That’s the headline from this new article, one of many I’ve been seeing on the inevitable arrival of the post-dollar world. This one sees the current economic upheaval as a sort of gigantic correction that will restore equilibrium to a global economy knocked out of whack by huge trade and capital imbalances.
A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.
This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.
The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed “crass Keynesianism”.
…The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.
What’s more, most Chinese don’t earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds. Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.
How China actually goes about doing that – adopting Henry Ford’s model – is anybody’s guess, but I’d say if it ever happens it’s generations away. (It reminds me of hopes that Afghanistan’s poppy-growing peasants will adopt democracy in short order, become a second Vermont and work out their most pressing problems in civil town halls over chardonnay and quiche.) That’s the flaw in this article, glossing over just how excruciatingly difficult such a sea-change would be to implement. Its observations about the fate of the dollar and the new balance of power, however, seem to me spot on:
These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world’s reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.
This is still a couple of years off, but China is preparing for it now. The dollar will spurt up periodically between now and then, but its general trend has to be downward. It is literally inevitable that the value of the dollar will be slashed over the next couple of years. The government needs to lower the value of the dollar, but is hoping to do so slowly. The problem is, those holding dollars, like China, are hardly stupid and know what’s going on, and will not cheerfully stand whistling on the deck as the Titanic goes down. And if there’s a panic and a global dumping of the dollar, it could mean havoc. For a good description of why this is so, and why the dollar simply must go down, check out this clip from CNBC (scroll down). Highly recommended, especially toward the end.
For the record, i have no background in economics and make no claims that I have even the slightest idea what I’m talking about. I just like to write about money and politics. What I do know, however, is that I first recommended buying gold here in the closing days of 2006. Here’s where it was when I recommended it then compared to now.
1
By Chip
The title of that article is a bit off. Dollar is dead? kinda. “Long live the RMB?” Laughable.
September 28, 2009 @ 9:31 am | Comment
2
By Richard
I think the point is the increasing economic muscle of China in general as the dollar wanes.
September 28, 2009 @ 9:43 am | Comment
3
By stuart
Does the RMB even qualify as a currency in the true sense given its manipulated, exchange-restricted form?
September 28, 2009 @ 10:13 am | Comment
4
By merp
Does the RMB even qualify as a currency in the true sense given its manipulated, exchange-restricted form?
Making it exactly like the currencies of all other emerging economies? Yes. For some reason there is this unwarranted suspicion among developing nations that foreign speculators will attack their currencies if policy is too lose.
September 28, 2009 @ 10:42 am | Comment
5
By Richard
It’s manipulated, but I gotta say, I was paid the last few years in RMB and I am very, very glad. I would much prefer at this point to be paid in RMB than dollars.
September 28, 2009 @ 11:08 am | Comment
6
By Ran
“Does the RMB even qualify as a currency in the true sense given its manipulated, exchange-restricted form?”
I don’t know. Perhaps you may post this question to Mahathir and Soros.
September 28, 2009 @ 1:25 pm | Comment
7
By ecodelta
I wouldn’t dismiss the dollar so fast.
That said, here in the Euro-zone we are quite happy with the Euro thank you.
The contraction of export markets is a real problem for excess capacity economies.
Stimulus package at national level may help, but only for a short time.
And stimulus, infrastructure package is needed but on a global scale, not only to just build new things but to create new markets for the current overcapacity.
Some examples.
Desertec.
http://www.desertec.org/en
(similar project also in central asia been discussed)
Euroasian railroad link
Provide alternative to container ships. Also makes central asia and east China more accessible to development.
Rail, pipelines and road links through Indochina to ease traffic in malaka straits
Bering strait bridge
http://en.wikipedia.org/wiki/Bering_Strait_crossing
September 28, 2009 @ 2:20 pm | Comment
8
By ecodelta
Some more
http://en.wikipedia.org/wiki/Trans-Asian_Railway
http://en.wikipedia.org/wiki/Bridge_of_the_Horns
http://en.wikipedia.org/wiki/Gibraltar_Tunnel
September 28, 2009 @ 2:31 pm | Comment
9
By Si
Ultimately it is in no-one’s interests for the RMB to replace the USD. As far as the CCP is concerned, they need a strong RMB like they need a hole in the head. Certainly the USD will lose value, but it isn’t going to get replaced as the reserve currency anytime soon. What is its replacement? The Euro? The Yen? There are no obvious candidates amongst the other major currencies (and as yet, the RMB is not a major currency – this will change, but it is unlikely to be soon)
September 28, 2009 @ 7:23 pm | Comment
10
By stuart
“Mahathir and Soros”
Cabaret?
