As the article mentions, most of the emerging economies that are starting to be affected more by the yuan than the dollar are in East Asia. That only makes sense, anyway. The dollar isn't being displaced as a key currency, it's losing some prominence in emerging markets--which, if they're ever to emerge, will float freely, anyway. It's exactly what you'd expect.
The basis of the Euro is on a multi-state entity with closed books and little regulation. This basically means the liability of any single country can impact the whole of the EU and by extension the Euro. Until the EU makes a part of membership, approval oversight on all member country budgets, the stability of the Euro is a bit fractured. (Getting oversight is something the countries generally refuse on the non-incorrect grounds of state independence, but then why join a combined currency in the first place? UK got it sorta correct)
And for clarity, the reason I see the multi-state being an issue is, it is slow to act to resolve issues or expose issues, since resolving issues takes a combined intent and single states have little incentive to keep their books correct publicly (plenty of upside, little downside).
While I don't see the dollar being the world currency forever, I also don't see it needs to be.
No, money normally moves into countries with higher interest rates (ie their currency is purchased), all things being equal. But of course all things are not equal.
China will not replace the USA as the central economic power, even if the economy of China exceeds that of the USA. Step back from the details for a moment and think about great economic centers when they are at the peak of the power. Is there any generalization we can make that is true of all civilizations, in all centuries, and for which we have fairly detailed records, even going back thousands of years? Yes, there is at least one generalization that we can make with confidence: each center, when it was at its peak, was a place where foreign merchants felt safe and comfortable. Does that hold true today in China? Do foreign merchants feel they can make deals as equals with the native Chinese merchants? Can foreigners trust that the Chinese courts are fair and neutral and unbiased?
Islam was at it peak in the 800s and 900s, and during that time Jews, Christians, Hindus and other groups, which had been hated in the past and would be hated again in the future, were all welcome.
Venice was at its peak in the 1400s, and muslims merchants felt safe there, despite the strong anti-muslim sentiment in much of Europe at that time. The same holds true of Amsterdam when it was at its peak in the 1600s.
As for England, as it reached its peak in the 1700s, we have Voltaire's famous description:
"Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion and reserve the name of infidel for those who go bankrupt. There the Presbyterian trusts the Anabaptist, and the Church of England man accepts the promise of the Quaker. On leaving these peaceable and free assemblies, some go to the synagogue, others in search of a drink; this man is on the way to be baptized in a great tub in the name of the Father, by the Son, to the Holy Ghost; that man is having the foreskin of his son cut off, and a Hebraic formula mumbled over the child that he himself can make nothing of; these others are going to their church to await the inspiration of God with their hats on; and all are satisfied."
He does not use the phrase to mean "the biggest economic power", though often the center is the biggest economic power. But he also applies it to Antwerp in the 1500s, when the religious wars were at their peak, and when, despite the wars, southern Europe and northern Europe needed to find a way to trade with each other, and market and political forces established Antwerp as the center of trade in Europe, because it was a northern city still mostly under Spanish control -- the perfect meeting place of north and south.
I am not saying that the USA will always be the center of the world economy. But I am saying that the next center will be open to the world, in the same way that previous economic centers were. China is not currently open to the world in the same way. It would take a political revolution as big as the one in 1949 to transform China into the kind of open political entity that former economic centers have been.
And can a nation really have the dominant currency if it is not the central economic power? It is reasonable to say that Chinese yuan will become more important over time, but this title implies a larger change: "The yuan is displacing the dollar as a key currency". If the implication is that the yuan will actually replace the dollar as the dominant reserve currency, then that implication is probably false. Politics plays a large role in these shifts, not just economics.
> Do foreign merchants feel they can make deals as equals with the native American merchants? Can foreigners trust that the American courts are fair and neutral and unbiased?
As a foreigner, I feel somewhat qualified to answer that question.
The corruption perceptions and international ease of doing business surveys and rankings would provide more statistically significant evidence to counter your anecdote. Note that competition is relative - we may find the U.S. courts deplorable on specific issues but they do turn out a measure better than most other economic powers' courts, e.g. China, Russia, or Brazil.
Did you look at the actual data behind this survey? I just did, and it's a little sketchy.
