Short of China converting to a democracy tomorrow and the European Union becoming the giant that every backpacking teenager wished it could be, the US will remain the currency of choice for Oil, gold, and any other commodity, raw material, and energy available on this pseudo green earth. Yes, aliens descending from MARS with technologies into the next millennium may make this a less compelling argument. For the time being, the bet is on the USD.
Take Japan for instance. In the early nineties numerous economists and analysts were suggesting the Yen will become the currency of choice after the Japanese binge of US assets in the late eighties and early nineties. The USD was on the “outs”. History proved this notion wrong. Not only did Japan not become the currency of choice, but the Yen became the center of what was commonly referred to as the carry trade of choice. The Japanese economy is only now hinting at an exit of the stagflation that took place during the 1990’s and 2000’s.
We know what is happening in Europe. Does the global economic power really want a currency that is mired in incongruous and possibly debilitating political strife, inefficient diplomacy, lack of sufficient job creation, to be the backing of all materials that contribute to global production and growth? For the time being, NO.
On to China. Yes, the Chinese have grown by leaps and bounds in the last 15 years. A little known fact, in the year 496 was China had 50% of global GDP. The Chinese have already surpassed Japan to be the 2nd largest economy. Even with “slower growth”, 7.3% growth per annum is nothing to gloss over. The problem with China, as every analyst, central banker, and hedge fund manager has commented is the reluctance of the Chinese government to reduce controls of the Yuan.
The reason for the control of the currency is the fact that China is a communist regime with capitalist tendencies. What is the probability that China will see the Western Light and convert to a capitalist democracy? Clearly, quite low. Does the G20 feel comfortable in readjusting the entire macro-economic mechanism to step away from the USD as a primary currency? You know the answer to this answer as well as I do.
Given crisis and after crisis, through crashes and market exuberance, the USD and the US treasury market has been the bastion of “perceived” security and caution. Grounded with the strength of an economy and a political system that by-in-large is able to sustain itself from little geo-political interventions. What other country and currency is able to offer a bit of security and comfort in a world of contortion, confusion, and malfeasance? Yes. That’s right. As I write this, we are getting word of a possible EBLOA case in NYC. So I am keeping my fingers crossed.
I challenge the central banker, manager, trader, and investors to manufacture and financially engineer a safer and better alternative to the USD.
E Pluribus Unum
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