September 28, 2009 @ 8:11 pm | Comment
11
By pug_ster
ecodelta,
Alot of the goods that is shipped from China to Europe is thru Siberia. It takes 20 days to ship something there but China is planning to make a railroad to go thru Xinjing instead.
A railroad between Alaska and Russia is just impossible and not economically feasable. mostly because of the harsh climate between the 2 countries.
September 28, 2009 @ 9:27 pm | Comment
12
By ecodelta
@pug_ster
An improvement of the railway communications towards the west could improve the balance between the coast and inner cities of China.
It could actually re-balance the country.
Road improvements wouldn’t be bad either. I plan to go by car from west Europe to Beijing one day. 😉
Spain->France->Germany->Poland->Ukraine->Russia->Kazajastan->China.
September 28, 2009 @ 9:56 pm | Comment
13
By Si
“I plan to go by car from west Europe to Beijing one day.”
I take it you plan to live to a ripe old age then?
September 28, 2009 @ 11:29 pm | Comment
14
By ecodelta
@Si
Short life, but exciting. 😉
September 28, 2009 @ 11:36 pm | Comment
15
By George
Nice post, I’m always a big fan of economics-related posts! 🙂
It’s strange that many of the journalists that write economics news articles imply a relationship between a weak dollar and the end of American competitiveness/big troubles for America. The dollar has been very strong for several decades and while it allows part of America to maintain a high standard of living, it is also promoting the erosion of a middle class. Wage inequality in America is greater now than it has been for since the 1920s, which is both good and bad. On the one hand, highly capable people are being highly rewarded by the marketplace. On the other hand, the have nots of American society will find it harder and harder to get by.
Devaluing the dollar would be very damaging if it occurred quickly. Even a gradual devaluation would lower the average American standard of living, but we Americans are already living far above the level of world sustainability. As the richest nation in the world, I’ve always felt that we have a responsibility to lead by example in preparing for a more crowded 21st century, and a downward adjustment of our standard of living is unlikely to be accepted voluntarily.
I agree with Si and Ran that the RMB isn’t a viable replacement right now. Just as the dollar is artificially high, the RMB is artificially low and if the RMB were allowed to float naturally in the market, its strength would be a death knell for a lot of Chinese exports.
September 28, 2009 @ 11:46 pm | Comment
16
By Si
You’ll have to find some obliging relatives/friends to ferry your remains to Beijing then, if you want to make that trip…..Unless you can do it for charity or some such
September 29, 2009 @ 12:36 am | Comment
17
By ecodelta
@si
“Beijing or bust!!”
Can pick you up along the way if you want.
September 29, 2009 @ 12:56 am | Comment
18
By Richard
George, I don’t think the RMB will replace the dollar soon, and I also don’t think weakening the dollar is bad – it’s necessary. The problem is that when there is a loss of confidence in how we are going to pay our $12 trillion in debt, and panic over the oncoming waves of new foreclosures adding more and more toxic debt to the balance sheet – then there can (and I believe will) be a steep drop as China and others sell in panic, people empty their bank accounts to place it in safer assets, and soon you have a vicious circle. Top it off with the fact that we are printing money as fast as we can, which could, in a year or two, lead to serious inflation (after some deflation along the way) and you have a perfect storm. My other prediction is that the stock market will do alright. People will want to get rid of their dollars and will place them in stocks and commodities – anywhere but in the bank as dollars. The stock market must never be seen as a reflection of how well the economy is doing. It’s kicking butt right now, as graduates face 52 percent unemployment and 10 percent for adults, as well as endless debts from college loans and credit cards. An absolutely atrocious time for America, and there’s just about nothing Obama or anyone else can do about it. He is caught in a vice. Raise interest rates and risk revolution. Keep them low and risk inflation. No way out.
Ecodelta, did you watch the CNBC clip in my post? It is really an excellent primer on the current state of the dollar. No matter what the Euro or other currencies did, the dollar is going down.
September 29, 2009 @ 1:13 am | Comment
19 Posted at www.pekingduck.org
[…] that we talked about this just yesterday in regard to a relatively obscure article, and now it is the 2nd leading story on the front page of […]
September 29, 2009 @ 7:59 am | Pingback
20
By Ran
“Cabaret?”
Something like that, here in the East we call it a Third World leader and Robin Hood, the western hero that stealing from the poor and giving to the rich.
September 29, 2009 @ 8:30 am | Comment
21
By Richard
Let’s put all comments to this in the new post on the subject.
September 29, 2009 @ 9:32 am | Comment