China will not replace the USA as the central economic power, even if the economy of China exceeds that of the USA. Step back from the details for a moment and think about great economic centers when they are at the peak of the power. Is there any generalization we can make that is true of all civilizations, in all centuries, and for which we have fairly detailed records, even going back thousands of years? Yes, there is at least one generalization that we can make with confidence: each center, when it was at its peak, was a place where foreign merchants felt safe and comfortable. Does that hold true today in China? Do foreign merchants feel they can make deals as equals with the native Chinese merchants? Can foreigners trust that the Chinese courts are fair and neutral and unbiased?
Islam was at it peak in the 800s and 900s, and during that time Jews, Christians, Hindus and other groups, which had been hated in the past and would be hated again in the future, were all welcome.
Venice was at its peak in the 1400s, and muslims merchants felt safe there, despite the strong anti-muslim sentiment in much of Europe at that time. The same holds true of Amsterdam when it was at its peak in the 1600s.
As for England, as it reached its peak in the 1700s, we have Voltaire's famous description:
"Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion and reserve the name of infidel for those who go bankrupt. There the Presbyterian trusts the Anabaptist, and the Church of England man accepts the promise of the Quaker. On leaving these peaceable and free assemblies, some go to the synagogue, others in search of a drink; this man is on the way to be baptized in a great tub in the name of the Father, by the Son, to the Holy Ghost; that man is having the foreskin of his son cut off, and a Hebraic formula mumbled over the child that he himself can make nothing of; these others are going to their church to await the inspiration of God with their hats on; and all are satisfied."
He does not use the phrase to mean "the biggest economic power", though often the center is the biggest economic power. But he also applies it to Antwerp in the 1500s, when the religious wars were at their peak, and when, despite the wars, southern Europe and northern Europe needed to find a way to trade with each other, and market and political forces established Antwerp as the center of trade in Europe, because it was a northern city still mostly under Spanish control -- the perfect meeting place of north and south.
I am not saying that the USA will always be the center of the world economy. But I am saying that the next center will be open to the world, in the same way that previous economic centers were. China is not currently open to the world in the same way. It would take a political revolution as big as the one in 1949 to transform China into the kind of open political entity that former economic centers have been.
And can a nation really have the dominant currency if it is not the central economic power? It is reasonable to say that Chinese yuan will become more important over time, but this title implies a larger change: "The yuan is displacing the dollar as a key currency". If the implication is that the yuan will actually replace the dollar as the dominant reserve currency, then that implication is probably false. Politics plays a large role in these shifts, not just economics.
You are pinning a vast economical shift on just one factor? You have a very blinkered view of history. When Voltaire wrote that description he was just seeing the very few anointed few which the English allowed for their own benefit to trade with them in London.
>each center, when it was at its peak, was a place where foreign merchants felt safe and comfortable.
And talking about foreign merchants feeling safe and comfortable, did you ever ask how the American Indians felt as the US become an economic empire, or how comfortable it was for non-europeans to do business in the European colonies? Yes, London allowed a few traders from it's colonies but they worked damn hard to make sure the colonies didn't industrialize. India in particular become deindustrialized under British rule - all of India's cotton mills were packed up and send to Manchester, and the production of cloth forbidden. Even relatively small things like the production of salt in India was forbidden so British salt could be exported to India.
The majority of foreign merchants weren't even allowed to participate in British markets and were violently suppressed if they tried to. This world you speak of - where economies grew because they set up such nice and comfortable places to do business in - never existed.
You say China isn't open to business - why then is the entire Fortune 500 doing business in China and increasingly shifting more and more of their manufacturing there? There is cost, but there is also the fact that besides cost, as Steve Jobs told Obama, the expertise, supply chains and capability is shifting to China.
If you read any recent works on China, like the recent one on China by Dambiso Moyo - she makes the point that China is better at doing business with developing countries than America. http://www.dambisamoyo.com/
>Do foreign merchants feel they can make deals as equals with the native Chinese merchants?
This is exactly the point she addresses, and most African and many developing Asian countries are increasingly favoring dealing with Chinese. The Chinese pay more for resources, build useful infrastructure, and provide much needed goods at affordable prices - all things which are increasingly making it an essential part of the economic center in much of the world.
> Do foreign merchants feel they can make deals as equals with the native American merchants? Can foreigners trust that the American courts are fair and neutral and unbiased?
As a foreigner, I feel somewhat qualified to answer that question.
