Dark Skinny

In a recent and significant article from Reuters entitled “China PM calls on Russia to Fight Crisis Together”, concerning a meeting of government heads between China and Russia in Moscow, Chinese Minister Wen Jiabao explained:

“We need a new [World Financial] system whereby developing nations will have a stronger say,” he added. “We need to diversify the global currency system, to support its stability through the use of different currencies.”

Wen visited Moscow just three weeks before Russian and Chinese leaders are due to take part in an emergency summit in Washington, called to discuss measures to end the current turmoil and to reshape the global financial architecture. Both Russia and China blame the economic crisis squarely “..on the inefficiency of the existing financial infrastructure focused on the U.S. dollar”.

“Reforming the global financial infrastructure … is an important thing and most timely now,” Wen said.

Russian Prime Minsiter Vladimir Putin suggested that switching, at least partially, to the rouble and yuan in mutual trade could help both countries to weather the crisis. He added:

“At the moment the world which is based on the dollar is suffering serious problems … The situation on the global financial markets remains difficult,” he told the forum.

“In such conditions, we need to think about improving the payments system for bilateral trade, including the use of the national currencies,” he said.

“This will help stabilize our national economies, stabilise finance and stabilise capital markets,” he added.

Both China and Russia have met to effectively decide what can be done about the volatile dollar, in preparation for a World Financial Conference in three weeks time in Washington. From their comments it is clear that both Russia and China are tired of the dollar’s unstable and erratic behaviour, and have clear intentions of perhaps decoupling from the dollar and diversifying their reserves into other  currencies. Currently, China holds $1.9 trillion dollars and Russia holds $500 billion in their dollar reserves.

If China and Russia as well as other countries do decide to sell off their reserves and with a consequent lesser demand for the dollar in commodity purchases, then all those greenbacks will come back home to America. The US government will no longer be able to sell its huge Fiscal Debt abroad in such vast amounts anymore - which would be economically catastrophic for the US government, leading to possible inflation or even rampant hyperinflation and bankruptcy.

From a well-known Chinese blogsite called Global Voices, here are some Chinese comments and opinions concerning the dollar situation and the current financial crisis:

“1. Americans dare not put money in the banks.
2. The downfall of financial industry would drive people away from the bonds Wall Street issued, thus its financing capability would be very much undermined…
5. The dollars are going to devalue so that its status as a global currency would come to an end.
6. As the largest and second largest holders of U.S. Treasury bills, Japan and China would be marred due to the slumping dollar value.
7. Major nations in the world might endeavor to displace their crisis by the method of war, and a new world war with the massive use of nuclear weapons is inevitable…..”

“We should know that China could play a positive role in the crisis as the largest holder of dollar reserve. The problem is, since U.S has long been giving troubles to China and trying to impede the reunification of China. Should we pay back the bad with good?”

“Yes, we should help it. But it should be conditional. Though it’s not moral to bargain that way, we don’t have to feel guilty to do so with Americans, since that’s the way they treated us. We can bargain on Taiwan and Tibet issues. What good chips!”

“So as you guys say, America should never fall, and the entire world ought to uphold the power of U.S so that it can spend others’ money to pay and order goods from other countries.”

“China is like working for U.S, a boss who someday says he has run out of money, the company going to collapse. However, China says,”No, you can’t fall, or I will be starving without a job.” Then the boss says,” OK, then please lend me some money, so that I can keep the company, and you can keep working for me.” What a logic!”

The Washington G20 Summit in three weeks time should prove very interesting.

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