the Dollar

The dollar still has a near monopoly position in world trade and the U.S. has monopoly like military and economic power to enforce its monopoly.

1. China’s $1 trillion+ U.S. Treasury Holdings and Massive Trade with the West (the U.S. and its satellites)

Chinese Holdings of US Treasuries May 2015 - February 2017

Chinese Holdings of U.S. Treasury Securities increased $10 billion from November 2016- February 2017.

People's Bank of China Gold Reserves June 2015 - March 2017

The People’s Bank of China’s gold reserves are flat from October 2016 – March 2016

Trade with the West is More Lucrative Than Trade with the BRICS

The idea that the BRICs (Brazil, Russia, India, China and South Africa) are marching down an exclusive preset gold payments road where dollars are not used may be misguided. China must be acutely aware that the west accounts for the bulk of their exports. Indeed, the GDP of the United States, Eurozone, Japan and Great Britain is nearly EIGHT TIMES larger than the combined GDPs of Russia, Brazil, India and South Africa.

GDP of the Brics Nations in 2015

Total GDP of the BRICS Nations without China was $5.538 trillion in 2015.Source: World Bank

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GDP of the SDR nations in 2015

Total GDP of the SDR Nations without China was $41.593 trillion in 2015. Source : World Bank

Add in the GDP of other nations under U.S. aegis, Australia ($1.339 trillion), Canada ($1.552 trillion) and Switzerland (.67 trillion) Israel (.3 trillion) and Chile ($.271 trillion), another $4.1 trillion to the $41.593 trillion in GDP of the SDR nations and the total is $45.725 or MORE THAN eight times the GDP of the BRICS nations minus China.

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Chinese Credit Creation his record high

China loves credit. There is a misconception that because China loves gold that it is a sound money gold paradise. It’s not. Not withstanding its gold predilection, China is a centrally run top down credit/stimulus driven economy. China is not concerned with deficits, but rather in operating an economy that can keep it in power. (sound familiar?) At some point, China would probably like to emulate the US and become a net importer of cheap goods itself from other countries in Asia and Africa.

China, Part of the Club

They are all in the same fiat, money printing, low interest rate QE club.

BONUS- the US Treasury, unlike most other sovereign issued debt, pays a rate of interest.

The Dollar Index 2006 -2016

dollar index ten year chart

The Dollar Index hit a ten year high in early 2016.

The Dollar Index 1971-2016

Dollar index 1971-2016 chart

The Dollar Index peaked in the mid 1980’s after the Fed raised interest rates and the economy recovered.

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