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US Threat to Cut China Off from the International Dollar May Be Empty

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Earlier this month, the US threatened to lock China out of the dollar system if it doesn’t follow UN sanctions on North Korea. Treasury Secretary Steven Mnuchin threatened this economic nuclear option during a conference broadcast on CNBC.

If China doesn’t follow these sanctions, we will put additional sanctions on them and prevent them from accessing the US and international dollar system, and that’s quite meaningful.”

The threat may be meaningful, but it also might be empty.

Mnuchin was talking about locking the Chinese out of SWIFT – Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar is the world reserve currency, SWIFT facilitates the international dollar system.

The US has used SWIFT as a stick before. In 2014 and 2015, it blocked several Russian banks from the system as relations between the two countries deteriorated. But would the US really pull the plug on China?

Probably not.

First, there are the obvious economic ramifications. As Jeff Thomas pointed out in an article on the International Man, cutting China off from SWIFT would be economic suicide. The US runs a $350 billion annual trade deficit with Beijing, and the People’s Bank of China holds over $1 trillion in US debt.

In stating this, the US government is doing nothing less than threatening economic warfare against China, which would unquestionably prove catastrophic to the global economy. This is astonishingly shortsighted, as the US can no more do without trade with China than China can do without trade with the US. Further, the US will unquestionably pressure its other trading partners (particularly the EU) to endorse and follow the sanctions. This they will not comply with, as it would serve to cut their own economic throats. The relationships between the US and their partners have been wearing thin in recent years, and the present threat against China is very likely to prove to be the final straw. The net effect would be to place the US out on an economic limb, alone.”

There is also a practical problem with this US threat. China, Russia and other countries are working toward freeing themselves from relying on the international-dollar system, and developing an alternative system. As we reported recently, Russia and China seem to be betting their monetary futures on gold. Their long-term maneuverings could seriously undermine the dominance of the US dollar and shift the world’s economic center of power from West to East.

In a significant move, China announced the launch of a gold-backed, yuan-denominated oil futures contract. The move potentially creates a way for oil exporters to circumvent US dollar denominated benchmarks by trading in yuan. The contracts will be priced in yuan, but convertible to gold.

On a larger scale, Thomas says the Russians and Chinese have already developed and alternative to SWIFT.

China, Russia, and others have seen this day coming and have created their own SWIFT system, world cable network, and world banking system. All that’s needed to kick it all into gear is a major international need to bypass SWIFT. The US government has just provided that need with this threat. There would certainly be teething pains in getting the new system running on a massive scale, but the sudden worldwide need would drive the implementation.”

The US faces another major economic problem at home – the ballooning national debt. Trump is pushing to completely eliminate the debt ceiling. Thomas calls the ceiling “the last safeguard in governmental fiscal responsibility.”

[Trump has] effectively chosen to assure that the US will experience economic collapse.”

The US has long relied on its economic dominance to bully other countries into submission. That power is clearly eroding. China is growing in economic influence, along with other emerging nations. Brazil, Russia, India, China and South Africa (BRICS) are rapidly accumulating economic power, and are less and less dependent on the US and its dollar. But it seems policymakers in Washington D.C. aren’t completely aware just how precarious their perch on top of the economic mountain actually is. Thomas said none of this bodes well.

What we’re witnessing is a train wreck about to happen, and we’re all, to a greater or lesser extent, on that train.”

Get Peter Schiff’s latest gold market analysis – click here for a free subscription to his exclusive monthly Gold Videocast.
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