Wednesday, October 23, 2013

Fading American Expectation and Exceptionalism

Since the financial tsunami of 2008, I have been monitoring the bilateral currency swap agreements that China has entered into. According to the most recent report, China has 24 such agreements in place, the recent agreements with EU and UK are probably the most significant.

Most significant because EU represents a major portion of global economic activity, second only to the US and because UK is unabashedly and proactively going after opportunities associated with becoming a swap center for Renminbi (along with Hong Kong and Singapore) and bending over backwards to entice Chinese investments into UK.

There was a time when UK was the leading economic power of the world--you know, when the sun never set on the British empire. The pound sterling was at the time the world's reserve currency of choice. That was then.

Since then America has overtaken UK and became a superpower and after the collapse of USSR, the world's only superpower. The dollar has replaced the pound as the reserve currency.

Despite the fact that the financial collapse of 2008 was caused by American greed on Wall Street, the dollar was still considered the safest currency to have and hold. Foreign money piling into the US did its part in keeping the interest rate of US Treasury bills low.

Since that time, however, the US Congress has twice threatened to renege on the national debt which would in effect render the foreign holdings of US Treasury bills worthless. Each time, Congress kept the world watching with abated breath and backed off as the clock was about to strike midnight.

Congress has not offered a permanent fix to the circus revolving around the fiscal budget and debt ceiling but merely kicked the can down the street with yet another deadline looming on December 13. Some wags have suggested that Congress lacked sense of humor and did not select February 2, Ground Hog's Day, for the deadline.

Watching the US fiddle with the prospect of default is no joking matter but the world clearly appreciated that Washington has become one big joke.

As Wall Street Journal, among others, have pointed out, Asian countries in particular are now busy doing their own side deals in bilateral currency swaps to avoid additional dollar exposure. The most prominent next to China has been South Korea. They have been cutting one deal after another with their major trading partners. Their central banker said Korea is following China's lead.

The worldwide trend is obvious to anyone except members of Congress. American exceptionalism is fraying along with the declining desirability of the dollar. When enough countries decide holding on to the dollar is too risky, the American dollar will cease to be the reserve currency of choice.

When China is courageous enough to make the Renminbi freely convertible, the appeal of the dollar could take a quantum dump. When the world ceases to want dollars for their rainy days, the value of the dollar will go kaput. The American taxpayers will rue that day but it will be too late to throw the rascals out of Washington. The damage would be beyond repair.

No comments: