Will the US Dollar Collapse, Be Replaced By Chinese Yuan?

A few days ago, I had a discussion with someone who fervently believes the dollar is going to collapse and become worthless. The main thrust of their argument was that the Chinese Yuan is going to become more valuable, the other countries of the world will abandon the dollar for the Yuan, and the good times for the USA will be over.

Those of you who read my stuff frequently know that I think this is all nonsense. There’s a lot of scare talk out there nowadays about the dollar disappearing as the world reserve currency and being replaced by some other currency, like the Euro and or the Yuan. I say, don’t buy a lick of it. This person I was discussing the issue with is a good friend of mine, so I had to gently but firmly get my response across to them: “You’re wasting your time worrying about it.

We can find evidence to support or disprove such an assertion. In the past, when examining the international position of the dollar, I have drawn attention to the US Treasury TIC (Treasury International Capital) charts. These charts show us the amount of US Treasury debt held by foreign central banks. The numbers contained therein can offer us clues as to how these foreign nations view their relationship to the dollar.

Take a look at this:

TIC

First, let us examine where China stands. We can see that in June of 2013, China held $1.275 trillion. This was decreased to $1.268 trillion one year later; a decrease of $8 billion. On the whole, that’s nothing. It’s peanuts. The highest levels were in November, while the lowest was in April.

However, examine Hong Kong: from June to June, their holdings went up, from $124 billion to $158 billion. To the extent that mainland China dumped US debt, Hong Kong snaggled it up.

Let’s examine the other BRIC nations (Brazil, Russia, India, China), of whom we hear are gunning to ditch the dollar.

Brazil didn’t go anywhere, from June to June. In between, they increased, then decreased, then made it back to where they started, at $253 billion. Currently, they are on a 5-month trend of increasing US debt holdings.

India increased it’s US debt holdings from $61 billion to $72 billion. For the most part, it was a steady trend upward.

Russia is the only nation of note that made a significant drop: from $138 billion to $113 billion, a decrease of $25 billion. This is mildly significant, but not necessarily earthshattering. It is only barely significant.

The major point I want to draw attention to is the bottom line, T-Bonds and Notes. In June of 2013, worldwide foreign holdings of US debt were at $3.649 trillion. By June of 2014, foreign holdings had increased to $3.767 trillion. The number, quite obviously, is going up. The foreign Central Banks of the world are still buying US Treasury debt, which is denominated in dollars. What does this say about their behavior? It means the Central Banks of the world still want dollars. Nearly every other developed and semi-developed nation in the world is pursuing a Mercantilist policy; they buy US debt, which devalues their own currency against the dollar, making their exports to the USA cheaper and more attractive to US consumers.

When it comes to the world of international finance and monetary policy, I say that we should look at what foreign Central Banks are actually doing, and not pay attention to what they or their heads-of-state are saying. In this case, it is clear what the foreign Central Banks are doing. They are embracing the dollar, for the most part. As it stands, I see no reason why this will not continue to be the case for the next few years at least, probably even beyond that.

You might ask, “But what about the talk from Chinese and Russian leaders about dumping the dollar and re-aligning the international finance system?” Yeah, so what? Politicians say a lot of things. Until the actual behavior of foreign Central Banks seems to represent a fundamental change, I’m not going to predict any earthshaking developments.

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