"Can foreigners trust that the Chinese courts are fair and neutral and unbiased?"
My question: Can foreigners trust that the US courts are fair and neutral and unbiased? Please look at the most current cases of Apple vs. Samsung and Cisco vs. Huawei before giving your answer.
The title says displacing, not replacing - the yuan carving out a zone of dominance in Asia-Pacific would, by itself, be monumental.
Economic orthodoxy asserted that an opening of the Chinese economy and FX regime necessarily precede yuan internationalisation. Observing currencies (and implicitly capital flows) moving in concert with the yuan absent those steps suggests a back-door route to internationalisation distinct from the traditional IMF/B-W path (and thus off the radars of the American and European financial centres).
Given that currencies and capital markets are in large part a confidence game, i.e. punctuated equilibria versus smooth progressions, seeing premature, and more shockingly shadow, internationalisation is profound.
I don't mean to twist this into a bitcoin debate/discussion, but this statement...
"But I am saying that the next center will be open to the
world, in the same way that previous economic centers
were."
... appears to help explain the support and rise of bitcoin. The only way it isn't yet open to the world is access and usability and there are people currently solving those two problems.
The only problem I see with that is that was true when fast reliable communication required presence. Now China could be the economic center of the world, but no one foreign would have to show up.
I think you make a good point, and show a good history of the rise of countries that adopted economic liberalism (and subsequent decline of many when they rejected it).
However, the stronger point that comes from your comment is that the USA needs to look at how it is drifting from a place where foreign merchants can gather safely and trade freely, and how that will certainly affect the future prosperity.
The correlation in currency movement is most likely a result of concrete steps taken by China over the years to reduce the need for an intermediate currency, traditionally the USD, in trade between two countries.
There's plenty of evidence that the seeds have been planted for a free-floating (potentially gold-backed) Yuan to eventually sit alongside (not necessarily displace) the Euro and USD as a major reserve currency.
January 2012: "Sheikhs fall in love with renminbi"
March 2012: "China has signed a $31bn currency swap agreement with Australia, a step towards boosting the renminbi’s profile in developed markets. Beijing has established nearly 20 bilateral swap lines over the past four years, but Australia ranks as the biggest economy yet to sign such a deal"
April 2012: "This morning, we saw the launch of the first RMB bond outside of Chinese sovereign territories. And it happened here in London. This builds on the progress London has already made toward becoming the western hub for RMB.’
June 2012: "China and Japan began direct trading of Chinese yuan and Japanese yen in Tokyo and Shanghai on June 1, in a move to boost trade and investment between the world's second- and third- largest economies, and also viewed as a further step to enable the yuan to become a truly global currency."
June 2012: "China and Brazil strike $30bn bilateral swap deal to reinforce economies. Announcement also includes plans for joint satellite launches, culture centres and language networks
August 2012: "ZIMBABWE has been urged to follow the example of some Central African countries which have taken the initiative in using the Chinese currency - the yuan. Last month a number of Central African banks were given access to yuan-denominated bonds by the China Development Bank Corporation (CDB)."
As the article mentions, most of the emerging economies that are starting to be affected more by the yuan than the dollar are in East Asia. That only makes sense, anyway. The dollar isn't being displaced as a key currency, it's losing some prominence in emerging markets--which, if they're ever to emerge, will float freely, anyway. It's exactly what you'd expect.
It's pretty obvious that neither the Republicans nor the Democrats are willing to cut down on spending enough to start chipping away at the national debt. Hopefully the (partial) weakening of the greenback's status as the world's primary reserve currency will force them to take action.
Actually, people trust the dollar so much that the yield on a 10 year treasury bond has been below 2% for quite some, historic lows. Bonds that aren't inflation protected actually lose money (i.e., bond bought for $1000, worth $950 10 years later); people are paying us to hold their money.
And you'll note that Japan has had a much, much higher debt-to-GDP ratio for quite some time, but has had sluggish growth throughout. The U.S. debt-to-GDP ratio was higher during WWII.
The main reason for this reply is that we shouldn't be cutting spending right now. Governments should be running deficits during recessions. For proof of how poorly cutting your way to growth works, take a look at most of the countries in the E.U. (and no, we are not on our way to Greece. It's a horrible analogy. Greece was on the Euro, not their own currency. Their goods, therefore, are not competitive. So rather than external devaluation, a weak currency, high inflation, they're having internal devaluation, people have to accept lower living standards).
