Srinivas Thiruvadanthai and I wrote a joint piece (with the above title) for Mint four months ago. Four months is a long time. Stocks double in value in this period. I do not know if Srini still stands by what we wrote then. Knowing Srini, it is very likely that he would. I do, for sure.
Several observers predicted the experiment will hasten the internationalisation of the renminbi and erode the status of the US dollar as the world’s only reserve currency. [Link]
That is from an article in FT on China’s new digital currency. I doubt if that ‘prediction’ would come true. Unlikely, in my view. What follows below is a modified and expanded version of the comment I left on the article in FT.com.
Financial repression and treatment of foreign investors (covert or overt or both) do not facilitate internationalisation and reserve currency status. Store of value, medium of transaction are remote outcomes. Unit of accounting – yes, internally. Capital account convertibility is missing and will be missing in action for a long time. Relatively open societies and comfort with foreign ownership and CAC go together.
America itself might be turning its back on these prerequisites but it is the incumbent global reserve currency. Incumbency is powerful. The analogy with Britain only goes thus far. Britain was groaning under the weight of debt from World War II and global imperial overreach. Its clout was weaker. More importantly, America was strong then – in every respect – fiscal, political and economic. The US dollar was ready to replace the pound sterling. Such is not the case with any other country in the world today.
There was another article in FT about how the pandemic was testing the confidence in the US currency. That article mentions the ‘exquisite timing’ of Jeffrey Frankel and Menzie Chinn in predicting the replacement of the US dollar by the Euro as the dominant global reserve currency by 2022 at the peak of the Euro valuation against the US dollar in 2008. That was the peak of the Euro in every respect. A recent temporary rally on the back of an alleged European debt mutualisation should not be misunderstood as a vote of confidence in the Euro as an alternative to the US dollar.
Read this article on how the ‘EU accord’ was secured and here is a delightfully outspoken sceptical voice from Finland – that of the former Foreign Minister of Finland, no less. In case the letter is not accessible, pl. click here: FT_Letter_ Covid-19 aid package leaves EU looking like Hotel California _04082020.
No doubt, America is working very hard at undermining the confidence in the US dollar – with its open-ended liquidity provision and distortion of financial markets prices. But, the problem is that the rest of the world is no better off with their own ‘on-again, off again’ campaigns exhorting citizens to buy stocks, whenever the government wishes them to do so.
Further, China’s debt levels and deficit levels are re-stated by the IMF in its annual Article IV assessment by the IMF. In the last assessment published in August 2019, the IMF had projected that the government’s ‘augmented fiscal deficit’ would be persistent at 12% of GDP and that the ‘augmented general government debt’ would touch 100% of GDP.
Yes, America is leading the charge of the central bank brigade at debasing currencies. There is no doubt about that. If they keep at it – as is likely that they would – the day the world says enough will draw closer. However, what replaces it, if and when it happens, is anybody’s guess. It is hard to bet on the other paper currencies or their digital clones as the alternative to the US dollar. They are all in it together. They will sink together.
We need a global monetary order or ‘Rules of the Game’ and we may get it. It may not be dominated by any one currency and it may not be a fiat money arrangement.
For the time-being, whoever is behind this tweet and the beautiful collage has a lovely sense of humour:
I wonder what folks think about the dollar right now? [Link]
The text above was the descriptor for this collage: