Short Sunday post – interesting opinion piece in the Times of London on the dollar, including why the Chinese renminbi (RMB) is not a substitute (yet). As long as the RMB remains pegged to the dollar, Chinese exports will have a substantial cost advantage.
The saddest part of the article (from my perspective anyway, and it’s my blog) is that the dollar’s ultimate fall has far more to do with American policy than the emergence of China. Key paragraphs:
Still, doubts about the dollar’s future persist. Its recent decline may be consistent with its performance in previous currency cycles. And the drop might be due to a willingness by investors to take on more risk now that the recession seems to be ending, rather than to a lack of faith in the safety of the dollar. But investors remain worried that the dollar’s decline, so far acceptably gradual, will turn into a rout, perhaps not next year, but in 2011.
Ben Bernanke, Federal Reserve Board chairman, says that this can be avoided if two policy steps are taken. First, the American government must make “a clear commitment to substantially reduce federal deficits over time”. Second, Asian countries must boost domestic demand so that they don’t have to rely so heavily on exports to America, and allow their currencies to appreciate against the dollar so that the US trade deficit continues to fall as a percentage of American GDP.
What Bernanke did not say, perhaps because he was playing the discreet central banker, is that neither of these things is likely. The Obama administration has already pencilled in eye-watering deficits for a decade and more, and is in the process of adding perhaps another $1trillion to the US deficit by “reforming” healthcare — claims of savings are somewhere between delusions and lies. It will then turn its attention to the energy sector, and the subsidies required to fund its green revolution.
Meanwhile, the Chinese are unlikely to allow their currency to appreciate in value, and other Asian nations will continue to intervene to prevent their currencies from rising against both the dollar and renminbi. Trade imbalances will, therefore, persist.
Which puts the ball right back in the Fed’s court. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed’s balance sheet by winding down $2 trillion in support programs — and does so precisely when the recovery takes hold so as not to cause a relapse by moving too early — the dollar’s decline will accelerate, shattering confidence in its long-term value. One well-respected expert tells me that in two to five years the dollar will no longer be considered safe enough to be the currency in which the world does business. Its replacement: separate deals in local currencies — the Chinese paying for Brazil’s oil in renminbi, which the Brazilians use to purchase stuff made in China — and the International Monetary Fund’s drawing rights, bits of paper backed by a basket of currencies, including but not limited to the dollar. That would mark the end of an era which has seen world trade flourish and millions emerge from poverty. Sad.
Suffice it to say, as an American and as a businessman who’s made a considerable investment in China, I like the status quo. The dollar peg makes PassageMaker’s job much easier. I hope that the author of this opinion piece is wrong and that Washington finds the sense to turn things around. I would rather not have to negotiate a currency swap every time we arrange a shipment for our clients.