Interestingly enough, the largest area of long-term debt growth is health care costs (medicare and medicaid). The Bush tax cuts are number 3 or 4. The ACA takes some initial steps in order to slow the growth of Medicare and Medicaid. The Ryan plan does, too, but by moving the cost to the elderly.
It's obvious that the Republicans and Democrats TOGETHER can't do it. Either party has things they'd be happy to cut (extra healthcare, extra military, extra tax cuts) - it's the combination of both together that are making the deadlock.
Also, it is mathematically as much a problem of not raising revenue as it is a problem of cutting spending. Strange that you did not mention this.
It isn't at all obvious that the level of the national debt is the only issue influencing the dollar's usage as a reserve currency.
SDR (Special drawing rights) will displace the dollar before the yuan does. SDRs are instruments created by the IMF that represent a basket of currencies held by IMF member countries.
The yuan currency market is too small and illiquid to displace the dollar as the world's reserve currency.
I doubt that SDR will ever replace the dollar. From wikipedia:
> Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. After the collapse of that system in the early 1970s the SDR has taken on a far less important role.[5] Acting as the unit of account for the IMF has been its primary purpose[Williamson 1] since 1972.
The article seems to be looking at trends from the crisis years vs the pre-crisis years. It seems odd that it'd leave out any consideration of the fact that there's been a substantial amount of uncertainty in the global economy of the last couple years, and that whenever the economy seems like it's heading for trouble, the dollar gains and less "safe" currencies (the rupee et al) decline. One would think that would at least have a significant effect on the fact that the correlation between the dollar and developing world is shifting.
Gold trade has features that are similarly key to bitcoin trade: immune to inflation, anonymous, and untraceable. Could BTC supplant Gold as a currency in that regard?
The dollar was given a central place in the international exchange system under the Bretton Woods agreement, which came just after the end of World War II, as you guessed. Before the Great Depression, I don't think there was an analogue, because reserves mostly consisted of gold. However, part of the reason that gold became the monetary standard (as opposed to say silver) was because of its use by the British Empire, which was the largest player in international trade.
[+] [-] lkrubner|13 years ago|reply
Islam was at it peak in the 800s and 900s, and during that time Jews, Christians, Hindus and other groups, which had been hated in the past and would be hated again in the future, were all welcome.
Venice was at its peak in the 1400s, and muslims merchants felt safe there, despite the strong anti-muslim sentiment in much of Europe at that time. The same holds true of Amsterdam when it was at its peak in the 1600s.
As for England, as it reached its peak in the 1700s, we have Voltaire's famous description:
"Go into the Exchange in London, that place more venerable than many a court, and you will see representatives of all the nations assembled there for the profit of mankind. There the Jew, the Mahometan, and the Christian deal with one another as if they were of the same religion and reserve the name of infidel for those who go bankrupt. There the Presbyterian trusts the Anabaptist, and the Church of England man accepts the promise of the Quaker. On leaving these peaceable and free assemblies, some go to the synagogue, others in search of a drink; this man is on the way to be baptized in a great tub in the name of the Father, by the Son, to the Holy Ghost; that man is having the foreskin of his son cut off, and a Hebraic formula mumbled over the child that he himself can make nothing of; these others are going to their church to await the inspiration of God with their hats on; and all are satisfied."
I am using the phrase "economic center" in the sense that Fernand Braudel uses it in his book "The Perspective Of The World": http://www.amazon.com/Perspective-World-Fernand-Braudel/dp/0...
He does not use the phrase to mean "the biggest economic power", though often the center is the biggest economic power. But he also applies it to Antwerp in the 1500s, when the religious wars were at their peak, and when, despite the wars, southern Europe and northern Europe needed to find a way to trade with each other, and market and political forces established Antwerp as the center of trade in Europe, because it was a northern city still mostly under Spanish control -- the perfect meeting place of north and south.
I am not saying that the USA will always be the center of the world economy. But I am saying that the next center will be open to the world, in the same way that previous economic centers were. China is not currently open to the world in the same way. It would take a political revolution as big as the one in 1949 to transform China into the kind of open political entity that former economic centers have been.
And can a nation really have the dominant currency if it is not the central economic power? It is reasonable to say that Chinese yuan will become more important over time, but this title implies a larger change: "The yuan is displacing the dollar as a key currency". If the implication is that the yuan will actually replace the dollar as the dominant reserve currency, then that implication is probably false. Politics plays a large role in these shifts, not just economics.
