It is being reported that there will be a currency swap
between the central banks of China and Argentina. The swap is reported to be for a total of $11 billion, with
the first payment going to Argentina in the range of just under $1 billion by
the end of the year. It will be in
the form of yuan, the Chinese currency.
Argentina just recently defaulted on its debt obligations a
couple of months ago. This
announced swap will help Argentina to shore up its reserves. The yuan could also be used to buy
Chinese imports.
Of course, $11 billion, while quite significant for
Argentina, is a drop in the bucket for the U.S. government. I mention this because the U.S.
government, along with the Federal Reserve, is not involved in this
transaction. It is a drop in the
bucket, but little drops do add up over time.
You could also say that each snowflake accumulates to
eventually make an avalanche. It
takes millions of snowflakes, but they start to add up after a while. I say all of this in reference to the
U.S. dollar’s status as the world’s reserve currency.
I don’t think there is going to be an avalanche in the U.S.
dollar losing its reserve status.
It will likely happen more subtly, one transaction at a time.
It is interesting that China is finding more and more
countries that will deal in yuan.
Despite China’s problems, it is finding that the U.S. dollar does not
command the same respect as it once did.
Chinese Reserves
This currency swap is really something of a loan to
Argentina. Argentina is plagued
with debt and inflation problems.
Reserves have been draining away and it is difficult for the central
bank there to get dollars because of the unreliability of its currency.
So while every international transaction that doesn’t
involve the U.S. dollar is a small step away from the dollar as the reserve
currency, this deal with Argentina makes Chinese officials look a bit foolish.
China holds well in excess of one trillion dollars in U.S.
government debt. Long-term, this
may prove to be really foolish, as the dollar loses purchasing power due to the
Fed’s massive monetary inflation.
If the answer of Chinese officials is to start loaning money
to Argentina, then this is even more foolish. The U.S. government is in a great financial condition
compared to that of Argentina. The
U.S. dollar is a safe and stable currency compared to Argentina’s.
Chinese officials have been making significant changes in at
least starting to get away from the U.S. dollar for transactions that don’t
involve the U.S. The most
significant is Chinese and Russian officials making deals in rubles or yuan.
But Chinese central bankers keep buying up U.S. debt. Apparently they are adding a little
Argentina debt into the mix. If
they want to pile up reserves, why don’t they start buying more gold? While they have been adding gold to
their reserves, it is almost nothing compared to the holdings of U.S.
Treasuries.
We should keep watching for these international deals that
are being done without the use of U.S. dollars. Hopefully, for China’s sake, they will find some better
countries to do business with than Argentina.
But Chinese officials still believe in central planning and
Keynesian economics. They are
mercantilists who believe that they have to subsidize their export sector by
keeping a weak currency. And until
they stop buying U.S. Treasuries, I can’t take them too seriously.
If China starts trading dollars for gold in order to back
their currency, then I will start to really take them seriously. In the long run, this would actually
benefit Americans because it would help put a stop to their reckless government
and central bank. And obviously it
would help the Chinese people tremendously.