The US ranks alongside the rest of Europe for most of the data sources that include the US (many of TI's data sources do not), except for two surveys which sharply differ:
* TI's own "Bribery Payer's Index", which gives the US a 4.6 out of 10 (a score more compatible with Southeast Asia than North America) in the crosstabs, but for which the actual TI BPI report gives results back in line with Europe.
* IMD's survey from 2010, which gives the US a 6.5 (again, significantly lower than Europe) but for which no actual data appears to be publicly available.
In both cases, the actual data extracted from these surveys (the TI index is a meta-analysis of many surveys; a survey of surveys) is "phone surveys to business leaders"; TI has selected specific questions from these surveys as indicative and discarded the rest of them. In the IMD case, for instance, there appears to be one question at all that's selected from the survey: "Is there bribery or corruption, yes or no".
A 6.5 score from the IMD report puts the US in the 6-7 band along with Estonia, Malaysia, Spain, and Israel. This seems like an extraordinary claim, as is the claim that there is less bribery in Qatar and Chile than in the US.
Similarly, the 4.x score in the BPI survey puts the US in a band with China, Russia, the Czech Republic, the Philippines and Argentina. This is an extraordinary claim, requiring extraordinary evidence.
If you excluded the BPI and IMD surveys from the data set, the US would probably be duking it out for tenths of a point at the top of the list with the rest of Europe. As it stands, we're simply in the top quintile, unlike China.
I agree that this is an extroidinary claim, but it is technically named as the Corruption Perception Index, which is relevent to the discussion about the perception of organizations doing business in different countries.
The real question is: Is there any other data on this scale to refute or back this research?
Once again, it's relative. It's not just corruption that matters, it's also economic power. Germany, for example, is ranked above the US at 14 in the CPI. However, the US is ranked 4th in ease of doing business, while Germany is 20th.
Economic power is also somewhat based on productive might (GDP, basically). If it weren't then we'd expect New Zealand to be the economic center of the world. Are we really going to argue that New Zealand is the economic center of the world?
The only entity I see which even comes close to matching these figures is the EU as a single entity. However, recent events have shown us that the EU is not a single entity.
>The corruption perceptions and international ease of doing business surveys and rankings would provide more statistically significant evidence to counter your anecdote.
As a foreigner in the US, who have lived and worked in two BRICS (Brazil and China) and visited a third (Russia), I don't think you've properly made your case. What about doing business here is inherently less fair to you as a foreigner doing business?
I explicitly am asking about doing business in the sense of trade of goods or services, both buying and selling. I am not talking about coming here as an employee on an immigrant visa.
"Can foreigners trust that the Chinese courts are fair and neutral and unbiased?"
My question: Can foreigners trust that the US courts are fair and neutral and unbiased? Please look at the most current cases of Apple vs. Samsung and Cisco vs. Huawei before giving your answer.
You are pinning a vast economical shift on just one factor? You have a very blinkered view of history. When Voltaire wrote that description he was just seeing the very few anointed few which the English allowed for their own benefit to trade with them in London.
>each center, when it was at its peak, was a place where foreign merchants felt safe and comfortable.
And talking about foreign merchants feeling safe and comfortable, did you ever ask how the American Indians felt as the US become an economic empire, or how comfortable it was for non-europeans to do business in the European colonies? Yes, London allowed a few traders from it's colonies but they worked damn hard to make sure the colonies didn't industrialize. India in particular become deindustrialized under British rule - all of India's cotton mills were packed up and send to Manchester, and the production of cloth forbidden. Even relatively small things like the production of salt in India was forbidden so British salt could be exported to India.
The majority of foreign merchants weren't even allowed to participate in British markets and were violently suppressed if they tried to. This world you speak of - where economies grew because they set up such nice and comfortable places to do business in - never existed.
You say China isn't open to business - why then is the entire Fortune 500 doing business in China and increasingly shifting more and more of their manufacturing there? There is cost, but there is also the fact that besides cost, as Steve Jobs told Obama, the expertise, supply chains and capability is shifting to China.
If you read any recent works on China, like the recent one on China by Dambiso Moyo - she makes the point that China is better at doing business with developing countries than America. http://www.dambisamoyo.com/
>Do foreign merchants feel they can make deals as equals with the native Chinese merchants?
