Two of the most significant economic events of the past 40 years have taken
place this year. Compared with the dramatic credit-crunch of 2008 and the
temporary respite since then, this year's events may seem insignificant.
But they are, in fact, the beginnings of a more permanent solution to what
is now a very fragile international monetary system.
Some three or four months ago, China revalued its currency (the renminbi,
or yuan) upwards. For many years, the renminbi had been valued against the
free-floating American dollar. If the value of the dollar went up or down
versus other free-floating currencies then the renminbi followed parrot
fashion. The Chinese government did this in order to maintain low prices of
the consumer goods it was exporting to America, its principal customer,
whenever the dollar declined in value. Never mind that approaching half of
the Chinese exports had been made by American firms based in China, some
American politicians cried foul. But China was as entitled as any other
country to value its own national currency in any way that suited it.
From time to time, China pacified some of its more strident American
critics (of the trade union left and the Republican hard right) by
adjusting the value of the renminbi upwards against the dollar, thus making
its exports less profitable. But this year China took away its dependance
on the American dollar completely. Its renminbi is now valued against a
basket of other currencies, mainly of other countries in Asia. For those
who can discern the real meaning of this, it means that China now has
little faith in the declining value of the dollar and that it (including
the many American firms within China) sees its trading future lying more in
Asia and South America than with America itself.
The other significant event of this year is that several of the largest
Western banks are now joining with China in promoting the newly independent
renminbi as a future world trading currency as well as the two existing
ones, the dollar and the euro. According to an article in the Financial
Times yesterday, some of the world's biggest banks, such as HSBC, now have
enough reserves of renminbi to be able to settle the accounts of firms
which trade with China. Several of them, including Standard Chartered,
Citigroup and JPMorgan are holding roadshows in the financial capitals of
the world. The renminbi is now being transformed into a world trading currency.
The use of the renminbi for cross-border trade is still small compared with
the dollar or the euro, but it is already leaping upwards. In the first
half of this year, the direct use of renminbi for trade is twenty times
that was used in the second half of last year. The burger chain McDonald is
the first of many multinationals that will be issuing bonds denominated in
renminbi instead of dollars.
China, along with Russia, India and Saudi Arabia have been pressing America
for several years to bring about a new stable world trading currency. But
they've been scorned. Furthermore these four are all buying gold. India
bought a large tonnage from the IMF very recently. China and Russia are
also expanding their own substantial gold mines. Saudi Arabia is said to be
requiring America to pay additional gold premiums when buying oil.
Ever since President Nixon cut the link between the American dollar and
gold in 1971, the monetary world has gone mad. Because of the dollar's
already predominant position as a trading currency then, from 1971 onwards,
America was able to print as much American currency as it needed in order
to pay for its imports, its 200 plus army bases around the world and the
wars it promotes. In doing so it is also causing all the other major
currencies to depreciate. In effect, the rest of the Western world has been
paying for America's prosperity and military dominance.
At least it did so until about 1999. The worms started turning then. The
Europeans launched the euro as a powerful competitor against the dollar.
The European central banks stopped selling gold in order to retain what
they already had in their vaults. China started buying gold to strengthen
its reserves. A resurgent India followed suit and so did Russia, newly
flush with selling natural gas to Europe. Investment funds, including those
of John Paulson and George Soros are buying gold. The result is that the
price of gold has increased four-fold in the last ten years. It's not a
spike or a bubble -- its baseline is a smooth exponential curve. Besides
being a hedge against depreciating paper currencies, gold is now gradually
resuming its 2,500 year-old role as the basis of any country's currency.
Gold is not yet the standard for the world's nationalistic currencies as it
was before 1914. It was then when Western countries started printing money
ad lib to pay for the First World War and, after a few hesitant attempts,
never left off after that. The reality now is that Western European,
Japanese and American governments can never repay their present debts out
of taxing their citizens -- at least, not without massive inflation, more
money printing and more chaos in their banks and economies. They can't do
more money-printing for much longer. And, if they don't inflate their
currencies, then they'll continue to deflate -- as Japan already has for
the past twenty years. But in view of the massive unemployment that would
be involved -- and the civil instability that would follow, already evident
in one or two countries -- they can't do that either.
More than any other single country, America is now between a rock and a
hard place. Unless it makes up its mind fairly soon to take part in
negotiations for a world currency then the dollar (and probably the euro)
will be displaced by the renminbi alone. And then, unless China were to
call for a world currency conference and a genuinely objective world
currency -- and we could only hope it would do so -- we might be in the
same danger of a renminbi hegemony instead of the dollar one of the last 40
years.
Keith
Keith Hudson, Saltford, England
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