Peter Myers – May 2, 2012
The Dollar’s role as the world’s reserve currency allows the US to run a large Current Account Deficit. In effect, it prints Dollars and presents them around the world, to buy assets, build military bases and equipment, and generally run the Empire.
In the process, the Empire gets the benefit of Seigneurage – it can spend/consume far more than it produces. As long as the US Navy rules the waves, no one can collect the US debt.
Producer countries like China, Japan and Germany, which have long had Current Account Surpluses with the US, now hold $ bonds and other $ assets which are unrepayable. Any attempt to pay them would crash the $ and render the assets worthless.
The only way these countries can escape from the $’s gravitational field is to conduct trade in other currencies.
China is now doing that. Given the size of its trade, this is a historic shift in the world economy which will force the US to withdraw from its empire, just as economic collapse forced the Soviet Union to do so.
The cause of this historic shift is Free Trade, coupled with Laissez-Faire economic policies, both of which are promoted by nearly all economists. The remedy is a return to Protection – but that is already too late, since the US has exported its technology and offshored its production.
Although one might applaud the end of US empire, the prospect of Chinese empire is daunting.
It’s likely that as China’s succession to US hegemony approaches, some sort of conflict will break out between them, as Americans realize that the “One World” policy they imposed on the world has led to their demise, and try to stave off collapse by blaming China for outsmarting them.
In item 8, Stephen Roach condemns Americans for a fixation on the Yuan (Renminbi, RMB) – blaming China for keeping it too low. He points out that the RMB has risen 31.4% against the $ since mid-2005, and that China’s current-account surplus has fallen to 2.3%.
However, as China advances in value-adding, it will increasingly export high-tech equipment on the lines of Japan Inc. So the Current Account Problem will remain; China will try to hide it by buying assets abroard, this time in Yuan rather than Dollars.
As the Trotskyist WSWS site argues, Internationalizing the Yuan will make it more vulnerable to currency manipulators – like George Soros, for example. But the size of the Chinese currency pool will make this risky for the manipulators too. Wen Jaibao’s call for more foreign capital to be allowed entry (item 9) shows the high-stakes game China is embarking on to achieve world-power.
The ouster of princeling Bo Xilai may be connected with this change of direction at the top. See “Fall of a Princeling“, Editorial in The Guardian, Thursday 12 April 2012.