DE-DOLLARIZATION CONTINUES PAST THE HICCUP ECONOMIC COLLAPSE IN THE AUGHTS

The Global De-dollarization and the US Policies

In its quest for world domination, which the White House has been pursuing for more than a century, it relied on two primary tools: the US dollar and military might. In order to prevent Washington from establishing complete global hegemony, certain countries have recently been revising their positions towards these two elements by developing alternative military alliances and by breaking with their dependence on the US dollar.

Until the mid-twentieth century, the gold standard was the dominant monetary system, based on a fixed quantity of gold reserves stocked in national banks, which limited lending. At that time, the United States managed to become the owner of 70% of world’s gold reserves (excluding the USSR), therefore it pushed its weakened competitor, the UK, aside resulting to the creation of the Bretton Woods financial system in 1944. That’s how the US dollar became the predominant currency for international payments.

But a quarter century later this system had proven ineffective due to its inability to contain the economic growth of Germany and Japan, along with the reluctance of the US to adjust its economic policies to maintain the dollar-gold balance. At that time, the dollar experienced a dramatic decline but it was saved by the support of rich oil exporters, especially once Saudi Arabia began to exchange its black gold for US weapons and support in talks with Richard Nixon. As a result, President Richard Nixon in 1971 unilaterally ordered the cancellation of the direct convertibility of the United States dollar to gold, and instead he established the Jamaican currency system in which oil has become the foundation of the US dollar system. Therefore, it’s no coincidence that from that moment on the control over oil trade has become the number one priority of Washington’s foreign policy. In the aftermath of the so-called Nixon Shock the number of US military engagements in the Middle East and other oil producing regions saw a sharp increase. Once this system was supported by OPEC members, the global demand for US petrodollars hit an all time high. Petrodollars became the basis for America domination over the global financial system which resulted in countries being forced to buy dollars in order to get oil on the international market.

Analysts believe that the share of the United States in today’s world gross domestic product shouldn’t exceed 22%. However, 80% of international payments are made with US dollars. As a result, the value of the US dollar is exceedingly high in comparison with other currencies, that’s why consumers in the United States receive imported goods at extremely low prices. It provides the United States with significant financial profit, while high demand for dollars in the world allows the US government to refinance its debt at very low interest rates.

Under these circumstances, those heding against the dollar are considered a direct threat to US economic hegemony and the high living standards of its citizens, and therefore political and business circles in Washington attempt by all means to resist this process.This resistance manifested itself in the overthrow and the brutal murder of Libyan leader Muammar Gaddafi, who decided to switch to Euros for oil payments, before introducing a gold dinar to replace the European currency.

However, in recent years, despite Washington’s desire to use whatever means to sustain its position within the international arena, US policies are increasingly faced with opposition. As a result, a growing number of countries are trying to move from the US dollar along with its dependence on the United States, by pursuing a policy of de-dollarization. Three states that are particularly active in this domain are China, Russia and Iran. These countries are trying to achieve de-dollarization at a record pace, along with some European banks and energy companies that are operating within their borders.

The Russian government held a meeting on de-dollarization in spring of 2014, where the Ministry of Finance announced the plan to increase the share of ruble-denominated contracts and the consequent abandonment of dollar exchange. Last May at the Shanghai summit, the Russian delegation manged to sign the so-called “deal of the century” which implies that over the next 30 years China will buy $ 400 billion worth of Russia’s natural gas, while paying in rubles and yuans. In addition, in August 2014 a subsidiary company of Gazprom announced its readiness to accept payment for 80,000 tons of oil from Arctic deposits in rubles that were to be shipped to Europe, while the payment for the supply of oil through the “Eastern Siberia – Pacific Ocean” pipeline can be transferred in yuans. Last August while visiting the Crimea, Russia’s President Vladimir Putin announced that “the petrodollar system should become history” while “Russia is discussing the use of national currencies in mutual settlements with a number of countries.” These steps recently taken by Russia are the real reasons behind the West’s sanction policy.

In recent months, China has also become an active member of this “anti-dollar” campaign, since it has signed agreements with Canada and Qatar on national currencies exchange, which resulted in Canada becoming the first offshore hub for the yuan in North America. This fact alone can potentially double or even triple the volume of trade between the two countries since the volume of the swap agreement signed between China and Canada is estimated to be a total of 200 billion yuans.

China’s agreement with Qatar on direct currency swaps between the two countries are the equivalent of $ 5.7 billion and has cast a heavy blow to the petrodollar becoming the basis for the usage of the yuan in Middle East markets. It is no secret that the oil-producing countries of the Middle Eastern region have little trust in the US dollar due to the export of inflation, so one should expect other OPEC countries to sign agreements with China.

As for the Southeast Asia region, the establishment of a clearing center in Kuala Lumpur, which will promote greater use of the yuan locally, has become yet another major step that was made by China in the region. This event occurred in less than a month after the leading financial center of Asia – Singapore – became a center of the yuan exchange in Southeast Asia after establishing direct dialogue regarding the Singapore dollar and the yuan.

