Geopolitics and Regional Currencies

The new weapon is currency, This is the new WMD that could have vast impact on a globalized world. The Cold War has not ended but has morphed into a war fought with money, energy and commodities. Indeed a top general from Europe forecasted that Third World War will be fought over water. Wars, whether hot or cold, are about countries trying to protect themselves and gain advantages over other countries. That is why we have trade pacts and G7, G20, ASEAN and all manner of meetings between heads of states. Each country tries to position itself to gain by forming blocs of all kinds.

Five major players are in this competition . USA, Europe,BRICS, pro-USA Middle East, anti-USA bloc. Each party is in the competition for survival. USA and Europe faces large and growing unemployment and massive debts. BRICS wants to protects its reserves especially US Treasury Holdings and want to improve living standards of its people . Oil rich Middle East has declining oil outputs and may fall back on its reserves to sustain its lifestyle. Anti-USA ENTITIES want nothing more than the collapse of USA or a toothless USA.

In simple terms, it is a battle between the haves and have-nots. The have-nots are countries with massive debts and need to continue to borrow .Like drug addicts, they cannot face the withdrawal pains of not having easy either by borrowing or printing. The haves are those with large reserves , lots of which Is in US dollars which faces steady devaluation. Both parties are locked in a fatal embrace and this year will see a more rapid unlocking of this embrace.

The most obvious unlocking is to stop using US dollar in international trade. Countries have SWAP agreements which enable them to trade using a regional currency. Four regional currencies may appear, the Russian ruble, the Chinese Yuan, Euro and the SDRs of the IMF. Japan is too fearful of the USA , it's political leaders too weak and fragmented to be a regional currency.
Russia will try to persuade Ukraine, Central Asia and Eastern Europe to use the ruble. China will corner Africa and Latin America and even Middle East to use the yuan or the SDRS. Euro will continue to be used by its member states. There already exists various SWAP agreements to allow trade between different currencies without the US dollar.

What this means is that trillions of US dollars will go back to America causing high inflation.It is like a man who eat excessively but his friends get fat , not him. The more he gorge himself, the fatter his friends became. He enjoys all the pleasures of eating and his friends suffer from its effects. Imagine that one day, all the fat accumulated ny his friends suddenly returns to this glutton. Imagine the impact on the glutton even is 20 percent of all fat accumulated on his behalf by his friends is returned to him! That glutton has a name.Hebis called America and his friends are called Japan, China, Russia and Brazil.

Most of these arrangements will be done in secret or with little publicity. We don't get to read it or even understand its importance as the world media covers US presidential elections , Euro debt crisis and the Arab Spring. But momentum is slowing building and like the bamboo, regional currencies suddenly become the talk of the town. It won't be a global catastrophe except for those with US dollars, but there will be confusion by idiots who cannot envision a world where US dollar is no longer the world's reserve currency.

It is good for the world even for America. Take the glutton example. Isn't it better for each country to face the effects of own monetary policies rather than defer the bad effects by temporarily transferring it to others? Not being the world reserve currency will impose fiscal discipline on American politicians who seem to think that it can print and borrow money ad infinitum.

Investors who understand the above stands heads over shoulders above those who blindly follow trends and fashion based on the assumption that US dollar wil be strong as always.