Future of The dollar
Many researchers have been announcing the US dollar is in terminal decline, and that it is about to be replaced by another currency, maybe the Chinese Renminbi or a new Asian or Mideast regional currency similar to the Euro Buck.
The Bearish story can be summarised thusly : rates are so low in the States that global capital is flowing to raised rates in the Eurozone ( therefore the power of the EU Buck ). In addition, the huge Fed holes will exceed the taste for US Treasury bonds, requiring the Fed to print cash to buy the bonds — a measure widely presumed to be inflationary and so a negative for the dollar.
As valid as these bearish points could be, they do not address each issue at hand. From another point of view, it could be dawn for the US dollar instead of sunset. Eventually , a currency is a mirrored image of the economy that issues it. So the greenback bears are unconditionally or explicitly reckoning the Eurozone and Asian economies — especially China — will be stronger, more profitable and more steady than the US That may be a bad bet, for the following reasons:.
As poor as transparency could be in the States fiscal system ( you know, all those “mark to fantasy” derivatives and credit default swaps ( CDS ) are still wafting around off-balance sheet ), it is far worse in the East and yes, in some nooks and crannies of Europe too. China’s large banks are still under the effective control of the government. So when the state orders the banks to loan out billions of Yuan in “economic stimulus,” they do so, although the risks of adding to their already stupendous bad debts are awfully high. Please see my essay China : An Interim Report : Its Economy, Ecology and Future for more on this subject.
Japan’s banking sector and countrywide balance sheet has been chronically unwell for 20 years, and demographics and the global recession are only worsening that country’s concealed fiscal ills. Please see my essay Japan’s Runaway Debt Train for a more in-depth explanation. ECU banks face their own debt implosion, one that’s poorly accepted and largely opaque : the giant Eurozone banks have massive exposure to loan defaults in the quickly sinking Eastern ECU nations. The major Eurozone banks in effect made “subprime loans” to whole countries, not just homeowners. The losses have hardly started to be reported or scheduled.
IRs, particularly in the long-run, are rising in the U.S, and this can make dollar-denominated bonds more fascinating to worldwide capital. To buy US bonds, you must own or buy greenbacks ; so demand for bonds interprets into requirement for bucks. In spite of plenty of talk about trading oil in currencies apart from the US greenback, the buck remains the currency of the oil trade. Therefore in one sense the greenback acts as a defacto oil-backed currency. To buy oil, you first have to buy greenbacks. That sets a certain demand floor for the buck worldwide.
Contemporary upticks in the HK, German and French economies mask the underlying reality that all of the major Asian and Eurozone economies are still export-dependent. Once the positive results of their domestic stimulus spending plans wear off, Asian and Eurozone economies will find their expansion drops off, too. Regardless of all of the talk about domestic demand in China and the ECU , these economies are structurally conditional upon massive exports for their expansion and profits.
Without exports, their economies will be mired in recession. The US is also a major exporter, but it is seriously less conditional on exports than other trading countries. The US remains the only world “Empire” and thus the advantages deserving of an Empire accumulate to it alone.
This statement isn’t triumphalism, but simply a mirrored image of the reality the US maintains a worldwide commercial, diplomatic and army presence which is unequalled by any other country or regional coalition like the EU. every country above postage-stamp size is a “region of interest” to the US the bulk of worldwide active U.S.-based corporations’ profits are earned overseas, American diplomacy is active in each corner of the world, and the US maintains army bases in 63 states and has army missions in over 150 countries.
While the US is obviously stumbling thru a serious mortgage and finance crisis, some of its key global establishments and policies are quite forward-thinking. The value of this world reach and influence is simply overstated, but it’s also simply understated. Holding a currency or a bond denominated in a currency is in effect a bet on the future price of the issuing state’s economy and the soundness of its policies.
Its expansion, profitability, transparency, resilience, productiveness, resources, creativity and capability to weather crisis are all at risk. Other states face even bigger structural challenges in demographics, energy, food, water, creativity, and policy, but many are more adept at masking their incredible bad obligations and basic issues than the “let it all hang out” US. Maybe as the world recession mutates into a structural interplay of chronic crises, world capital will decide that “the demon you know” — the US buck — is indeed preferable to the demon you do not know.