Be in no doubt, when the dust settles and the crisis of these times recedes into the history books, the world will look different.
And one of the main differences will be the position of the US. Post credit crunch it will quite simply have less power and influence than pre credit crunch.
It won’t necessarily be a bad thing, it could even be a change for the best, but the fallout from a seismic change like this will always be unpredictable.
Yesterday saw another of those key moments in the course of this great power shift of these times. This time it was words spoken by the Chinese finance minister, and they matter, they matter a great deal.
California is in trouble. As you know, Arnie’s state is as good as bust. In fact, she is one of the richest casualties of the crisis, a far richer casualty for example than Iceland or Latvia. In fact, as of 2007, if California was a country, there would only be eight nations on earth with higher GDP. She is still bust though.
In Europe there is a chance other major economies could follow a similar fate, Ireland and Italy, for example.
The thing that all these economies have in common is that they don’t have their own currency. They are at the mercy of forces beyond their control.
Some argue that in the event that a major Eurozone economy moves close to default, Germany will have no choice but to bail it out. If more than one country hits the buffers, even Germany could come under extreme pressure.
But the US is not like that. The US has this one advantage that the rest of the world can only envy. She owns the currency that the rest of the world wants.
If the US gets into unaffordable debt, Uncle Sam could always print more money, and use that to pay it off. Imagine that you owe your bank some money and you get a stinking letter demanding repayment. So you nip into your bedroom, turn on the printing press, and the next day pop into the bank with your readies. It is just that if you were in that position you wouldn’t get the stinking letter in the first place, rather a phone call asking you out for lunch. And while you are munching on the caviar the kind bank manager offered you, you may hear some kind of vague hint that if at some time you could reduce your overdraft it would be rather pleasant.
But the snag is, when you can print your own money, it is rather tempting to overdo it.
There is another snag with owning the world money’s printing press. It can mean that your own currency becomes too expensive relative to other economies, so you watch with fury as cheap goods are imported from overseas at the expense of lost jobs at home. You end up with a huge balance of payments deficit, but hey, does it really matter, after all, you do own the world’s currency.
But then you can’t have it both ways. You can’t borrow whatever you like, but at the same time moan that other countries enjoy better terms of trade.
And that brings into play China.
Back in March, Zhou Xiaochuan, Governor of the People’s Bank of China raised that very point when he said: “The price [of dollar hegemony] is becoming increasingly high, not only for the users, but also for the issuers of the reserve currencies.” He also said: “When a country’s currency is no longer used as the yardstick of global trade, and as the benchmark for other currencies, the exchange-rate policy of the country would be far more effective in adjusting economic imbalances.”
And ever since then, there has been a growing chorus of voices saying the days of dollar dominance are coming to an end.
Last month, Russian President Dmitry Medvedev talked about a need for a new international super currency.
There are also signs that China is beginning to settle trade accounts with its local trading partners in yuans.
The alternative to the dollar appears to be what’s called Special Drawing Rights, which is a little like an IMF currency. When the IMF issues loans it values these loans in these Special Drawing Rights, which is actually calculated from a basket of currencies made up of dollars, pounds, euros and yens. In all likelihood, yuans and rupees will be added to that list in the not too distant future.
Yesterday at the G8 summit, Dai Bingguo, the Chinese State Chancellor said, and this was within hearing range of Barack Obama: “We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system.”
The loss of dollar dominance is inevitable, the speed with which it happens is unclear. But China is making it clearer: she wants to see the change occur faster rather than slower.
And the credit crunch is accelerating that process.
© Investment & Business News 2013