Is the US dollar on its way out?

To protect dollar reserves from seizure, China threatens to dumb them down.

Speculation abounds last month about whether Russia's seizure of its foreign exchange market reserves marks the end for the US dollar as the world's reserve currency. Multiple theories may explain this phenomenon. As a result of military action in the South China Sea, China could start to dump its enormous US dollar reserves.

A conference was held by the Chinese central bank and finance ministry Saturday to discuss how to avoid a seizure of foreign currency reserves by the United States, according to the Financial Times. Also, during this period, Communist Party intellectuals discussed the possibility of dumping US dollar reserves.

By far, China holds the largest number of reserves in the world. $3.2 trillion dwarfs Japan's $1.3 trillion, which comes in second. It appears that the US dollar's role as the world's reserve currency is about to come to an end since China holds by far the largest amount of US dollar reserves.

It is the biggest economic development since Bretton Woods in 1945 when the US dollar became the reserve currency. Western countries are likely to see a sharp decline in living standards over the next decade due to inflation eating away at consumers' wages.

A large number of wealthy Western economies have virtually eliminated their manufacturing base over the last 50 years. China, for example, imports much of its manufactured goods. In exchange for these goods, paper money is recycled into debt - mostly government bonds. The amount of US government debt held by China currently exceeds $1 trillion. This arrangement was accepted by the developing world until now because it helped their economies grow. That's over.

How will this be rebalancing work? 

Because of the possibility of seizing Western currencies and debt, it is anticipated that countries like China will be much more reticent to hold them. With the Chinese moving away from accepting Western currencies, we will see a decline in Western currencies. Chinese products will therefore become more affordable for them and less affordable for us. The West will see prices rise and wages stagnate.

How does this affect China?

Their economy will need to rely less on exports to the US to grow. However, the Chinese economy relies less on trade than it did in the past. In the mid-2000s, China ran current account surpluses of 7-10% of GDP. It has been years since China relied heavily on trade for its economic growth during the financial crisis of 2008-09. There was a slight surplus in the Middle Kingdom's current account last year.

As a result, the US appears to be losing its largest leverage over world affairs. A US dollar that is just one of many currencies will lose its status as a global superpower. A serious development such as this deserves the attention of our leaders. Still, very little is being done to stop this from happening.