by tonytran2015 (Melbourne, Australia).
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(Blog No. 161).
A trade war combatant may have to weaken and destabilize its opponent by refusing both to accept or to hold the currency of that country. That refusal is a defensive move and it may start snowballing into an international refusal of that currency beyond its national border. This will create additional problems and costs to the economy of the opponent country.
#trade war, #de-internationalize, #national currency, #gold currency, #dollar,
Trade war tactics, Part 6: Using gold based trading and refusing opponent’s currency.
1. Refusal to hold opponent’s currency is defensive.
It is very risky for one trade war combatant country to hold the currency of its opponent.
The simple basis for citizens accepting the fiat money of their own country is that those who had done works for the government have the fiat money (a form of certificates) and the population at large have to exchange goods and service for those certificates to pay their own tax (those who don’t pay will be jailed) and buy some goods or service from the government. [1,2]
So why should any non-citizen not living in that country accept the fiat money from that government? Especially any sovereign country should not hold fiat currency of any of its trade war opponents. Doing so is very risky for the following reasons:
a- The country issuing fiat money may require all holders of its fiat money to switch to new versions within 48 hours at the banks. This will invalidate any old version of fiat money held outside its territory or inside its territory but without adequate documentations proving the legality of its possession. This has recently been carried out in India. 
b- The country issuing fiat money may intentionally dilute the value of the money to reduce the entitlement of foreign countries with large holding of its fiat currency.
For example, let a country C hold USD 1,200bn worth of fiat currency of another country A [4,5,6] while the current GDP of country A is worth USD 19,000bn . In this example, country A owes (1200/19000) of its GDP to country C.
If country A decided to give one bonus dollar to every dollar currently held inside the country by its citizens then after this issuance A would owe C only (1200/(2*19000)) of its GDP ! (This is a standard technique of stock market, called “shares dilution”.)
So holding a large amount of foreign currency always carry with it some risk. Trade war combatants should not hold large amount of opponent’s currency (or treasury notes, which are equivalent to “currency in the coming years”). Although France and USA were not in trade war at the time, French President Charles De Gaulle demanded that the US ship back their dollars in converted gold to France  and subsequently many other countries followed France’s example, leading to the US abolishing the gold base for its US dollars .
2. Refusing a national currency reduces its base and its perceived stability.
When US dollars are not held in the central banks of other countries there will be less demand of US dollars and there will be less US dollars in circulation.
As there are less dollars in circulation their values will be more sensitive to inflation or deficit figures from US treasury and government.
Knowing this, China is trying to establish its gold and oil backed yuan. [10-11]
3. Returning to gold or commodity certificates
To be safe, each country should not hold much fiat currency of any other country. Any country which has large holding of fiat currency of another country has to divest that amount. The problem is more urgent if that country hold the fiat currency of its opponent [12-15].
The problem is even worse for opponents of USA in its economic war when the Bank for International Settlement is involved in the processing to transfer US dollars to countries on USA’s sanction list [16-18].
The inevitable solution to international trading is an obvious old method used by the USSR: All trades are to be settled in gold !
The current trade war will lead to the de-internationalization of US dollars and gold will have to be again used as an international trading medium that is free of manipulation.
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