This is exactly the point she addresses, and most African and many developing Asian countries are increasingly favoring dealing with Chinese. The Chinese pay more for resources, build useful infrastructure, and provide much needed goods at affordable prices - all things which are increasingly making it an essential part of the economic center in much of the world.
Monarchies were hardly an open political entity and the Middle Ages were hardly tolerant times. So perhaps the base ingredient is rather simple, be open to trade. There have been periods when both China and Japan were inward-looking, and it took gunboat diplomacy to force open trade routes.*
Today, regardless of politics, China is most definitely open for business, and actively courting the world for trade. Many expats choose to live, work and build businesses there. If you don't, thanks to technology, you can still do your business with China while sipping a pumpkin spice latte in Starbucks.
*As an aside, today's multi-national corporations are remarkably similar in many ways to the British East India Company, just without the muskets!
The title says displacing, not replacing - the yuan carving out a zone of dominance in Asia-Pacific would, by itself, be monumental.
Economic orthodoxy asserted that an opening of the Chinese economy and FX regime necessarily precede yuan internationalisation. Observing currencies (and implicitly capital flows) moving in concert with the yuan absent those steps suggests a back-door route to internationalisation distinct from the traditional IMF/B-W path (and thus off the radars of the American and European financial centres).
Given that currencies and capital markets are in large part a confidence game, i.e. punctuated equilibria versus smooth progressions, seeing premature, and more shockingly shadow, internationalisation is profound.
'displace' and 'replace' are synonyms in this context. What you are discussing is China becoming the dominant reserve currency in East Asia, which is a separate claim than the one made by the article.
I don't mean to twist this into a bitcoin debate/discussion, but this statement...
"But I am saying that the next center will be open to the
world, in the same way that previous economic centers
were."
... appears to help explain the support and rise of bitcoin. The only way it isn't yet open to the world is access and usability and there are people currently solving those two problems.
The only problem I see with that is that was true when fast reliable communication required presence. Now China could be the economic center of the world, but no one foreign would have to show up.
The problem was never having to show up. The problem is making sure that disputes are solved fairly, that your debtors can be compelled to pay and that your assets won't be seized.
I think you make a good point, and show a good history of the rise of countries that adopted economic liberalism (and subsequent decline of many when they rejected it).
However, the stronger point that comes from your comment is that the USA needs to look at how it is drifting from a place where foreign merchants can gather safely and trade freely, and how that will certainly affect the future prosperity.
It's pretty obvious that neither the Republicans nor the Democrats are willing to cut down on spending enough to start chipping away at the national debt. Hopefully the (partial) weakening of the greenback's status as the world's primary reserve currency will force them to take action.
Actually, people trust the dollar so much that the yield on a 10 year treasury bond has been below 2% for quite some, historic lows. Bonds that aren't inflation protected actually lose money (i.e., bond bought for $1000, worth $950 10 years later); people are paying us to hold their money.
And you'll note that Japan has had a much, much higher debt-to-GDP ratio for quite some time, but has had sluggish growth throughout. The U.S. debt-to-GDP ratio was higher during WWII.
The main reason for this reply is that we shouldn't be cutting spending right now. Governments should be running deficits during recessions. For proof of how poorly cutting your way to growth works, take a look at most of the countries in the E.U. (and no, we are not on our way to Greece. It's a horrible analogy. Greece was on the Euro, not their own currency. Their goods, therefore, are not competitive. So rather than external devaluation, a weak currency, high inflation, they're having internal devaluation, people have to accept lower living standards).
Interestingly enough, the largest area of long-term debt growth is health care costs (medicare and medicaid). The Bush tax cuts are number 3 or 4. The ACA takes some initial steps in order to slow the growth of Medicare and Medicaid. The Ryan plan does, too, but by moving the cost to the elderly.
I disagree. Treasury yields are not that low because of trust, but rather because the world is awash with money, and the owners of that money are desperate to park it in a liquid format, of which there are few options on the scale needed.
I actually meant to include this in the original comment.
I disagree with you in this respect. Investors do have a lot of money, and they do need vehicles in which to invest their money. But when equities are not attractive, they go for safer bets: treasury bonds.
So in essence, it is an issue of trust. Investors would rather place their money in equities as opposed to trusts because the yield is so low, but they fear placing money in equities.
I'm not sure I understand your argument about the scarcity of liquid instruments. The number of available equities and money market instruments hasn't shrunk. And there are bonds available from other currencies.
