The De-Dollarization Hoax, by Al Martin

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by Al Martin

The De-Dollarization Hoax

(7-24-14) Even though the US dollar is the world’s reserve currency, there has been much talk recently regarding nation-states using other currencies and moving away from using the dollar in trade.

Despite the recent cases of Turkey's de-dollarization discussions with Russia to move to settlement in local currencies, as well as the DW report that “China's Foreign Exchange Trade System (CFETS) said the Asian nation would start direct trade between the renminbi and the British pound on Thursday in which Sterling and yuan would be directly swapped without using the US dollar as an intermediary,” the US Dollar will remain the planet’s reserve currency – likely – forever. Why? Because when economic collapse comes, it’s going to strengthen the dollar against all other currencies.

It should be noted that the Chinese renminbi is still a restricted currency – and not free to float – and the Chinese will not make it a free-to-float currency, despite pressure by the United States to do so for years, until such time as it is a free-to-float currency and fully convertible, it could not possibly compete with the US dollar as the world’s reserve currency.

The People’s Bank of China (PBOC) is going around the Bank of International Settlements (BIS) since they can not clear or convert the RMB (renminbi) at the BIS since it’s not a free-to-float currency. China doesn’t have any gold reserves posted with the BIS because they won’t accept any deposits from China.

What the Chinese are now doing is trying to deal with smaller individual central banks into an arranged clearing relationship called central bank to bank, like they’ve done with the Bank of England (BOE) where they can convert RNB into sterling. The problem is that it has very limited impact because sterling is the tail wagging the dog. It’s not a large enough currency and they could not clear more than 6-7% of international trade in sterling.

This then becomes a sterling- RNB swap market that will have a daily quote but will not be tradable and -- this is key -- will not have a tradable spread. It’s being maintained only for the purposes of clearing commercial transactions in sterling. Of course, there’s nothing wrong with that, but it is of very limited help to the Chinese economy. It’s not getting around the dollar issue because they can’t clear large-scale commercial transactions since sterling isn’t a big enough market.

From a trading perspective, I know that with sterling-euro, sterling-dollar, and sterling- yuan, you can’t trade more than $10 billion – which is nothing in the realm of international trade. That’s within any given time. Even that kind of transaction can take 2-3 days to be crossed out.

In other recent news there was a report that Turkey prepares to De-Dollarize with local currency settlement with Russia... “In Sydney, the Minister of Economic Development of the Russian Federation Alexei Ulyukayev on the margins of the meeting of trade ministers of the Group of Twenty met with the Minister of Economy of the Republic of Turkey Nihat Zeybekchi.

“In 2013, the volume of trade between the countries amounted to 32.7 billion dollars. Russia is the second (after the EU) among foreign trade partners of Turkey, and Turkey - the eighth largest trade partner of Russia.

“As one of the measures to stimulate the development of trade and economic relations between Russia and Turkey, the Turkish side proposes to proceed in mutual national currencies.”

So is this significant? No, it’s just nickels and dimes. The relationship between Turkey and the Obama White House has been deteriorating since the last two elections that Turkish Prime Minister Erdogan stole. Even the ECB has backed away from Turkey, which has been trying for the last 10 years to become a part of the European Union. Erdogan admires Putin and wants to be “president for life” a la Putin. This is also a guy who’s stolen billions from the Turkish state treasury. In other words, Turkey’s not going to be able to become a “western power” which was Turkey’s desire – as long as Erdogan is in power. Like Putin, if this guy ever manages to lose an election, he would simply declare himself president for life, since he has enough military support to do that. The Turkish military will support whoever pays them the most money. The Turkish military is literally a private corporation within the country. It really isn’t a national armed force.

Another report called “De-dollarization continues: China starts direct currency trading with UK” by Voice of Russia claims “China is pursuing its quest to strip the US dollar of its global reserve currency status. After establishing the mechanisms for direct ruble-yuan trading and settlement, Beijing is now kicking the dollar out of its transactions with the Great Britain.

