Global Agenda: Greenback blues

The impression being created is that the US dollar is imminently doomed, whereas the relentless rise of the Chinese yuan is as inevitable as the ultimate triumph of the proletariat in the class wars of Marxist theory.

dollar 88 (photo credit: )
dollar 88
(photo credit: )
The new bon mot in the global economy, along with the "green shoots" hype discussed here several weeks ago, is the coming demise of the US dollar as the dominant currency for conducting business, trade, investments, etc. It is to be replaced, so we are assured, by the next big thing in the history of the world, namely China and its renminbi, or yuan (and let's not bother with why it has two names). Several leading Chinese officials have sounded off on this topic; more substantively, the Chinese government is beginning to make agreements - first with Brazil, now with Malaysia - in which trade will be conducted in the currencies of the countries concerned: renminbi and reals, or renminbi and ringitts. These developments follow more learned and "serious" discussion, in academe and at financial symposia over recent years, on the same theme. But whereas the academics were aware of the central facts regarding global reserve currencies (namely, that gaining or losing that status is the result of numerous complex factors and that developments in this field are measured over decades rather than years) and structured their papers and discussions accordingly, once the idea reached the popular media, this perspective went out the window. The impression being created is that the dollar is imminently doomed, consigned to the proverbial garbage can of history, whereas the relentless rise of the renminbi is as inevitable as the ultimate triumph of the proletariat in the class wars of Marxist theory. However, before racing off to join Jim Rogers and other drumbeaters for the "Chinese century" we have supposedly entered, enrolling in "Mandarin for dummies" classes and mastering the use of chopsticks, it is worth considering a few related aspects of the "renminbization" of global finance. By way of introduction, we note that the Western world went through a surprisingly similar bout of angst and pessimism exactly 20 years ago; except that then the country of the future was Japan and the currency was the yen, but all the rest was the same. The outcome then was that the Japanese economy imploded in 1990 and has never recovered, whereas the American economy did recover and went on to much bigger and better things. There are umpteen arguments why China is different from Japan and why America today is different from America then. Many of them are either partially or completely sound, and they therefore carry great weight and require very thorough consideration. But, at the very least, the Japanese saga should serve as a clear signal that nothing is ever clear-cut, let alone inevitable. I would go two steps further, however, and point out two critical reasons why Japan has never recovered from its 1980s bubble, neither of them pertaining to economics and therefore neither featuring prominently in the innumerable economic analyses of the Japanese and American economies. The first is demographic. Japan is in the process of committing national suicide, by resolutely and consistently failing to procreate. The steady aging of the Japanese population, which in more recent years has developed into absolute decline, has sapped the vitality of the economy and continues to do so, every day, month and year. The American economy, in total contrast, is the beneficiary of fresh blood pumped in, both by resident Americans having babies and by new immigrants. The latter source has been blocked off for at least the duration of the recession, but the massive immigration of the 1990s and early years of this decade will be a strong influence for many years to come. The second "noneconomic" issue is cultural, but in the present context we can call it political. The Japanese demographic crisis reflects a conscious decision, in turn reflected in a broad political consensus, not to allow in foreigners. This is part of a much broader political consensus as to how - and by whom - Japan is run. The bottom line of this system is that change is incremental, reform is infinitesimal and the status quo is sacrosanct. These are the key factors behind Japan's demise and America's resurgence in the period 1990-2005. These are much more fundamental issues than the financial data, ratios and regulations that are the standard measuring tools of financial crises, whether in Japan in the '90s or in America today. They therefore provide a basis for considering both sides of what is rapidly becoming the new common wisdom: On the one hand, that America is in irreversible decline; on the other, that China's rising trajectory is inexorable. Neither of these can be taken for granted, and, indeed, both ideas need to be taken with a large pinch of salt, as a subsequent column will discuss further.