Currency War: Is the Fiscal Cliff Threatening the Dollar?

China dominates dollar

The coming US Fiscal Cliff, a large cutting of the deficit that will begin on January 1st and is expected to slow down the already weak economy is worrying policymakers and economists all over the world. Back in August 2011, a politically driven, bullshit infused “Debt Ceiling Crisis” happened. All of a sudden, Republicans got up in arms against raising the debt, something that they have done quite often. The political feud that followed made markets plummet: Dow plunged from 1287 to 1080, a whole 200 points over this shit, and FTSE plunged 900 points in just a span of 26 days. This goes to show how a political game can make everyone sore up the ass afterward. It stands as one of the dumbest moments in American history.

Now, the debt ceiling crisis was over a year ago, and a new kind of crisis is looming. On January 1st, President Romney, I’m just screwing with ya’, President Obama will have to raise lots of taxes, tariffs and cut a lot of government programs. Why? Because the stimulus acts he passed will expire, and there ain’t no room for more. What will follow is a significant slowdown of the economy, which will turn into the 2nd Recession all over again, like we’re not in one yet. But what might happen besides the stock markets and taxes is making China wet its pants.

If the Recession and gloom happens, this will make a terrible, the hardest yet blow yet, to consumer and investor confidence in US and consequently all over the world. Because the Euro zone is in a hell of a shitstorm that it can’t seem to stop, most investors go for the dollar as a safe haven for now. In a way, the Dollar holders are profiting off the Euro crisis, because dollars are appreciating. So if the recession happens, and something like the event of August 2011 returns again three fold, investors and currency speculators, not to mention central banks and governments will begin to drop their dollar reserves because of rapid depreciation fueled by nothing but fear.

Stuff like this happened before, but the unique perfect storm that is awaiting lies in the fact that the Euro, which makes up 24 percent of the worlds reserves, is also fucked by it’s never endless bond buying bonanza. China is anticipating an event like this for ages now, here’s why:

If the Dollar and Euro become unsafe and toxic, the only sure currency there’s left is China’s Renminbi and maybe Japanese Yen if they’re lucky.

China, if sufficiently confident in Dollar’s weakness, will make quite a few power moves with India, Russia and its friends in the Middle East to subsequently dump even more dollars, making it depreciate even more.

Investors will buy China’s Renminbi with Euros and Dollars which China will dump even more, which investors will pick up and buy more Renminbi, so on and so on.

This scenario is plausible because China is very powerful, very centralized and very much in control. It’s the boss of Asia, and has a cozy relationship with Russia, which in turn has its relationships in Europe.

Alright, so China enters the reserve currency war. Will it succeed?

Right now, Oil is exclusively priced in US Dollars. The US spent shitloads of money and influence to achieve this, not to mention it consumes 44% percent of the world’s Oil, so it’s a no-brainer which currency you should price it in. Because it’s priced in dollars, every country which needs oil, which is every country in the world, has to buy dollars to buy oil. That’s how US Dollar is still at the top. If something happens, if the Oil sheiks and Governments in the Middle East will be persuaded to turn on the dollar, the consequences will be dramatic.

But in reality, it’s almost impossible. US is the biggest importer of Oil in the world and has a huge influence, political and monetary, over the Middle Eastern oil producing countries. You have to destabilize the governments to their core to achieve any anti-US results. China is pretty passive when it comes to international relations, sabotage and so on. I don’t think it’s so desperate to fund terrorist cells and opposition in those governments. Any power grab that will be staged by China will be a purely “white-collar” mathematical one.

The coming Fiscal Cliff will be a shock to this system, a shock that it might not endure. It all comes down to trust and expectation, and when it’s low and pessimistic, and has been low for years now, there’s no more room to maneuver. We are living in a rapidly changing world, and the show that is about to start will be a big one.