China’s banking system has twenty-five times the reserves of the US Federal Reserve. The USA’s power to dictate international monetary policy is lost as the rest of the world views the US dollar as a liability. People ask me every day about the “dollar collapse” – why do I keep predicting it, and why has it not happened yet? The answer is to be found in China.

For those of you who have already read How to Prosper from the Coming Shift in Power, module 5 in our free five part Secrets of the Super Rich course, I thought the following guest article by Keith Fitz-Gerald of Money Morning would be of interest. Keith is an investment analyst who lives part of the year in Asia. Here’s what he has to say…

Most Americans will view China’s effort to dethrone the U.S. dollar as the world’s main reserve currency as one of the biggest economic threats that this country will have to face.

But the reality is that this tectonic shift in global finance – and the economic shockwaves that will result – could provide investors with some of the greatest profit plays they’ll ever see in their lifetimes.

No matter which camp you’re in, the China-spawned changes are headed our way.

In 1990, the U.S. banking system was 2.3 to 2.7 times the size of its counterpart in China. Today, however, the situation has been reversed, and there is much more of an imbalance. In fact, China’s banking system has 25 times the reserves of the U.S. Federal Reserve.

At some point, the United States will no longer be able to dictate international monetary policy. Unfortunately, as our monetary policy aptly demonstrates, Washington seems to be the only player involved in this game of high-stakes global finance to not understand just how this is destined to play out.

U.S. leaders continue to employ monetary policy as a weapon – despite the fact that most of the rest of the world views the U.S. dollar as a liability.
At the end of World War II, virtually the entire world functioned on dollars. By some accounts, 100% of the world’s money supply was the dollar. Today that figure has dropped all the way down to 19%, says Rochdale Securities LLC analyst Richard Bove, a noted expert on the U.S. banking system and Federal Reserve.

Now that the federal government has deployed a few trillion dollars more as bailout bucks, it’s clear that the greenback has lost its mojo and the U.S. government has lost its international monetary leverage.

Why is this worrisome? History tells us that the countries with the strongest economies tend to also have the strongest currencies. It may take awhile for the latter to catch up with the former, but the relationship is highly correlated relationship – suggesting that China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at full throttle.

So if the U.S. dollar gets derailed as the world’s chief reserve currency – as we’ve repeatedly predicted is destined to take place – the world’s next reserve currency is likely to be China’s yuan, known officially as the renminbi.

Washington says that won’t happen, since Beijing takes steps to keep the yuan from being fully tradable. That’s true enough. But Beijing also understands that the dollar is a liability – which is why China’s leaders are going to great lengths to establish the yuan as a viable currency all its own, while simultaneously minimizing the Red Dragon’s dollar-based exposure.
In the last six months, for example, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. The countries that sign these deals are getting huge discounts from China in exchange for their participation – and for buying goods from China. And the deals enable China to do an end run around the entire dollar-based currency trading system.

When it comes to this long-term plan to boost the yuan’s importance, China is waging a campaign on multiple fronts. This past spring, for instance, China organized a meeting in Moscow – attended by representatives from Brazil, India and Russia – where the main goal was to supplant the U.S. dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies, one that is simply backed by China’s renminbi, or perhaps even one based on the International Monetary Fund’s so-called Special Drawing Right (SDR).

Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today, the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

My guess is that this gathering in Moscow was merely the first of many such meetings that we’ll see take place around the world in the years to come. Expect the list of attendees to grow, as well.

Given all that we now know, the real question becomes: What happens if China succeeds and the yuan displaces the greenback as the world’s top transactional currency?

The list of potential implications is very long, and includes several scenarios that are almost apocalyptic. But most of the outcomes raise as many questions as they answer.

Let’s consider the Top Five:

1. Global Gloom Leads to U.S. Doom: The U.S. dollar goes into freefall for the simple reason that if no country has to hold dollars any longer, they won’t. Instead – thanks to the ragged state of the U.S. government’s finances – many countries will dump greenbacks fast as they can, which will only put additional pressure on an already-strained U.S. financial system, which in turn will further damage our economy.
2. Inflation Inflates: Inflation will strike here with a vengeance, as anything bought, sold or priced in dollars will instantly rise in price to offset this fall.
3. Repatriation Risk: With the dollar serving as the world’s de facto currency, U.S. companies bear very little exchange rate risk when the time comes to repatriate assets or make currency-related adjustments. That would change overnight and prices throughout the value chains would rise sharply to compensate.
4. Money Costs More: The cost of money itself would rise. If the dollar falls, not only will there be massive selling pressure against it, but the cost of borrowing it will rise dramatically as lenders raise rates to cope with the increased risk of dollar-based transactions.
5. Death By Debt: And finally, if there is another reserve currency, other countries will no longer have to buy our debt, and you can guess where that will leave us – especially given the fact that we’ve taken on trillions in new debt to help finance our way out of our current mess.

