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Opinion: Why the US dollar’s currency status is shot
October 17th, 2009
By Neville Bennett
The world system is still reeling from the effects of the Greater Depression. It effects and consequences are still not obvious, but increasingly it seems that 2008 will mark the beginning of the demise of the US Dollar.
The landscape is changing and obviously the depreciating dollar is under pressure as an unsatisfactory trading and reserve currency. But my main purpose is to substantiate the dollar’s demise in three particulars: about London replacing New York as the world’s financial centre; a ‘plot’ to introduce a gold-backed currency, and China’s building rival commodity exchanges.
Gold standard in oil trade?
Robert Fisk broke a story in the Independent last week:
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese Yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have been held by finance ministers and central bank governors in Russia, China, Brazil and Japan.
Fisk says the meetings could explain the rise of gold. More importantly, the meetings augur an extraordinary transition from dollar markets in nine years. Fisk is adamant that “the current deadline for the currency transition is 2018”.
Brazil and India have shown previous interest in non-dollar oil payments, but China is aggressive. Former Chinese Envoy to the Middle East, Sun Bigan, has warned of divisions between China and the US over Middle East oil, saying: “Bilateral quarrels and clashes are unavoidable”. This almost implies a future economic US-China war over oil. There are other signs of a struggle with China making long term deals with Iran, Brazil, Venezuela, Sudan, and Libya. Iran at present deals in the Euro; Sadam Hussein proposed to use the Euro but was invaded shortly after his announcement.
China and Commodity futures
China is issuing an enormous challenge to US hegemony by positioning its futures markets to be major players in setting world prices for metal, energy and food commodities. China feels it will be less at the mercy of world markets, and American speculators, if it lets the world know what it thinks commodities are worth.
New Zealanders will appreciate China’s concern with being a price-taker. China is the second biggest oil importer but uses the New York Mercantile Exchange’s contracts which tend to set the global price. The Shanghai Future’s Exchange plans to muscle in and try to set prices too.
China will have its work cut out to rival New York, Chicago and London which set benchmark rates for most commodities, but it may gain a role because it is a major customer wanting a fair price. Suppliers to China will also welcome exchange indications: this would mean less guesswork about China’s buying habits. A beefed-up commodity exchange is another indicator of a growing super-power acquiring the instruments of autonomous authority.
London judged top financial centre
American power since 1945 has rested as much on financial power as military for in both areas it can impose its will and cow uncooperative entities with awesome sanctions.
According to the World Economic Forum, the largest economies took a tremendous hit in the Crisis. The Forum’s Financial Development Report places the UK over the US. Its success was not complete; the Forum criticized its financial stability. It examined exchange rate stability, the management of debt both public and private, and the problem of real estate bubbles. Britain came 37th in the category. Britain trailed Thailand, Poland and Brazil in economic volatility.
The Forum is really indicating a major change in the world order. An official said: “The UK and US may still show leadership in the rankings, but their significant drops in score showing increasing weakness and imply their leadership may be in jeopardy”.
Dollar Spurned
The US dollar is being spurned as central banks are holding alternative currency reserves in record quantities. According to Bloomberg, central banks placed 63% of their new reserves into euro and yen in the April to June quarter. This is the highest percentage ever. It reflects the perception that the Obama administration’s rhetoric about a strong dollar is a smokescreen for a gradual devaluation designed to increase American competitiveness.
Banks, business and traders alike are aware that the dollar has lost over 10% on a trade-weighted basis in the last six months. This is despite the Japanese and Swiss, for example, trying desperately to depreciate their currency and the pound losing almost any attraction.
The dollar is unattractive because of record low-interest rates, budget blowouts and rapidly escalating debt. Ben Bernanke has also indicated that interest rates will not rise soon. The markets also respect the views of major traders like Barclays Capital and Standard Chartered which predict further declines, partly because of the poor performance of the US economy.
Another aspect of the dollar’s demise is the importance of non-western creditors; the biggest of which are (in order) China, Japan, Russia, India, Taiwan and South Korea.
China
The Governor of the Chinese central bank rattled markets a year ago when he recommended reforming the global monetary system by ending the dollar’s reserve status. But there is no quick fix. China could increase its holdings of Self Drawing Rights, but these are not a true currency. It may have increased its exposure to the euro, yen and gold. But is has retained massive US reserves and if it moves a large amount out, it could provoke a massive dollar depreciation, thereby damaging its remaining reserve wealth.
Nevertheless, the status quo is unsatisfactory. A currency which is depreciating rapidly is unsuitable for a reserve or trading currency. Its status is shot.
____________
* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.
neville@bennetteconomics.com
www.bennetteconomics.com
Tags: China, commodities, Gold, London, Neville Bennett, New York, USD
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October 19th, 2009 at 8:34 am
”This almost implies a future economic US-China war over oil”
This is an inevitable consequence of peakoil – and resource depletion of all types. In a resource constrained world the potential for conflict will escalate.
October 19th, 2009 at 8:40 am
well said andy my thoughts exactly
October 19th, 2009 at 9:04 am
Gosh dang, where is Clark Kent when you need him.
