QUESTION: My question is this:
Russia and China making bilateral trade not using USD, China doing so with other countries etc. the buzz now is USD falling from grace. Yet is seems to me that as long as currencies out there are relating in any way with USD, and oil is priced in USD then in some manner they cannot disengage from it. So the question is: Is there any way to disengage from the USD?
Thank you for your time, attention and possible answer.
ANSWER: Trade is not the determining factor behind a currency’s value. Russia and China are trying to side-step the USD, but that is really a fleeting effort. The yuan is less that 10% of trade flows and the euro is even below the yuan. The key behind the dollar remains the simple fact that this is the RESERVE CURRENCY. What does that really mean? That is more than just saying so.
The USD is an extremely deep currency into which capital flows take place and park on a global basis. The euro failed in this regard because they did not consolidate the debts of all member states even though they have been federalizing Europe. Europe is no different from the state debt level in the USA – not ready for reserve status and way too much different security risks among the members.
The currencies of Russia and China are not ready for prime time. There is too much political instability right now and that undermines the value of a currency aside from the fact that people can trade in them, that is nice, but they then quickly covert to dollars. The process of dethroning the dollar is nonetheless underway. However, that will not be accomplished by trade. The way that will happen is only when we see the inevitable systemic collapse in government debts. That will begin in Europe, then hit Japan, and the USA will be last.
Both China and Russia had difficulty in selling their bonds this time around. Without the ability to park huge amounts of money into these currencies, there is no possible hope of undermining the dollar. Trade flows are just too tiny – it is the capital investment flows that count. Just ask yourself are you willing to buy bonds from China and Russia? Do you really think they would be a safer investment than the US? If you are honest in your answers you will see the reality distinguished from the same nonsense as usual that the dollar will collapse and somehow the rest of the world will just watch in amazement. These are people with opinions that are as biased as ever and have been saying the same thing all the time. That does not cut it when it comes to parking serious money.
Foreign countries issue debt in dollars to sell them taking on the currency risk themselves. China’s previous debt that it defaulted on during the Great Depression was likewise denominated in foreign currencies at that time. You can buy their bonds and Russian bonds from the 1930s for framing. You cannot do that with US bonds.