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China proposed replacing the U.S. dollar as the international reserve currency today, the first step in what could be a broader “dollar downfall” capable of wreaking untold havoc on the American economy.

China’s Central Bank made the recommendation to scrap the current system in an essay on its website, arguing for a new global reserve that isn’t dependent on the currency of any one nation – particularly a nation that’s been acting as crazy as ours has for the last decade.

As we noted earlier today, America has now pledged $13 trillion over the last year in an effort to stop the current recession, although credit markets remain frozen and jobs have continued to hemorrhage.

From the Financial Times:

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

“The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

Wow. Barack’s banker has finally figured it out.

Not only is China expressing grave doubt over America’s ability to pay back its skyrocketing debt, they’re now directly taking aim at the dollar as the global standard-bearer.

Stay tuned … the dollar getting ditched would obviously be one of the biggest financial stories of the decade – and one of the worst for America.

Of course, based on the fiscal policy that’s been pursued by the Bush and Obama administrations, it wouldn’t be surprising if it happens.