The Islamic Republic of Iran has recently announced its reluctance to use US dollars in its foreign trade. Additionally, the President of Kazakhstan Nursultan Nazarbayev has recently tasked the National Bank with the de-dollarization of the national economy.

All across the world, the calls for the creation of a new international monetary system are getting louder with each passing day. In this context it should be noted that the UK government plans to release debts denominated in yuans while the European Central Bank is discussing the possibility of including the yuan in its official reserves.

Those trends are to be seen everywhere, but in the midst of anti-Russian propaganda, Western newsmakers prefer to keep quiet about these facts, in particular, when inflation is skyrocketing in the United States. In recent months, the proportion of US Treasury bonds in the Russian foreign exchange reserves has been shrinking rapidly, being sold at a record pace, while this same tactic has been used by a number of different states.

To make matters worse for the US, many countries seek to export their gold reserves from the United States, which are deposited in vaults at the Federal Reserve Bank. After a scandal of 2013, when the US Federal Reserve refused to return German gold reserves to its respective owner, the Netherlands have joined the list of countries that are trying to retrieve their gold from the US. Should it be successful the list of countries seeking the return of gold reserves will double which may result in a major crisis for Washington.

The above stated facts indicate that the world does not want to rely on US dollars anymore. In these circumstances, Washington relies on the policy of deepening regional destabilization, which, according to the White House strategy, must lead to a considerable weakening of any potential US rivals. But there’s little to no hope for the United States to survive its own wave of chaos it has unleashed across the world.

Vladimir Odintsov, political commentator, exclusively for the online magazine “New Eastern Outlook”  http://journal-neo.org/2015/02/02/rus-dedollarizatsiya-i-ssha/

The USA Debt Time-bomb Tocking, Ticking, Tock, Tick…

Most of the world has an image of the United States as the one country of the advanced industrial world that took consequent action in the wake of the March 2007-September 2008 financial crisis. The result, we are carefully led to believe—via the politically ever-correct mainstream media like The New York Times or the CNBC financial network or Bloomberg—is that American banks and corporations today are back on their feet, healthy, robust. We are led to believe that eight years of Obama Administration economic genius have produced near-all-time low unemployment as the US leads the way among the G-7 to healthy growth. Only one thing wrong with this picture—it’s a complete, fabricated lie, fabricated by Washington with the collusion of the Wall Street banks and the Federal Reserve. The reality is pretty scary for those living in ignorance. The cracks now emerging in an unprecedented level of US corporate debt are flashing red alert on a new economic crisis, a very, very ugly one. 

Nobel economics laureate Paul Krugman once made the stupid argument that “debt doesn’t matter.” Dick Cheney back during the 2002 Washington budget debates over the wisdom of making new tax cuts amid huge costs to finance the new Washington War on Terror, made the equally stupid comment, “Reagan proved that deficits don’t matter.” In the real world, where debts of private households, of governments like Greece or Portugal or Detroit City, or private corporations like Chesapeake Energy or General Motors, effect jobs, technology, entire communities or nations, debt certainly does matter.

Corporate Debt Time Bomb 

Even more dangerous than the enormous rise in US National Debt since 2000, to levels today of over $19 trillion or 108% of GDP, is the alarming rise since 2007 in US debt of corporations, excluding banks. As of the second quarter of 2015 high-grade companies tracked by JPMorgan Chase paid $119 billion in interest expenses over the year, the most in debt service costs since 2000. Disturbing is that that was despite record low debt borrowing costs of 3%. US corporations took advantage of the Fed’s unprecedented near-zero interest rates to borrow up to the hilt. It made sense were the economy really improving. Now with a significant recession looming in the USA, the debt is suddenly a problem. i This is the true reason the Fed is unable to raise interest rates beyond the purely symbolic 0.25% last December. The US corporate debt pyramid would topple. Yet the zero interest rates are wreaking havoc for those investors or insurance companies invested in bonds for “security.”

Now signs are appearing that point to very serious developing corporate debt problems. Delinquencies–late debt repayments of 30 days or more–in the US corporate sector are rising significantly in recent months. In a genuine economic recovery, business debt delinquencies fall, as all ships are floated by a rising tide of recovery. Delinquencies are costly and avoided whenever possible. An early sign of a weakening economy on the other hand, is a rise in corporate debt delinquencies. Delinquencies lead to defaults lead to corporate bankruptcy of not reversed by an improving economic environment. And the real US economic environment is anything but improving.

A recent analysis by US economist Michael Synder compared business debt delinquencies in 2008 just before the Lehman Brothers collapse. Then, delinquencies were rising at a very frightening pace he notes, “and this was a very clear sign that big trouble was ahead. Unfortunately for us, in 2016 business debt delinquencies have already shot up above the level they were sitting at just before the collapse of Lehman Brothers, and every time debt delinquencies have ever gotten this high the US economy has always fallen into recession.”

