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To those who say America can go on printing money forever…

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 Albert Beardow.

 

21-05-2013: Every now and then I come across a commentator or blogger saying that the US will never need to worry about a debt crisis, as the dollar is the global reserve currency and so the US can just print as much money as it desires to meet its needs. To me, this just provides evidence for how arrogant and incredibly parochial many people in the West are today.

Leave aside for now the theft from savers and lenders that inflation would cause, not to mention the economic contraction as saving & productive investment become near impossible. Leave aside the fact that quantitative easing disproportionately benefits those who hold significant financial assets, mostly the very wealthy, at the expense of those consumers unable to meet price rises. I want to look here at the implications of the changing international order, and how this view is a denial of the reality that the US is in decline as a global hegemon. After all, inherent in the view that printing money will not cause problems is the idea that the US dollar will remain the world’s reserve currency. The rise of the Renminbi is coming sooner than you think.

It is not difficult to envision the following scenario. After such a long period of low interest rates and quantitative easing, inflationary pressures (be it in consumer goods or assets) really start beginning to bite, and interest rates move upwards. The unaddressed fiscal deficit is worsened by the increased interest outlays, and the Fed comes under immense political pressure to continue bailing the government out with its money printing. Meanwhile China, having steadily internationalised the Renminbi, has recently introduced full convertibility. Worried about future US monetary policy, countries have already substantially reduced their Dollar holdings in favour of other currencies. Faced with the choice of a rapidly inflating Dollar or a stable Renminbi, countries quickly move to the latter, initially in East Asia, by a large margin the largest economic region in the world, but quickly followed by South Asia, Africa, Oceania and Latin America. Even though they will lose out as dropping the Dollar hastens the fall in its value, these nations are prepared to take the loss to avoid any further disasters. Only Europe, the Middle East and Central America, for political regions, consider continuing to use the Dollar, but even there the economic logic is hard to resist. Faced with the loss of the Dollar’s status as the premier world currency, the US has no choice but to take the pain of inflation and austerity at home, experiencing the kind of devastation currently seen in countries like Greece and Spain. This is compounded by the surge in commodity prices in light of the weaker Dollar. The Chinese financial world order has arrived with remarkable speed.

Of course, the full convertibility of the Renminbi is still many years away, as is its complete replacement of the US dollar in the global financial system. There will be many years of flux and gradual change before that happens. But it will happen sooner than people think. In 2012, 6.6% of Asia-Pacific trade with China was settled in Renminbi, with the figure as high as 17.6% for Singapore and Taiwan – from a base of 0% in early 2009.  HSBC predicts that as early as 2015 half of China’s trade with developing countries could be carried out in Renminbi. Central banks in countries such as Malaysia, India, Japan and South Korea already hold foreign exchange reserves in Renminbi-denominated assets.  And China intends for Shanghai to be the global financial capital by 2020, which implies full convertibility by this date. Remember, this process only began in 2009, after the Western financial crisis. And if commodity scarcity turns out to be the main drag on the Chinese economy, a strong Renminbi could well work to their advantage.

The collapse of the dollar could also happen sooner than people think. There is however, a catch here, a possible saving grace for the US in the form of massive shale gas and oil reserves that can now be exploited. The full impact this will have on the American financial situation is not completely certain, but even if the US could use such a windfall to solve their fiscal issues, I doubt they will. The political temptation to spend even more on top of the energy boom is too great, and any crisis could be too mild to force the US to learn their fiscal lessons. The day of reckoning will merely be postponed. Perhaps to a time when the Renminbi is ready to take the Dollar’s place.