I still don't think it's trust. It's desperation. Equities aren't really in the same class as government bonds. But the holders of all this cash (I won't even call them investors, but rather folks left holding the bag after a gigantic monetary expansion) can't look to equities for a better rate, because in order for any instrument to provide a reliably high yield, the money supply would have to grow even faster, and it's already grown too fast.
I think from a simple standpoint, no citations are needed:
Fact #1) The U.S. borrows a bunch-o-money, therefore there exists a bunch of money available to lend.
Fact #2) Owners of that money would prefer a higher yield, but there does not exist enough alternative assets to put such a hugh amount of money, e.g. look at gold and oil price curves. Real estate is an option for some but it's messy and illiquid.
Fact #3) There currently exists no viable plan for the U.S. to reduce their unfunded liabilities, so what exactly are the owners of this money putting their trust in?
Safe assets are the most desirable, and in many cases the only permissible, collateral. Given increased collateral demand for financial institutions for reserves, margin, and collateralised borrowing and the potentially shrinking pool of non-Treasury "safe assets" not already on central banks' balance sheets the "price" (yield) of (on) safe assets would be expected to degrade swiftly without regard to concerns about the "safe" asset's quality.
It's obvious that the Republicans and Democrats TOGETHER can't do it. Either party has things they'd be happy to cut (extra healthcare, extra military, extra tax cuts) - it's the combination of both together that are making the deadlock.
Also, it is mathematically as much a problem of not raising revenue as it is a problem of cutting spending. Strange that you did not mention this.
It isn't at all obvious that the level of the national debt is the only issue influencing the dollar's usage as a reserve currency.
When has a major country ever really paid down its debt? The debt never gets smaller. At best the economy grows faster than the debt so that the debt to GDP ratio improves.
The problem right now is that we're spending too much money on the wrong things (military spending and entitlements) and it's crowding the things out of the budget that actually help the economy, like basic research and education. Imagine for one second where we would be if we swapped the budget lines for the DoD and scientific research.
If you visit http://www.budget.gov.au/2012-13/content/bp1/html/bp1_bst10-... and scroll down to Table 3, you will see that in the year 2008-2009, the Australian Federal Government had a net debt amounting to -0.1% of GDP. Net debt being negative means the government had net assets - any debt could have been paid off with cash on hand.
Of course, you can try to argue Australia isn't a major country...
You're talking about the deficit, not the debt. You can hardly read what I wrote as saying that no major country has ever run a budget surplus for a year or two. Australia continues to have some AU$200+B in outstanding treasury securities. (http://www.aofm.gov.au/content/borrowing/commonwealth/Monthl...)
SDR (Special drawing rights) will displace the dollar before the yuan does. SDRs are instruments created by the IMF that represent a basket of currencies held by IMF member countries.
The yuan currency market is too small and illiquid to displace the dollar as the world's reserve currency.
I doubt that SDR will ever replace the dollar. From wikipedia:
> Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. After the collapse of that system in the early 1970s the SDR has taken on a far less important role.[5] Acting as the unit of account for the IMF has been its primary purpose[Williamson 1] since 1972.
The article seems to be looking at trends from the crisis years vs the pre-crisis years. It seems odd that it'd leave out any consideration of the fact that there's been a substantial amount of uncertainty in the global economy of the last couple years, and that whenever the economy seems like it's heading for trouble, the dollar gains and less "safe" currencies (the rupee et al) decline. One would think that would at least have a significant effect on the fact that the correlation between the dollar and developing world is shifting.
Gold trade has features that are similarly key to bitcoin trade: immune to inflation, anonymous, and untraceable. Could BTC supplant Gold as a currency in that regard?
While I don't think the post you're referring to offered any deep insights, it's definitely not a conspiracy theory to state that the ability of the US to sustain their deficit spending largely depends on the dollar remaining the default currency of the global oil trade, and that maintaining this status quo is one of the key missions of US foreign policy. As such, it's one of the factors that determine US military presence, or interventions.
Specific conspiracy theories aside, it isn't implausible that the country with the largest military would be motivated to use that military to defend its economic position. It's also not entirely crazy to think that other nations would be terrified of a country with a massive military falling on hard times. Countries with lots of guns and lots of desperation do not tend to make decisions that are good for everyone else.
