The leaders of the Brazil, Russia, India, and China held a summit in Brasilia this week. Among the topics discussed was how to facilitate trade among the developing economies. Here is part of the statement released by the group:
In the interest of promoting international economic stability, we have asked our Finance Ministers and Central Bank Governors to look into regional monetary arrangements and discuss modalities of cooperation between our countries in this area. In order to facilitate trade and investment, we will study feasibilities of monetary cooperation, including local currency trade settlement arrangement between our countries.
These are early steps, but nonetheless a firm indication that China intends to make the yuan available for international trade. Given China's strong trade balances and its rapidly growing oil (and other commodity) consumption, I believe that the yuan will quickly surpass the dollar as the leading petro-currency. When that happens, the US bond market will meet the fate of every terminal debtor, and our hapless dollars will rapidly disappear as a reserve currency.
It won't take wholesale dumping to initiate the greenback's demise, just a loss in confidence from the marginal buyer of dollar based assets. The time to prevent that process has, most likely, already passed. Federal and state governments' inability to face fiscal reality got the ball rolling. Ben Bernanke's foray into the nether world of debt monetization introduced sufficient doubt to assure the outcome. The availability of a more sound alternative will be the coup de grace.