In view of the falling US dollar, many articles have emerged to defend the US dollar as being either irreplaceable or will become substitutable only after a defined period of years or the Chinese yuan may follow the unsuccessful attempt of the Japan yen to emulate the US dollar as reserve currency or of inapplicability of a gold linked currency in today’s paper money standard.
While they maybe correct, I inclined to think many of these have been relying heavily on past performances and projecting these into the future.
Debating The Fate of the US dollar
For me the issue of the continued privilege of the US dollar as reserve currency will depend on the extent of inflationary policies imposed by its government, and secondly, from the responses of the world to such policies.
Next, the US dollar hasn’t been stable relative to its purchasing power. The fact that it has declined by 95% since 1913, makes it “stable” in terms of the rate of purchasing power lost over the years.
Perhaps the US dollar could be seen as “stable” in relative terms, or against other currencies, as paper currencies in general continue to collectively suffer from eroding purchasing power based on the continued abuse of the elastic currency due to sundry political goals.
Moreover, given mercantilist tinge by many of the world’s central bankers who continue to embrace “cheap currencies for exports” mindset via the imposition of varying degree of exchange rate pegs, assorted subsidies and tariffs and other proscriptions, a global campaign for “competitive devaluation” could lead to a currency war.
To quote, Murray N. Rothbard, in Making Economic Sense, ``The whole world would then be able to inflate together, and therefore not suffer the inconvenience of inflationary countries losing either gold or income to sound-money countries. All the countries could inflate in a centrally- coordinated fashion, and we could suffer manipulation and inflation by a world government-banking elite without check or hindrance. At the end of the road would be a horrendous world-wide hyper-inflation, with no way of escaping into sounder or less inflated currencies.” (bold emphasis mine).
So again we shouldn’t see this as analyzing against a constant but of an action-reaction dynamics to evolving policies. Say for instance if the US will see an upsurge in inflation will global governments continue with the current setup?
My guess is no.
A Gold Link Currency In Today’s Fiat System?
Another, currency volatility has been due to too much distortion brought about by government interventions in the economic system.
A country which adopts a gold standard may indeed be destined to see its currency’s price swings based on gold’s price performance.
However, what must be understood is that the accompanying fiscal restraint brought about by adapting a gold-linked currency system will probably lead to an appreciation based on significantly less politicization of the nation’s political economy that could lead to a productivity spike.
Nonetheless currency values will always fall under natural law of demand and supply, as Ludwig von Mises in Theory of Money and Credit wrote, ``the valuation of the monetary unit depends not upon the wealth of the country, but upon the ratio between the quantity of money and the demand for it, so that even the richest country may have a bad currency and the poorest country a good one. (emphasis added)
This leads us to international trade, currency values aren’t everything; weak currencies don’t necessarily imply export strength, for instance Philippine exports plunged by 25% in July in spite of the underperforming Peso (Inquirer), whereas strong currencies don’t automatically translate to feebleness in exports, for example Europe registered a surplus on “strong exports” in July in spite of the steep appreciation of the Euro (google).
What would crucially matter is the market from which a producer of goods or services sells into, the capital structure of an economy and importantly policies that underpin the trade structure, as discussed in Asia: Policy Induced Decoupling, Currency Values Aren’t Everything.
But of course, a gold linked currency given today’s political setting and economic ideological framework isn’t likely to be in the cards for policymakers, simply because it is not politically appealing. A gold backed currency would restrain politicians from taking advantage of the easiest, least understood and most discreet form of wealth redistribution.
China’s Remimbi As International Reserve?
Finally past performances don’t equate to future outcome.
Figure 2: Wall Street Journal: Yen Denominated Trade Transactions
The Yen’s failure to emulate the US dollar as a reserve currency, see figure 2, doesn’t necessarily extrapolate to the destiny of the Chinese Yuan. The circumstances behind the Yen’s unsuccessful attempt are not exactly the same forces faced by the Chinese today.
Becoming an international reserve standard would depend on many factors that would make a currency accepted as an international store of value, unit of account and medium of exchange, such as convertibility, market economy, depth and sophistication of the financial markets, transparency, low transaction costs, military might and etc…
Nevertheless, one good starting ground is by way of marketability.
Again Murray Rothbard in What Has Government Done To Our Money, ``Now just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media--in almost all exchanges--and these are called money.” (bold highlights mine)
The degree with which China would assimilate a market economy will serve as the pivotal fundamental steps towards achieving such a goal.
Nonetheless, again it will also depend on the underlying policies that China would be undertaking aside from the policies by the US government as the de facto currency reserve and of the world relative to China.
It’s a complex and a highly fluid issue to speculate on.
