A few days ago, Japan Finance minister reassured the position of the US dollar in the world by giving it Japan’s endorsement. It openly states that Japanese yen is not a candidate for the USD replacement. Remaining contenders are Euros, Yuan (unlikely too, as the Chinese has proposed a “basket” approach, rather than a single currency approach) and Special Drawing Rights, SDR from the IMF.
Question is which one of the above carries the weight that the US dollar holds. It is true that the US currency has devalued though current trading value doesn’t truly represent that (those betting against or for dollar must be having lots of fun now). Having defeated the gold and slowly changing from paper to plastics or electrons, the US dollar has a presence which no other contender do have. As I learn from my ex-boss, history always play a part on the current development. All the constraints we see now could be the effects of the past. The US currency has deep roots.
To replace it, its rivals shall have to begin from the roots. The reason why you can use US dollar in places where there is no access to the local currency, is because the huge foreign reserves of the US currency worldwide. The person who takes the USD from you can easily find someone else to exchange something for him. In a sense, it’s like gold.
Not only that, many things are priced in USD. One notable example is oil. It is almost impossible to value the current price of oil. If it is to correctly represent its worth, the price of oil will be too expensive for everyone and immediately, another round of world inflation will occur.
It is not possible to replace US dollars in one day. One has to prepare enough pulp or bakelite for the world consumption. Maybe the EU has such capabilities. However, they are not really united on this front. Till today, it still amazes me to see the existence of European Union. Who would have imagined that the colonial powers have gathered and cooperated, after seeing the centuries of wars among them. Have they lost their desire to dominate the world? It’s really hard to say. One thing is for sure though. Too many minds together can be as constructive, and as destructive as they can be. Adding to that, are the diverse cultural background and historical contraints.
What about Yuan? China has been the topic of the new millennium. It is like it has been away for the past millennium. Its growth is envied by all though typical for all developing countries. The uniqueness about China is its ability to produce, not just for its own billion of consumers but also for the other billions in the rest of the world. Its value proposition is undeniably the best around the world at the moment. However, despite its actual age, China is still relatively young as an economical power. There are still many stages for it to reach before it fulfills its potential and matures. By this, I mean, when the China economy sneezes a bit and the whole world’s economy shakes. Then, the yuan and China are ready.
Having set such a difficult condition, it appears that there is no contenders that can really qualify and we are back to the same spot. We may need more than just a major change. A change that may take decades. Is it worth it? But if we were to keep status quo, we are devaluing our own money in relation to the current world currency of US. If we set appropriate values for our monies, we will face widespread inflation. It seems out of the 2 options, the first is a safer approach. Just like the choice taken by the Japanese minister… The Americans have promised that there won’t be a repeat of the financial system failure we just witnessed. I am thinking how long will this be? End of President Obama’s term? A decade? 2 or 3? The next generation will forget about this naturally and the effects for this time around is not as catastrophic (so who will remember this hard).
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