The New Paper Trail

As the United States slips and slides down the power ladder, from economic leadership to a drop in our global credibility, there is a growing chorus to down the U.S. dollar as the global “reserve” currency in which the world’s commodities and international trade/banking are framed and priced. There are screams that it should be the euro, the pound sterling, the yen, the Russian ruble (which has dropped almost in half against the dollar of late) or the Chinese renminbi (aka the “yuan”) or a new perhaps a supercurrency that would effectively be a more widely accepted version of the blended “special drawing right” currently used by the IMF, a trading unit that would represent a de facto blend of currencies, still heavily weighted with the U.S. dollar... at least for now.

This growing international desire – particularly from the Russians and Chinese – to move away from reliance on the U.S. dollar is nothing new, but if it were to happen, the United States’ would be not only lose even more global stature, but its international financial transactions, even the borrowings currently associated with supporting our massive federal deficit, would be subject to additional market vagaries outside of our borders, and our economic power would thus be directly further diminished. Think of such a move as a global downgrade of our economic position. Think of a barrel of oil denominated in this new currency blend and not in U.S. dollars. It would be the basis for all references in currency exchange comparisons and trading.

What does this IMF beast look like? “Special drawing rights (XDR aka SDR) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Their value is based on a basket of key international currencies reviewed by IMF every five years. Based on the latest review conducted on December 30, 2010, the XDR basket consists of the following the four currencies: U.S. dollars ($) 41.9 percent (compared with 44 percent at the 2005 review), euro (€) 37.4 percent (compared with 34 percent at the 2005 review), pounds sterling (£) 11.3 percent (compared with 11 percent at the 2005 review), and the Japanese yen (¥) 9.4 percent (compared with 11 percent at the 2005 review). The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.” Wikipedia. We can expect an updated allocation from the IMF this year. Russia (currently in weakened currency condition) and China have been the greatest advocates of the process… but they want their currencies to be prominently featured.

While Russian currency is teetering, the People’s Republic of China has some pretty strong claims to be part of a new SDR, not the least of which is their maintenance of well over a trillion dollars of US deficit debt. And despite US resistance to the inclusion of the yuan in that SDR mix, the PRC’s position is growing stronger by the minute, as its economy continues to grow, threatening even to eclipse our own. Striving for less currency volatility, the IMF continues working on proposals to increase reliance on these SDRs and decrease reliance on dollar-denominated valuations, and even our president has suggested that this migration to a blended reference currency is inevitable.

Not content to let these international institutions wend their way to a negotiated SDR as the global reserve currency, China has made a “little move” that just may be the first step in these new currency-primacy wars. They may actually want their currency to supplant the U.S. dollar in the foreseeable future. “The new China International Payments System (CIPS), which is set to debut before the end of 2015, has been described as a ‘worldwide payments superhighway for the yuan.’ What the creation of such a system means in the short-term is that the Chinese currency… has the potential to become a truly international, convertible currency and a more attractive currency for conducting international trade and finance. What it means in the long-term is that America’s long reign of economic dominance is at risk.

“Ever since the end of World War II, the dollar has been the bedrock of the international financial system. The rise of a competitor currency to challenge the dollar seems almost impossible. While the euro and the yen have emerged as possible options for supplanting the dollar, they have never had the global clout of the U.S. dollar. China’s plans for the internationalization of the renminbi, though, are a different matter entirely. Given the size and heft of China’s economy, it only makes sense that China is creating a global payments system to make it easier for people to trade, invest and conduct transactions using the renminbi.” Washington Post, March 10^th.

Indeed, China is everywhere. It has made commodities output deals all over the world, from oil to foodstuffs. Its agricultural activities in the Great Rift Valley of Africa are expected to keep China supplied with food for years to come. China is also all over the developing world with generous aid packages and infrastructure contributions, all of which make the recipient states receptive to accepting the renminbi as the global reserve currency. Those SDRs aren’t looking so bad right now, and without some additional boost in such a blended-currency world, China may just force her way in a few years.

As our gridlocked Congress and fractured government sends the message of our decline and dysfunction loud and clear, the People’s Republic of China is chuckling under their breath… and beginning to sow seeds that threaten U.S. global supremacy like no other force we have encountered in recent history. Remember, dollar fans, “it’s the economy, stupid!”

I’m Peter Dekom, and all this fractious political grandstanding may be great for the folks back home, but it is slowly pulling our entire nation down, bit by bit, as our global competitors love every moment of these acts of self-destruction.