|
The
international monetary system is stacked in favour
of the United States. It has been that way since the Bretton
Woods conference in 1944 placed the US dollar at the system’s centre, thereby
making it the dominant currency in global commerce. Although the
international monetary system presently operates far differently from the
mechanism established by that conference more than six decades ago, there is
no denying that the US dollar still takes centre stage.
Though
international trade denominated in US dollars has fallen from its peak around
95% to about 55% today, the dollar is still by far the most widely recognised and used international currency. The euro
trails at a distant second, with the British pound, Japanese yen, Chinese yuan and other currencies even further afield. As a
consequence of this leading role as well as the perennial US trade deficits,
the dollar is the most important national currency held in reserve by
governments and their central banks. As but one example, about 90% of Japan's
foreign currency reserve is denominated in US dollars. China, which holds the
world’s largest currency reserve, does not disclose its composition,
but it is believed that well more than one-half of its total $3 trillion
reserve is denominated in dollars.
This
accumulation of dollars has been advantageous to the United States. It has
kept these dollars out of United States, which would have a huge inflationary
impact if they were used to purchase US-based assets. It has also helped the
federal government finance its perennial operating deficit, and dollar
interest rates today are no doubt lower than they would otherwise be if
central banks were not regularly buying US government debt instruments with
the dollars funnelled to them from exports sent to
the United States. In its trade with China and Japan, the United States in
effect imports refrigerators and automobiles and countless other goods and
exports dollar denominated IOU's to pay for them, but rising tensions signal
that many countries are questioning whether they should continue accepting
this dollar imperialism willingly.
China in
particular with huge surpluses is becoming less inclined to automatically
accumulate dollars endlessly. It and other countries recognize that the
dollar is not a neutral tool in the international economy, but rather, a
weapon. In the view of Washington, D.C. policymakers, if you use the US
dollar, you have got to play by their rules. Many countries do not like their
sovereignty overruled in this way, as became clear at recent G20 meetings.
Further, many countries are questioning whether the huge build up of debt by
the Obama administration has eroded the US government’s
creditworthiness.
In recent
years, China, Japan and other countries have periodically reminded the United
States that they can always sell dollars and buy other currencies and various
assets. India took this step 18 months ago by buying gold offered by the IMF.
I don't see these actions so much as threat, but rather, a message from
countries friendly to the United States that the dollar is not almighty like
it was when the dollar was “as good as gold”, as the saying went
just a few decades ago.
The G20
meeting last year ended with a vague communiqué that tried to smooth
over areas of disagreement, but opened up the possibility that a war of words
will emerge as the next step in the nascent currency war that is becoming
increasingly apparent. The markets for US government paper in the United
States are broad enough and deep enough to absorb much selling, but unknown
is the important question. At what price? In other words, how high would
T-bond and T-bill yields need to rise in order for the markets to absorb
rampant selling from China, Japan or any other country?
We are left
to ponder whether past experience will continue. Countries have already
considered selling US government debt instruments, but for now at least have
chosen not to ‘rock the boat’. Will Washington’s
policymakers continue to be so lucky in the future?
James
Turk
All data and quotes sourced from Reuters. Originally Published by Goldmoney. All rights reserved.
|