“Several years ago it was impossible to imagine a world in which direct currency trading between European countries and China would be possible. Even today most cross-currency trading is done via the US dollar… Russia, China and other countries that are deeply concerned with the privileged position of the US currency are seeking opportunities to circumvent the established practices.”

In this case you have to look at the source. It’s a Russian source and Russia has long been jealous of the dollar’s reserve currency status. They have come up with endless machinations to try to dethrone the dollar all of which have amounted to naught. The only thing they have ever managed to do which is what they’re doing now is pecking around the edges. Plus the Russians have consistently devalued the ruble in its exchange value visavis the dollar.

So what happens if this is indeed true that China will not use the dollar in transactions with the UK? First of all, it doesn’t threaten the US dollar as the world’s reserve currency. Also it’s minimal by virtue of the fact that the pound sterling is the tail wagging the dog. It’s not a large currency.

And what are limits of their transactions? Probably $10 billion which you can get off in the pound – any other currency cross trade. These are real crosses that trade in marketplaces. The RNB-pound cross isn’t going to be available to trade because the RNB is not a convertible currency. There aren’t any exchanges where it can be traded on.

The Bank of England will now convert RNB and that’s the only “direct” thing about it. It will maintain RNB liquidity in pounds so that transactions can be settled in pounds up to a certain level. However that provides very little help to the Chinese who will do anything to expand their trade. It’s not going to expand their trade with Great Britain.

So what could China do to bypass the US dollar? You would have to come up with a “Chinese Fire Drill” mechanism where you essentially do what China is doing – attempting to establish individual central bank-to-central bank convertibility spreads with all of the smaller central banks. The Chinese have already done this with the Royal Bank of Australia (RBA) which is the central bank of Australia. They’ve already done it with New Zealand. But all this does is to help to facilitate trade that they are already conducting. It does nothing to expand that trade and it does nothing to help them expand trade in other countries. It’s of limited use to them.

The Chinese RMB is not going to be any serious competition to the dollar in terms of international transactions for reserve holding capacities until such time as China allows the renmimbi to float. In other words it has to be a fully convertible free-to-float currency where it actually can trade on exchanges and where the People’s Bank of China is willing to convert the renminbi (RMB) to other currencies.

China is unwilling to do that because they know what will happen and what the consequences are. That’s why the United States has been pressuring them for years. The RMB would immediately rise in value relative to the dollar.

What the Chinese have been trying to do since 1987 is that they have these daily trading bands that they keep expanding 3% per annum against the US dollar -- and that has been to keep the US Congress off their back and not being declared currency manipulators. Therefore they have allowed the RMB to rise in value against the US dollar about 3% per year for about the last 10 years. This is just enough so that whichever party is in the White House can go to the anti-Chinese crowd on the Hill and declare them not to be currency manipulators. Even the Obama regime did that because they knew they had to.

Incessant internet rumors coming from the Unwashed notwithstanding, the practical reality is that China is never going to allow its currency free-to-float. China is still a country in which 83% of its GDP is comprised of exports – and its major trading partner – no matter what anyone says – is the United States.

And China is also the largest holder of US Treasury securities. If they allowed the RMB to float, the first thing that would happen is that they would begin to lose money in their US Treasury holdings. It’s something that they couldn’t blame the United States for.

If the RMB were allowed to float and would rise in value in relation to the US dollar, the Chinese holdings in US Treasuries in US dollars would immediately start taking a haircut.

China and the United States both have the same vested interests to maintain the status quo. If China allows the RMB too gradually rise in value against the US dollar and gradually increase its convertibility in what would be peripheral currencies, this would have to be done to facilitate China’s Foreign Direct Investment (FDI). This is the real motivation they have in making these arrangements with peripheral central banks -- to facilitate their foreign direct investment between $20-40 billion a month. In other words this would facilitate the flow of money coming into China. FDI is simply the amount of capital coming into your country and used to purchase Chinese income-producing assets. China depends on that foreign capital.

De-dollarization is just a hoax which is proffered mainly by gold bugs and conspiracy theorists and wannabe so-called “traders” who always lose money with their infamous stop-loss orders. Remember real traders don’t use stop loss orders…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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