Below is our translation of an article from RIA Novosti with commentary and notes [in brackets] by Vince Dhimos.
Dmitry Orlov at the blog Club Orlov posted an insightful column reminding that empires eventually destroy themselves from within by incompetence, becoming corrupted by their own power, and their actions become less and less effective.
The US did a decent job of rebuilding Europe after WW II, where Germany and Japan eventually emerged as booming economies under US tutelage.
But then by the 50s, it was no longer feeling generous or helpful and did nothing for North Korea except bomb what was left of it into oblivion. In the 60s, the US was still simply grinding its foes into the dust, never helping Vietnam recover, for example. Of course, we must recall that the US did not win the Korean or Vietnam war. It was already becoming a decrepit empire at that early stage but only a few noticed that this was irreversible. Reagan floated his version of Make America Great Again to divert attention from the inevitable loss of US power and prestige. Nonetheless, the world now notices and MAGA II is not convincing any grown-ups.
We can take this a step further and apply this incompetence and corruption to efforts to remake the world through sanctions and embargoes, which were an even greater failure than military adventures because the US made the gargantuan mistake of using its precious dollar as a weapon. The lesson America never learned is that you can use a currency as a means of payment or you can use it as a weapon but you can’t do both for very long because the world will fight back, as it is doing now, with a worldwide dedollarization campaign. As we showed here, the US elites already see the dollar crash coming and are preparing an artificial devaluation, claiming that the aim is to boost US exports with a cheaper dollar. But that is not the real motivation. The elites know that the US debt has long reached a point of no return and is no longer manageable, so they want to devalue the dollar to enable repayment of the debt with cheap dollars – in other words, with a soft default, hoping investors won’t notice and will keep investing in Treasuries. The problem is, once the world sees this self-immolation of the currency, they will lose even more of the faith they once had in the USD and will buy even less US Treasuries. As our translated article shows, even old faithful allies and trading partners are reluctant to buy US bonds and the bond market reflects this, showing a low point in Treasuries sales. It is just a matter of time.
Day of reckoning: even US allies are ditching dollar assets
June 20, 2019
MOSCOW, June 20 - RIA Novosti, Natalia Dembinskaya. The share of the dollar in global currency reserves has fallen to a minimum since the beginning of the century. American government bonds on the balance sheets of the central banks of the world - the lowest amount in history. In April, amongst the record holders in the sale of treasuries was the closest ally of the United States - the United Kingdom. Why the world embraced dedollarization – from RIA Novosti.
To a minimum
In 2018, the dollar accounted for 61.7 percent of foreign exchange reserves of different countries. This is the lowest level in the last 20 years. As the European Central Bank notes in its June review, the dollar still remains the world's reserve currency, but its leadership has been significantly shaken.
Since the global financial crisis of 2008, when central banks held the maximum amounts of US currency in reserves, the share of the dollar has decreased by seven percentage points.
In 2018, US dollars were especially actively sold to developing countries. Argentina, China, Hong Kong, India, Indonesia, Thailand and Turkey jettisoned nearly 200 billion dollars’ worth of Treasuries. Some urgently needed cash dollars to stabilize their own currencies, others abandon US assets because of conflicts with Washington.
"The goal of many countries is to reduce dependence on the dollar in response to the American threat of sanctions," said the leading Turkish newspaper Sabah. “In Turkey, the US Treasury bond portfolio fell to a record low. Almost everything was sold off."
But the emergence of developed countries, including traditional allies of the United States, from dollar assets is a fundamentally new trend. For example, the United Kingdom in April cut US government bonds to 16.3 billion dollars all at once.
In general, China – the largest foreign holder of US debt (1.1 trillion dollars) – is taking the lead. Because of the trade war, Beijing got rid of 60 billion dollars’ worth of treasuries during the year, and sold another 20 billion in April, cutting stocks to a two-year low. Japan, the second largest lender to the United States, is not far behind: in April, Tokyo dropped its treasury notes by 11.07 billion.
Why China is preparing for the sale of US government debt and what will it lead to
The fear that China may withdraw from amongst America’s main creditors is growing. Analysts claim this scenario is unlikely. Inevitable in this case, a sharp devaluation of the bonds will cause more harm to the Chinese than to the Americans – and in general to the entire world economy.
However, as Bloomberg points out, Beijing can at any time reduce investment in these assets by several tens of billions for the sake of maintaining the yuan.
“If China starts selling US Treasury bonds, this will have less to do with new tariffs and much more with the regulation of its own currency,” Bloomberg quotes Columbia Threadneedle Investments analyst Gina Tannuzzo. When the capital drain becomes more intense, Beijing will have to protect the yuan and sell treasuries. "
Russia is considered one of the most active sellers of American assets. Back in 2010, Bank of Russia’s investments in US government bonds exceeded $ 176 billion. Since 2014, as Washington’s sanctions pressure increased, the Central Bank reduced its portfolio of treasuries, and by the beginning of 2019 only $ 14 billion dollars’ worth of these securities remained on the balance sheet.
According to the US Treasury, in April, Russia ditched another 1.6 billion dollars’ worth of US government bonds. Now the Central Bank has treasuries worth 12.13 billion dollars – at least since 2007. The Bank of Russia spent almost all the proceeds from the sale of dollar-denominated assets, on assets in euros and yuan.
"The share of the euro in Russia's foreign exchange reserves rose to 39 percent, the dollar fell to 27 percent, and the yuan jumped to 17 percent," a recent report by the European Central Bank says.
The same is happening in central banks of other countries. The International Monetary Fund recently pointed to a gradual decrease in the share of the dollar, along with an increase in the share of the euro, the yen and the Chinese yuan in the reserves of global central banks.
"Banks around the world continue to diversify reserves and divert them from the dollar," the IMF stated in a review of global trends.
As they jettison dollars, states are stocking up on gold. According to estimates of the World Gold Council (WGC), the volume of precious metals on the balance sheets of central banks increased by 651 tons over the past year - the highest figure since 1971, when the United States abandoned the gold standard. Almost half of this gold was bought by the Bank of Russia.
"Russia is quickly achieving results in an attempt to diversify the structure of gold and foreign exchange reserves, reducing the share of US assets," notes Bloomberg.
Now the gold reserve of the Russian Central Bank is estimated at 2,112 tons worth about $87 billion. This is a record for the entire post-Soviet history. Over the past ten years, the share of gold in the country's foreign exchange reserves increased from 3.5 to 18.6 percent.
“Gold is the hardest currency in the world, subject to only minimal natural inflation, and is good insurance against dollar fluctuations. It is a highly liquid resource, and large gold reserves strengthen investor confidence in the rouble,” points out the Neue Zürcher Zeitung.
The second largest buyer of precious metals is China, with a gold reserve of 1,853 tons worth 76 billion dollars. At the end of last year, Beijing, after a more than two-year break, sharply increased purchases, which led to a rise in price of gold to a semi-annual maximum of $1,300 per ounce.
Analysts explain: gold is also insurance against default of a US default. China and Russia are well aware that it will be very difficult for the States to pay off their debt obligations and, ultimately, the purchase of treasuries will be useless. The collapse of the American debt market is very likely, so Moscow and Beijing prefer to invest in gold.