These types of moves have been standard operating procedures for all the great nations since the dawn of time.
The health of the US depends on the trade of oil for dollars, just like the turn of the world depends on energy...
This petro-dollar system helps establish the dollar as the world's default currency, and regulates it dominance.
If you don't think we are going to eliminate anyone that tries to inject a non-dollar currency as a trade for oil, especially in the middle east, then you live in a fantasy world.
That entire region has been destabilized for the benefit of the US for the last 50 years.
It's much easier to come in and take (buy, transfer, etc) the oil when those nations are in ruin, then it is when a strong leadership is present.
The moment that leadership decides to trade oil for non-dollars, or even worse, under a gold-standard (non-fiat, non-debt system), then you start seeing on CNN and Fox News stories of all the innocent people being killed by "despot" monsters, and all our useful-idiots begin their war chants.
The dollar was given a central place in the international exchange system under the Bretton Woods agreement, which came just after the end of World War II, as you guessed. Before the Great Depression, I don't think there was an analogue, because reserves mostly consisted of gold. However, part of the reason that gold became the monetary standard (as opposed to say silver) was because of its use by the British Empire, which was the largest player in international trade.
On a horribly tangential side-note, if given the chance, have a stay at the Mount Washington Hotel in Bretton Woods, New Hampshire, where they actually hammered all this stuff out. It is of another era, and you can feel the weight of that event in the air there still.
The correlation in currency movement is most likely a result of concrete steps taken by China over the years to reduce the need for an intermediate currency, traditionally the USD, in trade between two countries.
There's plenty of evidence that the seeds have been planted for a free-floating (potentially gold-backed) Yuan to eventually sit alongside (not necessarily displace) the Euro and USD as a major reserve currency.
January 2012: "Sheikhs fall in love with renminbi"
March 2012: "China has signed a $31bn currency swap agreement with Australia, a step towards boosting the renminbi’s profile in developed markets. Beijing has established nearly 20 bilateral swap lines over the past four years, but Australia ranks as the biggest economy yet to sign such a deal"
April 2012: "This morning, we saw the launch of the first RMB bond outside of Chinese sovereign territories. And it happened here in London. This builds on the progress London has already made toward becoming the western hub for RMB.’
June 2012: "China and Japan began direct trading of Chinese yuan and Japanese yen in Tokyo and Shanghai on June 1, in a move to boost trade and investment between the world's second- and third- largest economies, and also viewed as a further step to enable the yuan to become a truly global currency."
June 2012: "China and Brazil strike $30bn bilateral swap deal to reinforce economies. Announcement also includes plans for joint satellite launches, culture centres and language networks
August 2012: "ZIMBABWE has been urged to follow the example of some Central African countries which have taken the initiative in using the Chinese currency - the yuan. Last month a number of Central African banks were given access to yuan-denominated bonds by the China Development Bank Corporation (CDB)."
Isn't the notion of a gold backed currency considered antiquated now? My understanding is that both the US dollar and Euro are fiat currencies as well, the US dollar having abandoned the gold standard in the 70s (http://en.wikipedia.org/wiki/Nixon_Shock).
Returning or going to a gold standard is a very regular recommendation by assorted persons. My personal perspective is that it's intuitive, but suspicious, and I'm not willing to invest the momentous amount of time and effort it would take to feel confident in taking one side or the other. (Other people need a smaller investment to feel confident.)
I've updated the post to clarify, as obviously nobody knows for sure. Many financial pundits think it might happen, with the RMB backed by a combination of gold and a basket of currencies.
By "backed by" I think you mean operated as a managed-float with these things as a basis.
RMB has lots of influence in Asia because many countries in the region are exporters to the US and Europe and in direct competition with China there. Countries like Malaysia have a managed-floating currency based largely on the value of the RMB to make sure that they can compete effectively with China on a day-to-day basis when dealing in foreign exchange. I believe this is part of the reason analysts tend to give the RMB too much credit, once China grows to the point of higher internal consumption and less export dependency we will see many Asian currencies reforumlate their floats to reduce the emphasis on China.
Yep, still a managed float, with gold perhaps added to the basket at some point to make the RMB a partially gold-backed currency. Up until a few years ago, the Swiss Franc was 40% backed by gold.
