An unprecedented signal from senior Chinese leaders that the Asian economic giant might abandon the U.S. dollar sent shockwaves through the markets today as the Dow Jones Industrial Average lost 360 points and the greenback fell to a record low against the euro.
Xu Jian, a Chinese central bank vice director, told a conference in Beijing, “The dollar is “losing its status as the world currency.” Meanwhile, at the same meeting, Cheng Siwei, vice chairman of China’s National People’s Congress, said, “We will favor stronger currencies over weaker ones, and will readjust accordingly.”
Craig R. Smith, CEO of Swiss America Trading Corp., told WND he’s been in the investment business for 30 years and has “never seen people more nervous.”
Alarmed by today’s economic news, he dispatched a note to brokers with a warning of ominous potential consequences if China and other trading partners abandon the dollar.
“If that were to happen, all bets are off, and we will be in a depression that makes 1929 look like child’s play,” he said, “or we will experience Weimar Republic inflation as the dollar makes extreme moves toward devaluations.”
China has $1.43 trillion of foreign exchange reserves. During the five months up to August, Chinese investors reduced their holdings of U.S. Treasuries by 5 percent to $400 billion.
Smith told WND that underlings in Beijing have been suggesting for some time that China could abandon the dollar, “but this is the first time a senior leader came forward, and it sent shockwaves through markets.”
Craig R. Smith
“What we’re experiencing today is a result of loose monetary policy, deficit spending and bad trade policies,” said Smith, a WND columnist. “It’s all coming home to roost at once.”
The dollar’s decline today to $1.47 against the euro helped push the price of crude oil to a record $98.62 a barrel and gold to a 27-year high. The U.S. dollar also reached its lowest level against the Canadian dollar since the end of a fixed exchange rate in 1950 and a 23-year low against the Australian dollar. The New York Board of Trade’s dollar index fell to 75.077, the lowest since March 1973, when the index began.
Smith said the U.S., and consequently the world, may face a major financial crisis if “we can’t find a way to get the $3 billion a day we need to stay alive and make balance of payments with foreign countries.”
The Federal Reserve faces a dilemma, he explained. If it raises interest rates to prop up the dollar, the housing market and the stock markets will be slammed, causing a recession. A lowering of interest rates to stimulate the economy would erode the dollar further and spark massive inflation.
Underscoring the alarm among investors, Smith said a prominent Connecticut investor called him this morning and said, “I’m terrified, I think we could be sitting on a collapse.”
Smith said the fundamental conditions are worse today than in 1979 and 1980, when gold spiked to $850 an ounce then fell for the next 20 years.
Today, instead of a rapid increase, there has been a gradual rise in oil and gold prices, among others, that suggests a long-term condition. Gold, for example, has gone from $265 in 2000 to $845 today.
Smith said the only solution is fiscal responsibility by consumers, corporations and government.
“We cannot spend money we don’t have, anymore,” he said. “The only thing that keeps us alive as a nation is our ability to borrow. We spend more money that we make.”
Now, Smith said, “the world is saying, ‘We lent you that much money, we’re not going to do it anymore.'”
The problem, of course, Smith notes, is that if Americans don’t spend, the economy doesn’t grow, and the nation goes into a recession.
But continuing to reduce interest rates and print money to maintain the spending leads to inflation.
Eventually, he said, Americans simply are going to have to live within their means to lay a foundation for long-term economic health.
“To get through some of this stuff, we’re going to go through some pain,” Smith said.
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