Uncle Sam can Sing Chicken Little's song now – The Sky has Begun to Fall

Thursday, May 21, 2009

The seeds are being planted for the removal of the dollar as a reserve or so it seems this fine Tuesday morning. I woke up to read in the Financial Times that both Brazil and China will seek to use their own currencies in trade rather than the popular US Dollar. What this means is that instead of China buying goods from San Paolo using the greenback, the Brazilians will accept the Renminbi and when purchasing goods from Beijing, the Chinese will accept the Real. This has huge implications and I will explain why.

Although this is a small deal between an economic mammoth and a moderate sized country, it opens the doors for other countries to do the same – it sets the precedent. And while it is not necessarily a Chinese or Brazilian declaration that they are ditching the dollar as a reserve, it allows them to begin scaling down their reserves as it is not needed for trade anymore. The Chinese have figured out a smart way to do this, without sticking a huge middle finger up at the US, and without making tsunami sized waves. This will be slow process, a backdoor to redefining the global monetary system without anyone seeing it happen before it is too late.

The US should have expected this, they are 12 Trillion Dollars in the hole and are only worth 14 trillion annually – a number that is certain to decline this year as a result of the slowdown. Being that there are only 800 Billion actual dollars in circulation (not including the fake ones that North Korea has been printing), this puts the US in a position similar to Rome eighteen hundred years ago – a dominant power in the world that those in need turn to for help yet on the inside, they are collapsing financially and are actually the ones in dire need of help.

We have never seen this before so it is hard to derive a historical reference that could give us insight as to how this will play out. But my Forex Online readers and Traders, I refer you to Zimbabwe as an example of what could happen if the proverbial crap hits the fan in the US.

Trade smart – and watch the Dollar today.


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