China and Russia Quitting the Dollar?

China and Russia Stopping Trading With Dollars?

The news came out on Nov 24th, 2010 that China and Russia would stop using American Dollars to trade with each other. I’m surprised such large countries woud use the dollar to trade with each other in the first place. Is this a strategical move for China to assert its superiority?

China is careful
China is much to careful to do anything to sabotage their trade relationship with the U.S. We purchase so many billions of dollars of every conceivable type of product from them, that any loss of trade would be felt hard by Chinese manufacturers. Usage of particular currencies effects how those currencies measure up in the Forex markets, and any change in the use of dollars will weaken our dollar. But, what does that mean, and what does it lead to?

A weak dollar?
Many in America can not figure out why America buys more than it sells in international trade. Are we just big spenders. The balance seems to be covered by China buying up trillions of our bonds. China owns us. If they decide to stop financing us, the U.S. would be in a serious economic situation that could force the government to print more money, causing out of control inflation. A weak dollar will mean that Americans will have to pay more for imported goods like cars, oil, outsourced Indian software, blueberries from Chile, sugar cane, and the list is endless. On the brighter side, a weak dollar means that America will be able to export much more than before due to much more competitive prices. Americans are not aware of this, but America is a world leader in weapons, aircraft, medicinals, pharmaceuticals, industrial machinery, automotive parts, telecommunications, electrical apparatuses, and Plastic materials, as well as the production of inexpensive beef. The rest of the world can not live without these. We might see the jobless rate go far down if our goods and services are purchased more widely around the world, and we might even see regular trade surpluses for years to come.

How does this effect India?
The China / Russia currency agreement made a week ago doesn’t really effect the world so drastically, but if those two countries permanently stopped using the dollar for any trade outside of the United States, the dollar would plummet, and that would make India’s outsourcing services a lot more costly with a weak dollar. Our exchange rate might become 30 rupees to 1 dollar, making it 50% more expensive to get outsourcing done. That would cause a huge reduction in the amount of outsourcing done between the U.S. and India, and between the U.S. and any other country.

America’s tragedy
Unfortunately, do to the poor spending decisions made in America over the last forty years, America is in debt up to its eyeballs, and we are no longer in control of our country. China pulls the strings now, and will have an increasing level of power over us, since they own our debts. Any move China makes that effects our debt or currency exchange will hurt the U.S. and hurt China’s ability to export to us too, but if they are willing to make a sacrifice in exports, they could bring America into a very serious financial crisis. I personally feel that its better for America to live leanly, stop fighting unnecessary wars, stop having trade deficits, raise taxes, and reduce our debts to a sane level in the next ten years. If we don’t, then a disaster is imminent. The bigger issue is that Americans are by and large not willing to make short term sacrifices for long term security, and this equates to a suicide made in a succession of very small steps over a long period of time which is similar to smoking unfiltered cigarettes or engaging in illegal drug use over an extended period of time.

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