Sunday, May 16, 2010

What if China backed the yuan with gold?

By Nick Sorrentino

In 1999 Saddam Hussein pulled one hell of a move. He decided to convert the sale of all of his oil from dollars to the euro. This sparked a rally in the euro and set off a chain of events that would lead to the invasion of Iraq by the US. Within 2 weeks of us invading Iraq we converted all oil trades back into dollars, despite the fact that the euro was roughly 17% stronger than the dollar at the time.

The re-conversion of Iraqi oil trades back to the dollar was one of the main reasons we went to war in Iraq, if not the reason. The implications of accepting this thesis are extensive and profound, and the subject of a book I am working on and will soon finish. But this post is not about Iraq. It’s about China, and how the original Red State can deal a very heavy blow to the US.

Imagine for a second that China were to drop the peg of the Yuan to the dollar and instead pegged it to gold, essentially creating a currency backed by a real asset. If that were to happen America would hear another “whooshing sound,” but this time it wouldn’t be jobs heading to Mexico, as Ross Perot predicted, but the sound of real capital exiting the dollar and converting to the Yuan.

This would create all kinds of problems for the Chinese potentially which I won’t go into here. (Because frankly I haven’t thought about it enough.) But the point is China now has the ability to launch a currency war against the US, with the flip of a switch, just like ole’ Saddam. This time however, there will be little we will be able to do to counter such a move.

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About Me

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Nick Sorrentino is the Editor of The Liberty and Economics Review and CEO of Exelorix.com a social media management company.