According to another analysis by Wolf Richter, delinquencies of commercial and industrial loans at all US banks, after hitting a low point in end of 2014 of $11.7 billion, have begun to balloon. “Initially, this was due to the oil & gas fiasco, but increasingly it’s due to trouble in many other sectors, including retail. Between Q4 2014 and Q1 2016, delinquencies spiked 137% to $27.8 billion. They’re halfway toward to the all-time peak during the Financial Crisis in Q3 2009 of $53.7 billion. And they’re higher than they’d been in Q3 2008, just as Lehman Brothers had its moment.”

Richter also notes that the debt problems are spreading to US farms which today are very much a corporate business: “Slumping prices of agricultural commodities have done a job on farmers, many of whom are good-sized enterprises. Farmland is also owned by investors, including hedge funds, who’ve piled into it during the boom, powered by the meme that land prices would soar for all times because humans will always need food. Then they leased the land to growers.” But as Richter relates, “Now there are reports that farmland, in Illinois for example, goes through auctions at prices that are 20% or even 30% below where they’d been a year ago. Land prices are adjusting to lower farm incomes, which are lower because commodity prices have plunged.

Now delinquencies of farmland loans and agricultural loans are sending serious warning signals. These delinquencies don’t hit the megabanks. They hit smaller specialized farm lenders.” He notes that delinquencies of farmland loans jumped 37% from $1.19 billion in Q3 2015 to $1.64 billion in Q1 this year.

Zero rate bubble danger

Many think that the aim of the post-2008 Fed Zero Interest Rate Policy was to stimulate investment into the economy to avert a new economic depression. Far from it. Since the first onset of the US sub-prime real estate crisis in March 2007, total US corporate debt levels, according to Standard & Poor’s, has ballooned to an all-time high level of $6.6 trillion as of the beginning of this year. In the past five years since 2011 alone corporate debt, amid virtually free Fed-inspired interest rates after tax adjustments, has increased by an eye-popping $2.8 trillion, at least 40% more net and total debt than in 2007. In 2016 the rise in corporate debt, annualized, is running at an alarming $1.4 trillion annualized rate, nearly double the rate prior to the financial collapse of September 2008.

Had that rise in corporate debt been used, as was the prudent corporate norm until recently, to finance plant, new more modern equipment and other long-term productive assets, such debt would have generated an income flow that would suffice to repay the debt, usually with a nice surplus profit to boot. It would also have boosted job creation and real economic growth, not the faked US Government virtual GDP growth.

This corporate debt binge has gone to nothing so productive. Instead it’s fueling an out-of-control stock market bubble, as seen in the all-time highs on the S&P 500 stock index. Corporations are using their near-free debt to buy back their own stock shares, a dubious practice which benefits only the stock price of shareholders but adds not an ounce of net productive gain to the real economy. Or it has gone to finance corporate mergers and takeovers, which again do not add net gain to the real economy but rather the opposite—job cuts, plant closings and asset strips. Highly profitable for Wall Street and for financial operators, not for the real economy.

As a totality US corporations today have a far greater vulnerability in terms of levels of debt in relation to revenues or income than at the onset of the 2007-2008 financial tsunami.

The Federal Reserve, along with the European Central Bank and the Bank of Japan have reverted over the past two years to the unprecedented and ludicrous policy of zero interest rates to keep their financial Ponzi bubble inflating, not bursting. The ECB and Bank of Japan recently have actually gone to negative interest rates meaning banks pay the ECB or BOJ to place reserves in the central bank. The Fed is considering such a negative rate policy shift. Today it has been calculated that more than $13 trillion worth of government bonds globally now have negative rates. That’s more than one-third of all government bonds. That means someone buying those bonds and holding until it matures, will actually lose money. Only because major pension funds and insurance companies are required by law, originally for reasons of safe and prudent long-term investment, to buy only high-rated government bonds can the negative rate bonds find buyers.

Now, for the same reason, high-rated corporate bonds are being offered paying negative interest rates. Bloomberg Business reports that $512 billion worth of corporate bonds now have negative rates, 11 times more corporate bonds with negative yields than there were six months ago. With so much of government bonds paying negative interest, and now an exploding share of the US corporate bonds, the solvency risks of US pension funds and insurance companies is growing alarmingly in a chain-reaction follow-on effect.

The alarming warning signal of trouble in the US corporate bond market with soaring rates of debt delinquencies, and the fact that since the collapse of the US shale oil industry Wall Street and other major bank creditors have been tightening criteria for extending more debt, say to me that the US economy is on the precipice of a new debt default implosion that will make 2008 appear a financial market hiccup by comparison. Maybe this reality is behind the utterly irrational Washington hysteria against Russia and now against China. If you run out of targets from whom to rob assets peacefully through stock market and bond manipulations, try the old method of gunpoint. Only this time the intended victims are not reacting at all as victims, but as defenders of their sovereignty. Something new and unexpected by Washington and their Wall Street patrons.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics, exclusively for the online magazine “New Eastern Outlook”  http://journal-neo.org/2016/07/28/the-usa-debt-time-bomb-tocking-ticking-tock-tick/