China's Renminbi Gains Trade Acceptance

China Gains 17% Of Global Trade in Renminbi

Speaking of China. You know. It wasn't that long ago that China's percent of global trade in renminbi was zero. But get this, you know all those currency swap agreements that I've been talking about for the past 4 years? Well, they generated 17% of the global trade last year! That's right folks, 17% of the global trade is now done in renminbi! Now, do those swap agreements begin to turn the light bulb over your head now that you hear that? And that percentage will only grow, as more trade partners have signed swap agreements in the past few months! 17% of global trade in renminbi. That's 17% less global trade in U.S. dollars, folks. That also means its 17% less U.S. dollar reserves that Central Banks need to hold.

And why has the renminbi / yuan grown so quickly? Ahhh grasshopper, it's all about the U.S. accumulation of massive debt, and what they'll have to eventually do to correct their mess. The Debt is the problem, as I've explained here for many years, and instead of getting better, it has only gotten worse. 

My view:

It seems appropriate here to reflect on the significance in the increase of trade in the Chinese currency, the Renminbi (or Yuan).

Like all nations at this moment in time, the Chinese currency is a "fiat" currency.  So in today's context, there is nothing unusual about it.  Why then is this headline significant?

As you may well know, dear reader, a fiat currency is a promise currency.  It's value is derived by the perceived ability of the nation to pay its debts relative to other nation's fiat currency.

As we see shift globally, from the US dollar - the reserve fiat currency - to other currencies, we need to ask why move?

Yes, the US is a highly indebted nation.

But European sovereign debts are also high. 

So where do nations and large investors put their funds?

As China continues to grow its economy, its influence also increases.  Exporting nation that it is, it is in China's best interests to bring its currency as a global alternative to the overprinted US dollar and European Union's Euro.  With the rate China is producing goods for sale elsewhere, a currency that is perceived to be valuable, and particularly has a sound foundation compared to the Euro or US dollar, it is certain to bring them a higher global profile.

This spells trouble for American and European banks in the long term.

As the reader may know, banks make credit available to borrowers who in turn invest in productive activities.  What may not be well known, is the dependency governments have on banks, in a fractional reserve fiat currency system to keep the debt bubble expanding.  If banks were to slow their purchase of US debts (treasuries), bond yields would rise, causing a domino effect with higher borrowing costs and slowing or negative economic growth.  This could be a major factor in tipping the balance of financial power globally away from the Anglo-American banks and also diminish American government influence.

The key way to continue this trend is for the Chinese central bank to behave in a way that boosts global confidence in their currency.

The primary ways to complete this process to to keep interest rates at attractive levels and purchase huge amounts of gold to back up the "promise" part of the fiat currency.

Given the trouble the Germans are having with the US Federal Reserve in getting their gold back in a timely manner, the US, with their giant budget deficits and massive bond sales, is rapidly eroding what confidence remains in the dollar by behaving in a way that indicates they just might not have the gold they say they have or even deliver on their bond payment promises.

In the end, perhaps the tipping point will be reached, not because of Chinese success, but by continued European and American debt excess.