My best guess is that we won’t see any one of these things in isolation, but will instead experience a blending of several or all of them. To the extent that China continues to absorb our inflationary influences, buy our debt in measured doses and maintain its reserves, we’ll probably have a measured decline in the value of the dollar – but not the catastrophic fall many in the doom, gloom and boom crowd are predicting. At the same time, I also see the IMF change course in the next few years to reflect China’s increasingly substantial influence and monetary power.

On the individual investor level, this clearly provides a new set of influences that most investors have yet to grasp. Most will perceive what I have said as a threat, but I believe the correct way to view this is that there will be a whole new set of opportunities coming our way.

Some of those opportunities will be obvious – like the need to invest in currencies and commodities that are of interest to China. Others, like direct investments in China’s yuan, will require special insight, a good investment guide, or a leap of faith.

Further reading: If you’ve not yet read Q Wealth’s five part course on offshore banking, asset protection and international wealth creation, check it out now. It’s free. If you are already a member of Q Wealth then you will have access to a wealth of material and information on how you can take full advantage of opportunities presented by the global crisis.

The bottom line – and the most important thing to remember – is this: No matter how this plays out, there will always be an upside for investors who are willing to seek it out.

by Peter Macfarlane, Offshore Banking Expert at The Q Wealth Report

Do you know how anyone, regardless of credit history, can borrow money offshore at only 1% interest (or even less) with no scheduled repayment date, then simultaneously reinvest it for a much higher return elsewhere?

Of course not – because the rock-solid European banks routinely making such loans are not allowed to advertise these deals in your country. Your government calls this “investor protection.” Here at The Q Wealth Report, we call it “protecting the cosy domestic banking cartel.”

Foreign currency aribitrage is one of the areas where you can make money even in a falling market. Currencies will always go up and down, and there will always be big differentials in interest rates. Trading “pips” in the forex market, where you can make or break your account in a matter of minutes, is not every investor’s idea of fun. Slower moving and less risky (though of course not risk free), the types of foreign currency arbitrage programs we are writing about here offer an attractive alternative for more conservative investors.

The arbitrage or investment loan is a fairly standard wealth creation offering from European private banks, albeit little known. The gearing of the initial deposit, together with the currency arbitrage, makes it possible to invest a larger amount in a currency with high interest rates, thereby increasing the prospects of high returns.

Typically you will have to invest about USD/EUR 250,000 in a private offshore bank to get that facility. This can then be leveraged from one to five times, depending on the risk level of the currency you are buying into. If the initial deposit is USD 250,000, a loan of up to USD 1,000,000 can be contracted and then a proportion of that can be invested in a high income Bank CD in a currency paying a much higher interest rate.

The loan will typically be taken in a low interest currency s0 at the moment, USD, EUR and GBP would be perfect… although traditionally most loans have been taken in Swiss Francs or Japanese Yen. To spread risk, you can also choose to take the loan in a combination of two or more currencies. Then, you take the loan proceeds to buy another currency, paying a higher yield in CDs – typically in a multi-currency account at the same bank.

A variation on the same theme, of course, would be investing in gold. You can certainly borrow money against CDs or electronic gold to invest in other products offered by your private bank. Whether they would allow you to borrow against physical gold? I doubt it, unfortunately. In this case you might just be better off buying Perth Mint Certificates and asking your friendly offshore banker for a loan secured by that. Alternatively, hedge your investments by borrowing against US dollar investments, in US dollars, but using the loan proceeds to buy gold. That way you get the best of both worlds.

(Note – I normally recommend only physical gold – see my article How to Buy and Hide Gold Bullion Offshore. But, if someone is lending me money at 1% interest in fiat currency, and I can buy gold with it, I might not be so fussy…)

The profit factors, to summarize, are as follows:

• Exchange rate factor: Raising a loan in one currency and investing in another can lead to exchange rate gains as wells as losses.
• Interest rate factor: Where investments are made in bank CDs, the interest rate level of the currency of CDs can affect the return on the investment.
• Gearing factor: The return on investments is improved by the gearing of the initial deposit. The gearing factor plays an important role again if there is a loss. (You lose more!)

Of course, like any investment, you should do your due diligence very carefully. The good thing is that this, when done correctly (read those last three words again!) this makes a standard, conservative bank deposit that much more exciting. In these times of low interest rates on major currencies, we could certainly all use a little more excitement like that, couldn’t we?

How do you go about getting an Invest-Loan? Not, as you’ve probably guessed, from your local high street bank. If your existing banker won’t lend you money for things like this, it’s time to think about moving your investments to a different bank. A good place to start with the Practical Offshore Banking Guide 2009, available free for download to our members. I’m happy to make personal referrals to private banks who will carry out Invest-Loan transactions, at no extra charge to all Q Wealth members as part of the free consultation that members are entitled to. Just contact me via the Q Wealth London offices. If you’re not yet a member, you can join now to gain immediate access to these privileges.