[+] [-] 77ko|13 years ago|reply
>each center, when it was at its peak, was a place where foreign merchants felt safe and comfortable.
And talking about foreign merchants feeling safe and comfortable, did you ever ask how the American Indians felt as the US become an economic empire, or how comfortable it was for non-europeans to do business in the European colonies? Yes, London allowed a few traders from it's colonies but they worked damn hard to make sure the colonies didn't industrialize. India in particular become deindustrialized under British rule - all of India's cotton mills were packed up and send to Manchester, and the production of cloth forbidden. Even relatively small things like the production of salt in India was forbidden so British salt could be exported to India.
The majority of foreign merchants weren't even allowed to participate in British markets and were violently suppressed if they tried to. This world you speak of - where economies grew because they set up such nice and comfortable places to do business in - never existed.
You say China isn't open to business - why then is the entire Fortune 500 doing business in China and increasingly shifting more and more of their manufacturing there? There is cost, but there is also the fact that besides cost, as Steve Jobs told Obama, the expertise, supply chains and capability is shifting to China.
If you read any recent works on China, like the recent one on China by Dambiso Moyo - she makes the point that China is better at doing business with developing countries than America. http://www.dambisamoyo.com/
>Do foreign merchants feel they can make deals as equals with the native Chinese merchants?
This is exactly the point she addresses, and most African and many developing Asian countries are increasingly favoring dealing with Chinese. The Chinese pay more for resources, build useful infrastructure, and provide much needed goods at affordable prices - all things which are increasingly making it an essential part of the economic center in much of the world.
[+] [-] fghh45sdfhr3|13 years ago|reply
[+] [-] grecy|13 years ago|reply
As a foreigner, I feel somewhat qualified to answer that question.
No. Categorically, no.
[+] [-] kevinlu310|13 years ago|reply
[+] [-] JumpCrisscross|13 years ago|reply
Economic orthodoxy asserted that an opening of the Chinese economy and FX regime necessarily precede yuan internationalisation. Observing currencies (and implicitly capital flows) moving in concert with the yuan absent those steps suggests a back-door route to internationalisation distinct from the traditional IMF/B-W path (and thus off the radars of the American and European financial centres).
Given that currencies and capital markets are in large part a confidence game, i.e. punctuated equilibria versus smooth progressions, seeing premature, and more shockingly shadow, internationalisation is profound.
[+] [-] malandrew|13 years ago|reply
[+] [-] stonemetal|13 years ago|reply
[+] [-] brc|13 years ago|reply
However, the stronger point that comes from your comment is that the USA needs to look at how it is drifting from a place where foreign merchants can gather safely and trade freely, and how that will certainly affect the future prosperity.
[+] [-] Gustomaximus|13 years ago|reply
[+] [-] bitcartel|13 years ago|reply
There's plenty of evidence that the seeds have been planted for a free-floating (potentially gold-backed) Yuan to eventually sit alongside (not necessarily displace) the Euro and USD as a major reserve currency.
January 2012: "Sheikhs fall in love with renminbi"
http://www.atimes.com/atimes/Middle_East/NA24Ak03.html
March 2012: "China has signed a $31bn currency swap agreement with Australia, a step towards boosting the renminbi’s profile in developed markets. Beijing has established nearly 20 bilateral swap lines over the past four years, but Australia ranks as the biggest economy yet to sign such a deal"
http://www.ft.com/intl/cms/s/0/4b6c4ab6-7404-11e1-bcec-00144...
April 2012: "This morning, we saw the launch of the first RMB bond outside of Chinese sovereign territories. And it happened here in London. This builds on the progress London has already made toward becoming the western hub for RMB.’
http://citywire.co.uk/global/london-launches-its-first-offsh...
June 2012: "China and Japan began direct trading of Chinese yuan and Japanese yen in Tokyo and Shanghai on June 1, in a move to boost trade and investment between the world's second- and third- largest economies, and also viewed as a further step to enable the yuan to become a truly global currency."
http://news.xinhuanet.com/english/china/2012-06/04/c_1316294...
June 2012: "China and Brazil strike $30bn bilateral swap deal to reinforce economies. Announcement also includes plans for joint satellite launches, culture centres and language networks
http://www.guardian.co.uk/world/2012/jun/22/china-brazil-bil...
