Increasing numbers of national governments are abandoning the US sphere of influence. Opportunities from trade with Asia compare favourably with rising currency and banking risks in a dollar-centric world.
Against an imploding banking system in long-established financial markets, China’s renminbi looks like a safe haven. Thanks to a savings-driven economy, China’s consumer price inflation remained very low, when those of the western alliance soared.
Now we face a credit crunch, as banks struggle to reduce their operational gearing which has become uncomfortably high. Consequently, borrowing rates will be driven higher, taking interest rate control out of central banking hands. Higher interest rates and therefore bond yields due to a credit crunch will escalate the banking crisis, which is only in its early stages.
Consequently, central bank credit will be inflated to prevent the commercial banking network from collapsing and to fund rising government budget deficits. It is the prospect and realisation of these conditions which will lead ultimately to a collapse of fiat currency values, and foreign holders of dollars, euros and sterling are only beginning to understand the danger.
Geopolitics are now undermining the dollar
In recent weeks, the threat to the dollar’s hegemony has noticeably increased. Like rats deserting a sinking ship, growing numbers of countries are backing off from the dollar in favour of China’s renminbi, and to a lesser extent other emerging market currencies. China has brokered a peace deal between Iran and Saudi Arabia, and in turn the Saudis are now improving their diplomatic relations with Syria.
It appears that America’s divide-and-rule Middle East policy has been overthrown. Even Mexico is reported to be prepared to accept renminbi in defiance of its northern neighbour’s policies. And Brazil has always been the B in BRICS. Now Argentina has applied to join an expanding BRICS, alongside Algeria, Indonesia, and Iran.
Saudi Arabia, Turkey, Egypt, and Afghanistan are also said to be interested, along with other likely contenders for BRICS membership, which includes Kazakhstan, Nicaragua, Nigeria, Senegal, Thailand, and the United Arab Emirates. All of them had their finance ministers present at the BRICS Expansion Dialogue meeting held last May. And if they all joined, the expanded BRICS would have a nominal GDP 30% larger than the United States, represent over 50% of the world population, and control over 60% of global gas reserves.[i]
Following China’s diplomatic coup over the Middle East, President Macron of France and Ursula von der Leyen, President of the European Commission, visited President Xi in Beijing last week ostensibly to see if he could persuade the Russians to consider a peace deal over Ukraine. That got nowhere. But the Chinese appear to see France as a more important trade partner than the European Commission. While Macron got the full diplomatic treatment, von der Leyen who recently delivered a hawkish speech over Taiwan was side-lined.[ii]
Macron’s popularity with China’s leadership is undoubtedly connected with his longstanding policy of promoting diplomatic and trade relations between China and France, with China making substantial investments in France. And it was recently announced that a French exporter of LNG to China even accepted payment in renminbi instead of dollars.
Clearly, the Chinese took all this into account in fêting Macron. Furthermore, Macron told journalists on the flight from Beijing to Guangzhou that Europe must not be a follower of the US agenda regarding Taiwan, and that European nations should not become entangled in “crises that are not ours” (Daily Telegraph, 11 April). Subsequently, Macron’s press office sparked a row by trying to censor his earlier comments.
This episode suggests that France is distancing itself from EU unity over foreign policy, and one wonders how little it might take to fracture not just the official EU approach, which is more in line with von der Leyen’s position, but NATO as well. And we can guess at what Xi told Macron over Ukraine: stand up for yourselves as Europeans and do not act as American stooges. Then the Russians might talk but without the Americans at the table. Doubtless, this was the same message that Putin told Macron when he visited Moscow early last year.
Not only has China succeeded in securing diplomatic successes in the Middle East, but it has suddenly become the go-to hegemon for world affairs — hence Macron’s and von der Leyen’s visit. As well as BRICS, China is joint ringmaster for the Shanghai Cooperation Organisation. While her own economy’s GDP is second only to that of the United States in nominal terms ($14.7 trillion compared with $20.89 trillion) on a PPP basis China’s is significantly larger ($32 trillion against the US’s $23 trillion).[iii]
Furthermore, China is beginning to expand again with bank credit increasing, while bank credit in the United States is contracting. The signal sent to trade partners around the world is to align their interests with China rather than America. But the neutrals are also looking at the state of the fiat dollar based banking system, and most probably concluding that it presents systemic dangers which it would be wise to avoid.
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