A couple of days ago, UK daily "The Independent" published an article according to which a group of countries, most notably China, Russia, Japan, France, Saudi Arabia and some other Arab states have secretly met and discussed to replace the USD as the main trading currency for oil. Instead they would be interested in using a basket of currencies and to phase it in over a period of nine years.
Predictably, this information created some buzz in the financial markets: are the dollar's days numbered? In response to such talk, the value of the USD fell immediately. It did not immediately recover, and now a couple of days after the event it all looks like an episode in the dollar's weakening trend which has been in place for some months. In this time perspective, the newspaper articles probably have little importance as they do not affect the actual business cycle trends. USA has repeatedly in the past months proven to be lagging the rest of the world in recovering after the downturn. Since many investors had managed to convince themselves that the US would lead the rest of the world back to economic growth, the current situation has created some turmoil. The reaction to the newspaper article was just another example of how the market selects news that fit in with the current thinking.
Yet, the reported meeting has quite an importance for the longer term prospective for the dollar, say, for the next 10 years or so. The reported story about the decline of the dollar is not new, however, except in the degree of details that have emerged, and that it in itself is worrying enough. Led by China, several large and influential countries are openly challenging one of the pillars of the dollar system put in place after WWII. By placing the dollar as the world's reserve currency, USA helped the world economy to pull out of devastations of the war – and granted herself enormous powers of leverage over the rest of the world.
In economic terms, this dominance has for more than 50 years given the USA more leeway to conduct irresponsible economic policies than would otherwise have been the case. The Reagan-Bush era was a first indication of what were to come. The Clinton years were characterised by relatively prudent economic policies that almost balanced the current account deficit, before the George W Bush administration let go completely.
This situation has worried quite a number of observers. The U.S. government's budget deficit together with the current account gap represent "unsound underpinnings" in an otherwise "good" economic landscape, Already in 2006, Robert Rubin, chairman of Citigroup Inc.'s executive committee and former Treasury Secretary in President Bill Clinton's administration, said the following in an interview:
"At some point, these kinds of deficits are not viable," Rubin said. "The probabilities are extremely high that if we don't address these imbalances, then at some point, and it could be years down the road, we'll pay a very big price."
That price is obvious now. After years of living above its means, the US is now losing economic influence, and it is symbolised by the moves by the countries mentioned above to reduce the role of the dollar in trading oil. It is more than a symbolical move. The US has used the fact that oil is traded in dollar as a means to exert influence over the oil producing countries and no single move could do more to undermine the dollar's position as a reserve currency. In other words, the threat to the US economic world dominance is utterly real. Apart from being the result of failed economic policies, it is also a move that will happen as the fast growth of the Asian economies will reduce significantly the relative weight of the USA in the world economy.
The problem is what US policy makers can do. The answer is: very little. Gone are the days where US military power could be used to impose certain policies on reticent states. Posturing angrily would only have negative effects. So apart from some shrill comments from commentators from the more silly part of the right-wing establishment, US officials have wisely kept shtumm. Expect to see a wave of comments trying to persuade us that the US administration is really happy at the current levels of the USD. Such comments will change nothing on neither short nor long term.
No comments:
Post a Comment