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U.S. Dollar Hegemony: Death by a Thousand Cuts?

The central bank of Malaysia’s deputy governor, Dr. Sukhdave Singh, believes it highly probable that the 21st century will belong to the Chinese yuan (also referred to commonly as the renminbi).

According to Malaysia’s The Star, Dr. Singh believes that if liquidity was supported by more currencies, then the “likelihood of any one currency being a determinant of global liquidity would be significantly reduced.”

Although he believes ultimately it’s up to the private sector to facilitate usage through international payments and receipts, Chinese policymakers need to be successful in managing the political, economic and financial trade-offs of such an eventuality.

USDYuan

The ramifications of countries like Malaysia “de-dollarizing” trade are obviously not to be ignored, especially if you buy, sell, hold or trade (i.e., your salary—services for cash) in U.S. dollars.

The dollar’s “strength” is built upon its popularity, so to speak, but what if that popularity wanes? It’s not an entirely disastrous situation if you travel abroad and your cash is no longer considered the “gold standard,” but it’s an entirely different scenario if you happen to be indebted everywhere you go and your cash is considered a pariah.

For decades, the U.S. dollar has enjoyed the role of being the world’s reserve currency, but as of late it appears many countries are rethinking that role, mainly rich emerging market economies. One of those rich countries just so happens to be the biggest creditor to the United States and the world’s largest trading country (hint: China).

As of 2014, the U.S. dollar is still the reserve currency of the world with approximately 60% of global allocated reserves held in dollars, with the Euro being second closest at 24%.

While trade between China and Malaysia is small and the transactions would be nothing but a blip on the global radar screen… more and more countries are also seeking similar trade relations with, not only China, but also Russia. So it would appear, slowly but surely, “King Dollar” is beginning to lose (some of) its luster on the world’s stage.

What does all this mean? Well, the optimists might say that it is simply par for the course and natural for developing countries to want to diversify their currency holdings, especially when you have such huge trading partners like China and Russia who also print their own currencies. Moreover, it’s no secret that China’s renminbi is headed towards being freely convertible very soon, so all these currency-swap agreements being put enforce are standard operating procedure (SOP) to help facilitate that transition.

The flip side of this argument is that the United States has enjoyed the fruits of being the world’s banker far too long and emerging markets, specifically the BRICS, don’t find the exchange beneficial any longer, so change is not only desired but (in many’s opinion) absolutely necessary. Moreover, some countries, namely Russia, view the United States as a bully (of sorts) on the global stage, and believe that the dollar is a scourge rather than an advantage to the world.

I don’t see how many can argue with the opinion that a new system is needed, especially after the 2007–08 financial crisis. The U.S. banking and financial services sectors caused the calamity, and then the U.S. Federal Reserve stepped in to bail them out by printing dollars non-stop, inflating markets and assets all over again. Certainly you’re not going to “win friends and influence people” (especially creditors) by devaluing your currency and reflating bubbles again, that’s for sure.

The U.S. dollar is a flawed reserve currency no matter what the current news cycle might be spinning. As a reserve currency it has lost 98% of its value since 1913, and that went hyperbolic in 1971 when Nixon cut its convertible strings to gold. The purchasing power of the dollar is discouraging, and no need to ask a central banker about that, just ask your grandparents.

So is replacing the fiat dollar with the fiat renminbi the answer? Hardly. Fiat currency has never succeeded well enough,  for long enough. Its track record is dismal, and that of “managed economies” are even worse. Certainly the dollar’s reign will be one for the history books, but as a curse or a blessing will depend considerably on you and how many of those dollars you earned and turned into something tangible like gold or real estate.

Jim Rickards—an economist, Washington insider, and the author of Currency Wars and the Death of Money—believes that the global monetary system will inevitably fail… and soon. He also believes this will not be the end of the world, as it has happened three times in the last 100 years and the world carried on.

I truly hope that he is right… that the (inevitable?) transition will be as smooth as silk, and that the next system is built upon more solid ground than the last. But with these things you can never know for sure. There are so many things that could happen, so many things that could go wrong, and so many unintended consequences one could write an entire book on the subject.

One thing is for certain, though, the end of the U.S. dollar as the world’s reserve currency is upon us and the logical conclusion is to replace it with a stronger currency (backed by gold?). The BRICS are making moves, and are already building a competing system. The recent BRICS bank is an example of this. The IMF and the World Bank have been key facilitators for the U.S. dollar hegemony, and these two institutions have made sure that the dollar is spread far and wide. But now with a little competition, it’s hard to say how things will develop—peacefully or aggressively, economically or militarily. These seem to be key concerns at the center of this debate.

Lastly, this topic is not new. Nor is it a conspiracy theory or just noise. The reality of the Chinese renminbi (or possibly another currency) becoming either a part of a new basket of reserve currencies or the reserve currency of the world is practically inevitable. Central bankers have been discussing this matter for years.

There is no question that China is a huge country with incredible economic strength, so its potential is nothing new or surprising. The only thing unknown is whether the United States (and her institutions) can handle not being the only sheriff in town, especially when Russia, an old and dear enemy, stands behind China like some sort of fox behind a wolf.

  • Matsumoto

    unless backed by gold or maybe basket of hard assets then it will just be continuous failure. what about SDR? IMF will not let power slip away. SDR better bet than yuan.