As the world’s media has reported the drama of the USA averting default, there has been much coverage of the effect of this crisis. As with 2008, the predictions are quite serious, suggesting a realignment of reserve currencies that might permanently affect the global domination of the USA.
For the vast majority of people, it is difficult to follow all the intricacies of reserve currencies and the effect of the dollar’s domination on individual national economies or global markets.
I do not intend to try and address or explain those here, even if I were able to. But the reality is that owning the world’s reserve currency enables a nation to print money virtually at will and to suck in cheap imports to provide a low cost of living for its people. But this comes at a price of creating increasing debt, which makes everyone worry that one day, the bill might have to be paid. Successive politicians deflect that concern to future generations and so it goes on.
But the growth of new economic forces, such as global corporations, many of whom now dwarf national economies, and a number of emerging economies, principally China, increase options and make that of simply holding dollars increasingly suspect in value terms.
Of course, as the world decided to abandon anchoring currencies in a real value based on the gold standard, their whole basis currently rests on demand.
So the Euro was launched to facilitate trade, investment and retail in Europe, but it also provided a possible alternative to the dollar for nations, companies and individuals to hold.
The dollar presently accounts for about 60% of the world’s circulating currency and the speculation is now that the Euro, the renminbi and other currencies, such as the Swiss franc, the Australian dollar, the yen, etc., might become alternative homes, with the dollar losing its edge. This would be a serious blow to a USA already facing inhibited growth and deficits in trade, income and expenditure.
The renminbi probably only accounts for less than 2% of world trade at present, but I would guess that, if there is relative global stability, this will rise towards 10% in the next 5-7 years as China revolutionises its relationships with the developing nations in particular. This would be accompanied by a supporting approach from nations like the UK and Germany, albeit for different reasons.
So we may be on the edge of a global change in reserve currencies as occurred between the two world wars of the 20th century, when sterling gave way to the dollar.
I do not think, however, that the Chinese want the renminbi to replace the dollar as the world’s reserve currency. I think their reasons are hard-headed – they do not want to be a global superpower, believing that leads ultimately to being overtaken and thus ultimately to a painful decline.
They prefer the German approach, that is to seek global leadership, shared with others, where China can prosper from a strong renminbi and low cost imports, creating dependencies from its suppliers to calm its borders, but not to the point of needing to control other nations’ internal and external policies.
China has shown its priority this week as Xi and Li have focused on calming relations in South East Asia, and will continue to show leadership in building Asian unity.
Provided the Chinese give increased and safe access to their domestic market for the Americans, and others, and provided the Americans can remain the global military leader with full economic access across the globe, then this changing situation need not cause tectonic effects.
But it must be handled with great care, as we know the USA can reach for the gun with great ease when it feels threatened. The need for a gun law in the USA is no simple coincidence. But American business does not want conflicts; they need stability for business, and they do not mind some loss of global power if it is accompanied by a lowering of crisis in the dollar and in Washington’s books.
So long as they have free and easy access to global markets then the USA may well be at ease with a lessening of the burden of global leadership.
But it requires the balancing of many forces in the USA – and in the last two weeks we have seen how traditional politics is endangered by megaphone posturing, which gives undue license to fringe and extreme elements and gestures, especially at times of crisis.
China, Germany and others will be watching this situation, seeing the opportunity to create a more balanced and peaceful world, where the USA focuses on economic restructuring for the next 10-15 years, but they will also recognise that managing the fermenting forces inside the USA is a responsibility they have some need to be concerned about and to address.
The world is in a period of great change and we must hope that China is led by the need for that change to be gradual rather than radical, as the latter could well lead to unforeseen consequences.
My sense is that Xi Jinping and Angela Merkel both get this. Let’s hope so.