Playing with the reputation of the global reserve currency is a risk
A quick quiz: who is the Chinese president? If you can do that, name the Chinese prime minister and foreign secretary as well. Tricky? Very much so. I’d be surprised if 5% of the population could correctly answer the first question and astonished if even 1% could get all three. It’s really quite remarkable how little prominence is given to what is likely to be the world’s biggest economy within a decade, or of the people who lead it.
Part of that’s cultural: the media give prominence to countries that people on both sides of the screen, airwaves or print-room are familiar with or which seem similar. Another part of it is about prominence: unlike in the days of the USSR, China isn’t so obviously a threat and trends don’t provide copy in the way that incidents do. It’s not just media and public who aren’t recognising the changing world.
Just before the Federal Shutdown started, Barack Obama stated that the Dollar is “the reserve currency of the world. We don’t mess with that” – except that messing with that is precisely what is happening: within a week, the US federal government could run out of cash to pay its debts. Probably a deal will be done as it was in 2011, the last time there was a similar stand-off. Even so, the brinkmanship involved then caused one ratings firm to downgrade US federal debt, placing the kind of question mark against the Dollar that really shouldn’t exist on the principal reserve currency.
Playing a little fast and loose with the reputation and trustworthiness of anything isn’t to be undertaken lightly but for a long time the raw power of the US economy, combined with its openness made it the only realistic game in town as far as a reserve currency went and that has perhaps bred a little too much complacency in Washington; something which is making itself felt at just the wrong time.
For now, the Dollar remains the prettiest currency in an ugly bunch but it no longer stands so clearly supreme and a default, even on domestic spending, would leave it with still more bruises. The Eurozone’s travails are well documented but the intensity has gone out of the crisis and – barring further major shocks – it will have come through politically strengthened and geographically widened. The Eurozone already has a population greater than that of the USA; one which could double if all non-Euro EU members and realistic future members were to join (they won’t all but within a decade, the likelihood is that most of the 2004/7 intake will have, and maybe others).
A more radical additional player is the invisible giant: China. If it’s punching below its weight politically at the moment, then financially, it’s barely in the arena. It is, however, heading in that direction, as noted in this article. There are still plenty of hindrances to the Yuan becoming a global currency but Beijing is slowing dismantling them. US policy-makers would do well to note that while China doesn’t provide a viable alternative (or additional) reserve currency today, it could well become the third major player within 10-20 years’ time. Indeed, perhaps the most significant factor preventing the Yuan rising to that status – trustworthiness – is the one those in Washington are currently risking.
The inertia that always exists in international systems will benefit the US for decades to come, though as with Britain in the past, that very inertia will also disguise any decline. It’s not, however, something that can be taken for granted. We live in interesting times.