A small pebble was dropped into world trading pond on Monday this week when
the Chinese renminbi (yuan) became directly exchangeable against
the Russian rouble on the Chinese foreign exchange market. Another pebble
was dropped on Tuesday when Chinese Premier Wen Jiabao and Russian Premier
Vladimir Putin agreed that the rouble will be directly exchangeable against
the renminbi on the Russian foreign exchange in December.
This formalises the renminbi-rouble exchanges that have been going on for
years purely on the basis of personal trust between Chinese merchants who
set up shops just inside the Russian border and Russian local buyers. By
this method, small quantities of Chinese manufactured goods have been
seeping into Russia, and Russian furs and timber have been seeping into
China for manufacture there and then re-export to the West. Indeed, some
furniture I bought when moving house a year ago came from this source. But
this border-trade is relatively picayune so far.
For the immensely larger oil trade between Russia and China, the American
dollar has been used until now. One reason for this is that, since the
Chinese Revolution in 1949, there hasn't been a great deal of trust at the
top political level between China and Russia. Mao Zedong upset Stalin no
end. Indeed, they have had a mini-war or two over territorial boundaries.
Trust has only been fully restored in the last decade or so -- resulting in
massive pipelines being built between the Siberian oil fields and China.
The other reason is that it's been convenient to use America dollars
because of their sheer volume in the world -- what economists call
liquidity. This is because, at the end of WW2 (strictly speaking, Bretton
Woods in 1944), America (being the only non-bankrupted victor) forced 43
other currencies into subservience to the dollar (only the latter being
allowed to continue to be backed by gold). And when Nixon cut this
dollar-gold tie in 1971, then American dollars were printed in even larger
quantities in order to pay for its military efforts around the world and
its own balance of trade deficits.
However, although it's been convenient to use American dollars for most
trade in the world, it has its problems. Since 1971 it has been
depreciating even faster than it did before. Furthermore, and particularly
since the institution of the euro currency in 1999, the value of the dollar
has been vacillating. This means that any entity that trades with dollars
has to insure the value of future delivery by hedging (using derivatives).
This costs money, of course.
Since about 1990, the notional value of derivatives (the value they insure)
-- and, of course, their premiums -- has risen 10-fold because derivatives
are not only insuring goods and currencies but even other derivatives --
and "squared" derivatives of those, too. Since the credit-crunch,
derivatives now cover 15 times the real value of total world trade. Which
is ridiculous. The cost of this monstrous invisible superstructure would be
risible if not entirely unnecessary if we had a stable American dollar and
European euro. But they're not -- they're as nervous as kittens (kittens
that throw millions of people out of work on occasion).
But most of the advanced countries (that is, the trading entities within
them) have not been able to escape from the domination of the dollar (or
the equally vacillating euro more recently) because their governments are
all in debt. It is no wonder therefore that the only two major countries
which have large surpluses have now decided to cut through the cackle and
trade directly and more cheaply with each other.
This is the thin edge of the wedge for the dominance of the American
dollar. Freely exchanging currencies (though excluding the dollar) can only
grow from now onwards. It will be difficult for other countries to join the
Chinese-Russian set-up because America will no doubt threaten them, but one
by one (Brazil will probably be the next, and probably fairly soon, too)
they will do so because it's in their economic interests.
But, more accurately, there are now two wedges against the dollar and/or
the euro (if it survives). And the other one has come from an American!
This is Robert Zoellick, the President of the World Bank. In his article to
the Financial Times two weeks ago he has revived the notion of a
gold-standard world currency. You can be certain that this has lodged deep
in the minds of Treasuries all round the world, whatever their attitude may
be just at the moment. They're not going to be able to dismiss this
person's suggestion of a gold standard as glibly as they have been doing in
the past few decades.
The two wedges are entirely compatible. Once the American dollar has been
put in its place (as one ordinary national currency among all others) then
not only can all 200-odd currencies freely exchange with one another but
they can do so instantly if there is a constant gold standard (or any other
constant standard) in the background. Without a gold (or other) standard,
freely exchanging currencies are, of course, possible and easy to carry out
but they would be sluggish over a 24 hour period. This is more than enough
time for currency speculators to make arbitraging profits. But why feed
these unnecessary parasites?
Let me change the metaphor from wedges to horses (having forgotten I
started with pebbles!). It's not a one-horse race any longer but a
two-horse race. In this race it doesn't really matter which horse wins or
even if they are joint winners. The race is on. And what a fascinating race
it will be if allowed to run to completion without another financial
catastrophe in the meantime!
Keith
Keith Hudson, Saltford, England
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