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Towards a New Gold Standard? Or a Currency War with China?

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This article was originally published on New Eastern Outlook

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Rumors have it that the remaining months of 2020 may bring drastic and explosive changes in the world's financial system. But such "doomsday" rumors have been floating around every beginning of fall during the last few years. Why? - The US dollar is getting weaker and weaker. It is not quite on a free fall, but still remains a major trading currency and a key world reserve currency. And for many economists that's difficult to understand.

However, it is unlikely that that the collapse of the dollar will come from one day to the next. That would not be good for the world economy, as still too many countries depend on the dollar.

Facts are,

i) China's foreign exchange reserves have just increased to US$ 3.112 trillion equivalent, of which about US$ 1.3 trillion denominated in US-dollars - and in general forex-reserves continue to grow;

ii) within short, possibly by the end of 2021, the Chinese yuan, or renminbi (RMB) could become the world's third largest reserve currency, after the US-dollar and the euro, surpassing the Japanese yen and the British pound, reported by CNBC;

iii) according to Morgan Stanley , at least 10 regulators (i.e. Central Banks and similar forex regulating institutions) added the yuan to their reserves in 2019, bringing the total to 70 - and rising; and

iv) according to the FED, the US economy could lose in excess to one third of its GDP up to the end of 2020 or mid-2021, while China's economy is expected to grow by 1.3% (IMF) in 2020, and by China's own estimate up to 3.5%.

Given the dismal covid-related world economy collapsing, and with China being the only major economy expected to grow this year, the number of yuan reserve holders may increase drastically by the end of 2020 and especially through 2021, suggesting that central banks around the world realize that for their financial stability, they must increase their yuan holdings significantly in the foreseeable future. This means shedding other reserve currencies, like the Japanese Yen, the British Pound, but especially the US-dollar. For example, Russia has dumped the dollar, reducing her dollar debt-holdings by 96%.

The Russian Trade Minister, Denis Manturov, called on his BRICS colleagues to increase their trading in local currencies instead of US dollars. Trade in national currencies is a key aspect of cooperation of the five-nation alliance that includes Brazil, Russia, India, China, and South Africa and it is an effective way to dedollarize their economies.

China and Russia and many of the Shanghai Cooperation (SCO) countries are trading for many years already in their local currencies, or in yuan, especially cross-border trading, but they are also promoting currency swap arrangements with other countries, eager to escape the iron fist of sanctions of the United States.

In an interview with MarketWatch, senior fellow Stephen Roach at Yale University and former chairman of Morgan Stanley Asia, says coronavirus may cause a dramatic decline of the US dollar in the near future - "In a Covid era, everything unfolds at warp speed." Roach also predicted an up to 35% drop of the dollar against major international currencies. He adds, given today's economic outlook, this might happen rather quickly.

Indeed, while western economies are struggling keeping afloat, China is preparing to launch a new international currency, the digital, gold-backed, possibly crypto-RMB as an international payment and reserve currency, completely outside the dollar-dominated SWIFT system. The new digital RMB money is currently tested in several Chinese cities with positive results.

The People's Bank of China - China's Central Bank - recently revealed plans to have its sovereign digital currency ready in time for the 2022 Winter Olympics. The international rollout could actually happen much earlier, possibly in 2021, or earlier if warranted by international monetary events. In any case, the new trading currency may very likely find an astounding attraction by many countries that are eager to de-dollarize and get out from under the boot of threats of sanctions by Washington.

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Peter Koenig is an economist and geopolitical analyst. He is also a water resources and environmental specialist. He worked for over 30 years with the World Bank and the World Health Organization around the world in the fields of environment and water. He lectures at universities in the US, Europe and South America. He writes regularly for Global Research; ICH; New Eastern Outlook (NEO); RT; Countercurrents, (more...)
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