It is being reported that there will be a currency swap between the central banks of China and Argentina.  The swap is reported to be for a total of $11 billion, with the first payment going to Argentina in the range of just under $1 billion by the end of the year.  It will be in the form of yuan, the Chinese currency.

Argentina just recently defaulted on its debt obligations a couple of months ago.  This announced swap will help Argentina to shore up its reserves.  The yuan could also be used to buy Chinese imports.

Of course, $11 billion, while quite significant for Argentina, is a drop in the bucket for the U.S. government.  I mention this because the U.S. government, along with the Federal Reserve, is not involved in this transaction.  It is a drop in the bucket, but little drops do add up over time.

You could also say that each snowflake accumulates to eventually make an avalanche.  It takes millions of snowflakes, but they start to add up after a while.  I say all of this in reference to the U.S. dollar’s status as the world’s reserve currency.

I don’t think there is going to be an avalanche in the U.S. dollar losing its reserve status.  It will likely happen more subtly, one transaction at a time.

It is interesting that China is finding more and more countries that will deal in yuan.  Despite China’s problems, it is finding that the U.S. dollar does not command the same respect as it once did.

This currency swap is really something of a loan to Argentina.  Argentina is plagued with debt and inflation problems.  Reserves have been draining away and it is difficult for the central bank there to get dollars because of the unreliability of its currency.

So while every international transaction that doesn’t involve the U.S. dollar is a small step away from the dollar as the reserve currency, this deal with Argentina makes Chinese officials look a bit foolish.

China holds well in excess of one trillion dollars in U.S. government debt.  Long-term, this may prove to be really foolish, as the dollar loses purchasing power due to the Fed’s massive monetary inflation.

If the answer of Chinese officials is to start loaning money to Argentina, then this is even more foolish.  The U.S. government is in a great financial condition compared to that of Argentina.  The U.S. dollar is a safe and stable currency compared to Argentina’s.

Chinese officials have been making significant changes in at least starting to get away from the U.S. dollar for transactions that don’t involve the U.S.  The most significant is Chinese and Russian officials making deals in rubles or yuan.

But Chinese central bankers keep buying up U.S. debt.  Apparently they are adding a little Argentina debt into the mix.  If they want to pile up reserves, why don’t they start buying more gold?  While they have been adding gold to their reserves, it is almost nothing compared to the holdings of U.S. Treasuries.

We should keep watching for these international deals that are being done without the use of U.S. dollars.  Hopefully, for China’s sake, they will find some better countries to do business with than Argentina.

But Chinese officials still believe in central planning and Keynesian economics.  They are mercantilists who believe that they have to subsidize their export sector by keeping a weak currency.  And until they stop buying U.S. Treasuries, I can’t take them too seriously.

If China starts trading dollars for gold in order to back their currency, then I will start to really take them seriously.  In the long run, this would actually benefit Americans because it would help put a stop to their reckless government and central bank.  And obviously it would help the Chinese people tremendously.