What the AIIB means for the dollar

Dateline: Merida, Mexico This Saturday, Chinese President Xi Jinping launched the Asian Infrastructure Investment Bank (AIIB) in Beijing. Despite the US government boycotting the bank, Saudi Arabia, Russia, Germany, Australia, South Korea, and the UK will be among over 50 countries joining. The AIIB is expected to lend $10-$15 billion per year for the next five years and, according to Jinping, the bank will finance Asia’s “enormous basic infrastructure needs”. More than just improve infrastructure across Asia, AIIB (along with the New Development Bank operated by the BRIC countries) will give China influence that it lacks in the US-controlled World Bank, Asian Development Bank, and the IMF. This, along with the fact that China and Russia are buying more gold, China is selling US treasuries and that the BRIC countries will control more of global GDP than the G7 by the end of this decade are reasons why US hegemony — and its fiat currency’s domination of world currency reserves — may come to an end. We’ve previously written about how the US dollar will fall from dominance and, like Britain and France before it, it will no longer be the home of the world’s reserve currency. The AIIB is one more domino to fall and signals a growing anti-dollar alliance in the Eastern world.

Why the AIIB?

Although China is now the largest economy in Asia, Japan still controls twice the voting share of the Asian Development Bank as China does. In the IMF, the United States controls 16.74% of the voting shares, Japan controls 6.23% and China only controls 3.81%. China is now taking matters into its own hands to exert its power. While the US has excluded China from the TPP in attempts to isolate it from the rest of Asia, the US is now finding itself isolated globally by boycotting the AIIB. In the long run, this may signal the exclusion of the US from the global economy or, at the very least, make it just one of several world powers sharing influence globally (which is already becoming a clear trend). Following the Second World War, the United States worked to create international organizations like the International Monetary Fund, the World Bank and the United Nations. These organizations allowed the world’s new superpower to exert its power across the world by guiding monetary policy and influencing the values of governments that benefited from its financing. With a stake of up to 50% in the AIIB, China now has that ability to counter that influence in Asia and beyond. As Washington will be watching closely, the AIIB will require projects to be legally transparent and protect social and environmental interests, however it will not force borrowers to adopt the kind of free-market practices favored by the IMF. Now, where all of this matters to an international investor is that if China were to gain enough influence globally and the dollar were to lose enough value, it would lose its reserve currency status across the world. Right now China has said that the AIIB will do business in dollars, but this could easily change at any time. Should the dollar fall, the US would not be able to issue new debt to borrow money and its bankrupt government would begin to face the consequences.

Consequences of a falling dollar

A country that is $16 trillion in debt has chosen its currency and banking system as its strongest coercive tool. FATCA is the most recent example of this strategy, as we’ve talked about before, which forces any bank in the world that defies the US government (by not succumbing to FATCA) to face a 30% tax and exclusion from US markets. We’ve talked about predictions that leading economists have made about the dollar. Rather than just political clout, the AIIB does actually serve a need for China in Asia as well. For China to become a world class power, it will need world class infrastructure, including high speed rail throughout China and connections with Russia to Europe. Beyond Asia, China is expanding into new frontiers, like Africa, in ways that the West hasn’t even attempted. In Africa, China has not only found a market for jobs (essential to their aging population) and resources, they’re assuring that they dominate the growing continent in the future. China has pledged $60 billion in loans and export credits to Africa and has even now opened a military base in Djibouti. Compare this with a country whose main forays into Africa are small-scale reactions to Boko Haram and ISIS. While uncertainty is the rule in the current economic climate, there are strategies any forward thinking person can use to stay ahead and profit handsomely. The worst option is inaction and tying your future to the whims of a falling empire. If you are ready to take action and find the best strategies to ensure your continued success despite any change in the economic and political winds, simply contact us.