“This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.” —Larry Summers, Harvard professor and past U.S. Treasury Secretary, wrote in an April Washington Post article.
The global economic and political power tides are shifting from West to East.
China is flexing its economic muscle and the balance of global power scales are beginning to tip in their favor. This month China announced the formation of the Asian Infrastructure Investment Bank (AIIB), an organization similar to and designed to compete with the U.S.-led World Bank.
Chinese government officials outmaneuvered Washington and convinced a number of major U.S. allies to join the Asian Infrastructure Bank as founding members. The move has raised questions about American political clout on the world stage and also increased tensions with our European allies.
A total of 57 nations signed on with China as founding member states, including Russia, India, Great Britain, Germany, France, Australia, New Zealand, Canada and South Korea. The U.S. and Japan are the only major nations conspicuously absent from the list.
The political gridlock in the U.S. may be part of the reason for the formation of the AIIB. Congress failed to approve International Monetary Fund (IMF) reforms that would have given China more clout and voting power. Snubbed by western leaders, China forged its own path in its goal toward larger global political and economic dominance and did so by founding the new AIIB. The AIIB will be used to finance new infrastructure investments in China and the larger Asian region, with initial capital expected to total over $50 billion.
China: The Rising Power In the East
China boasts the world’s second largest economy and is home to the largest share of the world’s population. However, their desire to have an equal say at the global table has been denied by organizations like the International Monetary Fund and the World Bank.
Recent years have seen explosive economic growth in the Asian region. All while China is still developing its peasant economy with further growth expected in the years to come.
“Asia’s share of world GDP has grown massively since the early 1990s to about 17 percent in 2012 from less than 5 percent in 1992. Even as GDP growth turned sharply negative in advanced economies during the Great Recession, real GDP in developing Asia continued to grow more than 7 percent annually throughout this period. Moreover the region’s 3.4 billion people account for nearly half the world’s population,” wrote Wells Fargo economists in a research report.
European Allies Losing Confidence In America
The creation of the Chinese led AIIB and the willingness of American allies to sign on may mark a watershed moment for the U.S. dollar and its role as the world’s reserve currency. This historic event exposed a major failure by U.S. policymakers in allowing our allies to sign on with the Chinese. Suggesting these European powers may have lost confidence in America’s ability to steer the global economy going forward.
U.S. Could Lose Its Reserve Currency Status
This on-going power shift from West to East leaves the United States vulnerable to a number of potentially catastrophic economic events in the months and years ahead. With total U.S. debt currently over $17 trillion, our nation is reliant on foreigners to buy U.S. government bonds to finance our debt and deficit.
The U.S. dollar is the world’s reserve currency, which means nations need dollars to finance their exchange of global goods and services trade, especially oil. Being the global reserve currency gives the dollar a huge advantage by forcing nations around the globe to purchase and hold U.S. Treasury bonds. Can you image the huge impact that losing that status would create?
A New World Order?
China has indicated its desire to internationalize the use of its currency in order to increase its power in the global monetary system. It is no secret that China would like to squeeze the U.S. dollar out of the global trading picture- in fact they are moving closer and closer by conducting an increasing amount of its trade in the yuan.
In 2009, the Chinese government first allowed international trade to be settled in the yuan, and trading interest has exploded. Nearly 20 percent of Chinese trade is now settled in yuan. That number has grown exponentially since 2009 and the trend points even higher. China and Russia are already largely bypassing the dollar in their bilateral trading and even countries like Australia and Japan are moving away from the greenback.
If the dollar were to begin to lose its dominant role in global trade, foreign nations would no longer need to purchase or hold dollars. This could lead to a dramatic collapse in the value of the dollar and also trigger a massive spike in U.S. interest rates if the demand for U.S. securities waned.
Gold: Prepare And Protect Your Assets Now
If the U.S. dollar begins to lose its status as the world’s reserve currency it could plummet in value. With the Federal Reserve printing dollars at unprecedented pace a waning demand could have a catstrophic effect. Gold is a hard asset that can hedge against a collapse in the dollar’s value. The Chinese and the Russians have been voracious buyers of gold in recent years. Significantly, the Chinese have halted all external gold sales and are hoarding their domestic gold production within their own borders. As Eastern powers look to spurn the dollar and the international community begins to pivot toward China, the American economy is increasingly vulnerable. Gold has a historical inverse correlation to the dollar and a plunge in the greenback could send the yellow metal skyrocketing higher.
Now is the time to protect and build your financial assets. Gold could provide a safe-haven for U.S. investors to protect against the economic storms forming on the horizon. Learn more about investment options in precious metals now.
Advantage Gold focuses on empowering and educating investors and we pledge to help you make informed financial decisions that will help you secure the type of retirement you have always dreamed about. Please reach out to our experienced precious metals executives with any questions that you might have about investing in gold and the process of setting up a Gold IRA. Call us today at 1-800-341-8584 to get started.Tags: China rising, global economic power, global economy, power shift, US currency strength