October 19th, 2009 at 10:09 am
The heart bleeds for those poor Chinese , who pegged their Yuan / Reminmbi to the dollar , at such a low rate , to allow them a massive trading advantage in perpetuity . There’ll be big smiles of joy all around Asia , as the PRC’s gigantic savings pool , in US treasuries , bites the dust . If you’re gonna play with the devil , best know what tunes he likes , pardner !
October 19th, 2009 at 10:10 am
“Greater Depression” – Like it. I assume its a dig at the way the crisis has recently been framed in the media as the “Great Recession” – which can have the effect of lessening the seriousness of the situation (at least in the US and UK). You only need one quarter of positive GDP and everyone can pronounce the recession as technically over.
October 19th, 2009 at 12:08 pm
@Marky Mark: the thing is, the “Great Depression” was I think a depression within a depression. So far (globally) we have had a bad recession, some countries have had a bad recession but some seem to be in depression territory, OZ and us, hardly, its not even. So, does this mean the “greater” will be worse for the second dip? or will there be multiple dips? or both? Look at what they say about OZ in the Great Depression, it suffered hugely as a commodities reliant country trying to export raw materials no one wanted….
“Australia’s extreme dependence on agricultural and industrial exports meant it was one of the hardest-hit countries in the Western world, amongst the likes of Canada and Germany. Falling export demand and commodity prices placed massive downward pressures on wages. Further, unemployment reached a record high of 29% in 1932, with incidents of civil unrest becoming common. After 1932, an increase in wool and meat prices led to a gradual recovery.”
http://en.wikipedia.org/wiki/Great_Depression#Australia
Sounds like NZ today? does to me…
Some say there are lots of parallels, others few, to my un-trained eye some of the similarities are striking, industrial over capacity, too easy credit…ppl borrowing to gamble in markets….too much money concentrated in a small minority of very rich ppl.
Sounds like NZ today? does to me…
I think “Greater Depression” could indeed be apt….what worries me is we are not yet out of this….maybe 9 years to go and it took WW2 to “fix things” ie massive Govn spending….so WW3 anyone?
@RT, hardly most of Asia also has money as $USD
regards
October 19th, 2009 at 12:22 pm
@Andy H: Wars over resources are quite possible and tend to be fights to the death, especially in this case, oil shortage is indeed upon us ie less than 5 years. The dis-advantage to both is they need oil to fight, neither has it….then they need raw materials and $ but no one is around to give it to them. So this strikes me as a fight by two 90 year olds with zimmer frames 100metres apart. Lots of noise, little movement and either one could drop dead from a heart attack at any moment…it would be funny except we are in it as well….
regards
October 19th, 2009 at 2:01 pm
Interesting opinion:
Wolfgang Münchau, Financial Times
This bubble won’t last long.
“….Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages.
Alternatively, central banks might prioritize financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.
In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability.
For all we know, there may not be a safe way down.”
October 19th, 2009 at 2:44 pm
Here’s some news about the impact of our strong Kiwi dollar;
http://www.newstalkzb.co.nz/newsdetail1.asp?storyID=164851
http://www.newstalkzb.co.nz/newsdetail1.asp?storyID=164842
Are we out of the woods or is everything seems positive already?
October 19th, 2009 at 2:49 pm
steven
i claim authorship of “Greater Depression”‘ it was inadvertent, i meant to type “Great” but it came out as Greater” and I think it could cover 2007-2012 (or longer)
If that seems pessimistic, i remind everyone that trade has fallen more than in 1931-2 and there is huge over-capacity in industry.
NZ better prices in meat and wool after 1932 was because of a devalued nz dollar, world prices were not robust.
October 19th, 2009 at 3:29 pm
Serfdom approaches fast Neville….be prepared!
November 6th, 2009 at 10:59 pm
I have great concern for my childrens future in this new world. This Great Depression is NOT like the previous one because there will not be the cheap energy resources to bring us out of it. All global economic systems are underpinned by availability of cheap energy. Without it it will die, kicking and screaming for the next 5 years or so.
One thing that will become common is that many states will lose control to groups of self interest. If you have enough groups bucking the ’system’ it won’t be able to contain them as it’s resources will be to thinly spread when it doesn’t know where they’ll be required, or in what form the groups will operate. The corporates will use this to their benefit of course, trying to take on many state functions in a bid to find a new profit stream.
This is an interesting article on the sort of chaos we’re likely to see:
http://www.worldpoliticsreview.com/article.aspx?id=4203
This site also has some very interesting views on how these small groups are likely to operate. It advocates localisation (like transition towns) as a means of maintaining independence, and I think that will become a common them from now on.
http://globalguerrillas.typepad.com/
November 6th, 2009 at 11:20 pm
Pete Wilson : Mark Hubbard introduced us to Thorium , several nights ago . It is a readily available radioactive material , which is incredibly safer than uranium . I did some Googling , and found screeds of info . The nights may not be as cold and dark as you envisage . Lots of chaos theories abound . Every generation of mankind has had them . And yet we are still here . And , outside of Kaiapoi , still civilised .