Sunday, 24 April 2011

Dollars anyone ... Err, prefer Yuan if available?

The one hundred US dollar bill, fondly known as the 'Benjamin,' remains universally accepted legal tender. More and more, the reason for such widespread acceptance relies more upon quantity – the number of Benjamin notes floating around – and not quality. (Of late, the US dollar has been a poor store of value against most currencies.)
At one time, any self respecting international gangster cherished the feel of large wads of one hundred dollar bills. No more.
The Chinese triad likely prefers the Yuan. Maybe even the Singapore dollar, exchange controls permitting. The Japanese Yakuza's loyalty stays with the Emperor and his Yen. Russian and East European organized crime syndicates probably prefer doing business in the Euro.
All is not yet lost for the US dollar. The Latin American drug kingpin and Mexican human trafficker still revel in Benjamin's glow. Moreover, gangsters in many Asian and African countries still yearn for the US dollar.
Organized crime syndicates may not be the only people shunning US dollars. Central bankers are also diversifying their reserves into other currencies.
The global move away from the US dollar is confirmed by the percentage of international reserves held in US dollars by central banks. The US dollar's share of reserves has been in steady decline for many years.
Thus, rating agency Standard and Poor's recent announcement placing the US credit rating on negative watch should not come as a surprise to many. Statistically, being added to the negative watch list implies that the odds of a US debt rating downgrade within the next three years are 33 percent.
Two major wars and an 'out of control' financial sector have taken a toll on the US economy. Not even the world's sole superpower can afford overseas military deployments measured in decades.
International military adventurism costs money.
Unfortunately for the US, China (as America's lead banker) seems to have run out of patience with the world's biggest debtor nation. China is no longer willing to write blank checks. Consequently, China is cutting back on its ongoing US Treasury bill purchases.
Fortunately for the US, there are few credible alternatives to the US dollar.

Nevertheless, China is trying hard to elicit other options. The country is buying 'real' assets in any country such assets are available. Even gold and other precious metals have regained respectability among central bankers.
Importantly, the People's Bank of China is making slow but steady progress in 'internationalizing' the Yuan; moving towards one elegant solution to China's foreign exchange reserves dilemma: gaining seigniorage for the Renminbi.
The United States is still the world's sole superpower. America's operating flexibilities, soft and hard power, are superior to any other nation in the world. That is a fact.
Nonetheless, America's role as the exclusive lead actor on the international stage is nearing its final act. The country's unwillingness (or is it inability?) to decisively affect events in Libya is clear evidence of America's declining global influence.
Some years ago, America's politicians would not have shied away from another overseas military engagement, especially if the conflict could be couched in the rhetoric surrounding the global war on terror. In 2011, there is little appetite to expand America's 'greatness and idealism.'
American financial, military and psychological energies have been sapped by internal problems. Surely, all nations have the ability to revitalize themselves over time. The US is no exception. None should write off the US as a global power.
Nevertheless, there is a transformation of roles occurring on the world's stage. Soon, the US will not be eligible for 'Best Lead Actor' nominations, but merely for the 'Best Supporting Actor.' The 'Lead Actor' position must be shared with an ancient civilization comprised of young dragons.
Over time, the US must learn to share the global spotlight.


  1. Agreed on the U.S. global spotlight. U.S. will remain to be the global super power for now and it is working hard to maintain it's global leader position while other countries are playing catch up. The thing is, U.S. Is a unique country. It is able to act fast during crisis. It is a large country with many talents and good systems. The people in this country quickly recognize that their countrynis slipping and they need to do something. However, the politics in this country is getting it's way from being great again. If Washington can come together and solve real problem instead of promoting it's own cause, this country will have a chance to be great again and continue to lead the world by playing supporting role. Our economy is so interconnected. We cannot afford any of the emerging/developed countries to screw up. As always, good article.

  2. Hi Lee,

    Thank you for your regular visits and taking the time to post a comment.

    You have highlighted some unique positives of the US, including talent, which are being negatively affected by the theatrics in Washington. Most nations would like to see the US get its house in order again. The recent earthquake in Japan demonstrates how interconnected the global economy is today.

    The world benefits from a healthy and vibrant US. A growing pie benefits everyone.

    However, I am concerned about the economic and psychological costs to the US of two major wars (Iraq and Afghanistan). The conflicts may have significant long term repercussions which are not yet apparent and difficult to predict.

    I look forward to hearing from you again in the future.

    Kind regards,