China’s Announcement
The People’s Bank of China (PBOC) recently announced they will stop stockpiling US dollars, described as a time bomb without a timer. This dollar departure was also a recommendation from Nobel laureate Joseph Stiglitz posted on the Wall Street Journal 3 years before this announcement.
Yi Gang, a deputy governor at the PBOC, stated that it isn’t in China’s favor to stockpile foreign exchange reserves which is reported to total just over 3 trillion dollars.
As Renminbi (RMB) SWIFT payments have grown 17 fold over the past 2 years and anyone not native to China has the freedom to open bank accounts that handle RMB, this move may not be a direct attack on the dollar. But it is more likely a part of China’s strategy to make the RMB the world reserve currency.
China’s General USD Economic Coverage Leading Up To This Announcement
At this point, an announcement of this magnitude should be taken in context with previous economic stories leading up to this decision.
November
– South China Morning Post, “PBOC Announcement to stop stockpiling the US dollar”
– Economist, “Economic Success Has Given China Greater Weight…”
October
– Forbes posts: “4 Reasons why China Will Keep Buying Treasuries”
– RT posts: “Renminbi Rising: Is China’s ‘De-Americanized World” Taking Shape?”
– Tapei Times posts: “Asian Currencies On the Rise…”
– Slate (Matthew Yglesias) posts: “Stop Being Wrong About Chinese Bond Purchases”
– Daily Caller posts: “Yglesias is Wrong About China’s US bond Purchases”
In “Yglesias is Wrong About China’s US bond Purchases” Robert Murphy argues that China’s US bond purchases give them significant leverage over the US government. He continues in his post, written on October 24th, by saying, “Chinese constitute some 23 percent of the entire foreign holdings of U.S. Treasuries. Furthermore, the CRS report also indicates that between 2003 and 2012, the Chinese covered at least $40 billion of the U.S. budget deficit in a given year, with the exception of 2011 when China’s holdings of Treasuries slightly declined. In this light, it’s understandable why so many analysts are alarmed. If for some reason the Chinese government should decide to halt its purchases — let alone dump its accumulated holdings — of Treasuries, surely this would have serious ramifications.”
The ramifications could include the further devaluing of the dollar so interest rates rise and more money is required to purchase fuel, food, and other goods.
An interest rate increase already has US banks threatening to charge for holding bank deposits.
Other Countries View of the US Dollar
Disenchantment towards the dollar expands beyond China’s borders and shows up in Russia as Mikhail Degtyaryov, member of Russia’s controversial nationalist LDPR party, is actively trying to get a bill passed to ban the US dollar from Russia and predicts a dollar collapse could in 3 to 4 years or around 2017.
The US government’s list of the countries holding it’s Treasury Securities provides a different perspective on China’s announcement revealing all the countries and groups around the world who have purchased US securities. This table’s data is from September 2012-2013.
This Economist’s debt clock is a reminder that all governments in the world have some level of debt and near the bottom of the debt clock tool, is a paragraph that says:
“Does it matter? After all, world governments owe the money to their own citizens, not to the Martians. But the rising total is important… when debt rises faster than economic output (as it has been doing in recent years), higher government debt implies more state interference in the economy and higher taxes in the future…”
Coverage From Major American Media
What is equally troubling is the lack of coverage from major media outlets discussing China’s announcement. This news seems to be absent from all major news publications as discussed in the Wall St Sector Selector.
Connection to Bitcoin
Within China, the high savings rate seen among its citizens has been attributed to the peer pressure of other citizens saving, and the long term consequences of the security measures taken while living under one child rule. Anyone who doesn’t want all their securities denominated in RMB has diversified assets in several ways. Most likely China’s budding interest in Bitcoin is testing new waters to see how their savings fare with a virtual currency. While the exchange rate is expected to fluctuate with Bitcoin’s current small market size, Bitcoins attributes of being a fixed quantity, and impossible to steal without private keys, make it an attractive way to store savings.
For the US, this story shows there are several factors continuing to eat away at the value of the dollar including the perception of endless quantitative easing. Since there is nothing preventing the other countries from removing or reducing their holdings in US securities, Bitcoin can be used to store wealth as a hedge against a future where holding the dollar may cost more than it’s worth.
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