August 2012: "ZIMBABWE has been urged to follow the example of some Central African countries which have taken the initiative in using the Chinese currency - the yuan. Last month a number of Central African banks were given access to yuan-denominated bonds by the China Development Bank Corporation (CDB)."
http://allafrica.com/stories/201208160818.html
October 2012: 'Chinese Gold Imports Through August Surpass Total ECB Holdings, Imports From Australia Surge 900%"
http://www.zerohedge.com/news/2012-10-21/chinese-gold-import...
[+] [-] luser001|13 years ago|reply
[+] [-] endersshadow|13 years ago|reply
[+] [-] bduerst|13 years ago|reply
[+] [-] adestefan|13 years ago|reply
10 years ago the Euro was going to take over the world.
Now the yuan is the enemy even though people still flock to the dollar even with interest rates near 0%.
[+] [-] Atropos|13 years ago|reply
Sure the next 5-10 years might be worse for the Euro, but for things like a global reserve currency one should think in 50+ year frames anyway...
[+] [-] bilbo0s|13 years ago|reply
but "...with interest rates near 0%...", one would expect a great deal of activity in dollars.
[+] [-] mcantelon|13 years ago|reply
[+] [-] bduerst|13 years ago|reply
[+] [-] w1ntermute|13 years ago|reply
[+] [-] douglasisshiny|13 years ago|reply
And you'll note that Japan has had a much, much higher debt-to-GDP ratio for quite some time, but has had sluggish growth throughout. The U.S. debt-to-GDP ratio was higher during WWII.
The main reason for this reply is that we shouldn't be cutting spending right now. Governments should be running deficits during recessions. For proof of how poorly cutting your way to growth works, take a look at most of the countries in the E.U. (and no, we are not on our way to Greece. It's a horrible analogy. Greece was on the Euro, not their own currency. Their goods, therefore, are not competitive. So rather than external devaluation, a weak currency, high inflation, they're having internal devaluation, people have to accept lower living standards).
Interestingly enough, the largest area of long-term debt growth is health care costs (medicare and medicaid). The Bush tax cuts are number 3 or 4. The ACA takes some initial steps in order to slow the growth of Medicare and Medicaid. The Ryan plan does, too, but by moving the cost to the elderly.
[+] [-] slurgfest|13 years ago|reply
Also, it is mathematically as much a problem of not raising revenue as it is a problem of cutting spending. Strange that you did not mention this.
It isn't at all obvious that the level of the national debt is the only issue influencing the dollar's usage as a reserve currency.
[+] [-] willholloway|13 years ago|reply
This sort of deleveraging would suck too much money out of the economy. We are barely hanging on borrowing a trillion dollars a year.
The most likely scenario: minimal economic growth and near-zero interest rates for the foreseeable future.
[+] [-] russtrpkovski|13 years ago|reply
The yuan currency market is too small and illiquid to displace the dollar as the world's reserve currency.
[+] [-] RickHull|13 years ago|reply
> Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves under the Bretton Woods system of fixed exchange rates. After the collapse of that system in the early 1970s the SDR has taken on a far less important role.[5] Acting as the unit of account for the IMF has been its primary purpose[Williamson 1] since 1972.
> Private parties do not hold or use them.
[+] [-] wutbrodo|13 years ago|reply
[+] [-] patrickgzill|13 years ago|reply
http://www.zerohedge.com/news/2012-10-23/how-iran-evades-wes...
And it lets Iran sell its oil to others pretty easily.
[+] [-] ihsw|13 years ago|reply
[+] [-] rolux|13 years ago|reply
http://www.google.com/search?q=yuan+oil+china+iran
[+] [-] rattus|13 years ago|reply
Not exactly new developments: http://news.google.com/newspapers?nid=1828&dat=19801006&...
The Yuan isn't really a publicly traded currency which is why it's interesting, I guess.
[+] [-] camus|13 years ago|reply
[+] [-] ljlolel|13 years ago|reply
[+] [-] kylelibra|13 years ago|reply
[+] [-] johnsang|13 years ago|reply
http://en.m.wikipedia.org/wiki/Bretton_Woods_system
[+] [-] akjj|13 years ago|reply
[+] [-] asmithmd1|13 years ago|reply
[+] [-] jvm|13 years ago|reply
FTFY (well, at least fixed that for the Economist headline writers)
[+] [-] tsotha|13 years ago|reply
[+] [-] aioprisan|13 years ago|reply