The Real Russian Threat

It isn’t to the Crimea, the Ukraine, or world peace.  The real threat is to the U.S. economy:

Economist John Williams says if Russia sells its U.S. dollar holdings, it could trigger hyperinflation.  Could it collapse the financial system?  Williams contends, “Yes, it certainly has a potential to do that.  Looking outside the United States, there is something over $16 trillion in cash, or near cash.  That’s about the same size as our GDP.  . . Nobody has wanted to hold the dollar for some time.  The dollar, fundamentally, is weak.  It couldn’t be weaker.  All the major factors are against it.  It’s just a matter of what would trigger the massive selling.  Nobody wants to hold it.

Before you all panic, James Rickards writes in Currency Wars that such actions by Russia or China will never happen because “the president of the United States has near dictatorial power to freeze any accounts that try to disrupt the market in that way.”  (Currency Wars, page 11)

According to Mr. Rickards and others, the real way for Russia and/or China to cripple kill the U.S. economy would be to announce the creation of a gold-backed ruble or renminbi/yuan.

China, as Goodman highlights, has been aggressively buying physical gold in recent years. And while some market watchers speculate that the Asian country’s end goal is to make the yuan a reserve currency, Goodman sees it differently. China’s end goal, according to Goodman, is to “eliminate the United States dollar as the reserve currency.”

To support his claim, Goodman points to China’s ties with Russia, and more specifically, Russian President Vladmir Putin.

“Mr. Putin is not a best friend of the United States,” Goodman said. “He would be in favor of eliminating [the US dollar] as that reserve currency.”

***

Goodman speculates that should China be successful in eliminating the US dollar as a world reserve currency, the impact would be tremendous.

“It just means that the United States is possibly in bankruptcy,” said the chairman of Dundee.

Mr. Goodman needs to look up the definitions of bankruptcy and insolvent.

Bankruptcy is a legal status of a person or other entity that cannot repay the debts it owes to creditors.

***

In the United States, bankruptcy is applied more broadly to formal insolvency proceedings.

***

Insolvency is the inability of a debtor to pay their debt. In many sources, the definition also includes the phrase “or the state of having liabilities that exceed assets” or some similar phrase. (emphasis added)

According to these definitions, the U.S. government is already bankrupt/insolvent.  To realize this, one only needs to compare the national debt and national income (i.e., GDP).

The current national debt of the U.S. is almost $17.5 trillion.  Nominal GDP for the U.S. was approximately $16.8 trillion in 2013, while real GDP for the U.S. was $15.76 trillion. This means that we already owe our creditors between $700 billion and $1.7 trillion more than the entire amount of goods and services produced within the U.S. in the last year.

So what can be done?  Mr. Goodman hits the nail on the head:

“The fact is, if we can return to a classical gold standard and get rid of the Federal Reserve being where we are, we will have a good time…

Not bad for a Canadian, eh?

*  All GDP figures are from an Excel file that I downloaded from the Bureau of Economic Analysis website.  You can download the same file using the following link: Nominal and Real GDP

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Categories: Bad News Everyone!, Borrowing, China, Debt, National Debt

Tags: , , , ,

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