China is calling for a move toward an obscure international currency known as SDRs (Special Drawing Rights) used by the IMF, to replace the U.S. dollar. The proposal on first blush suggests China is concerned with looming inflation in the U.S. and the devaluation of the debt it holds. While a reasonable concern, why would it push for such a dramatic shift?

The U.S. China relationshipis both complex and fragile. The American consumer has been the principal driving force that has fuelled the Chinese economy into becoming the world’s third largest. The result has been the creation of a communist controlled capitalist system very reliant on a democratic, open society on the other side of the Pacific.

The U.S. has long pressed for Beijing to allow its currency to float. All requests fell on deaf ears. Now with the world is in financial turmoil, and with the U.S. being blamed for mismanaging its own economy, there is some not so subtle muscle flexing being exerted by numerous countries, particularly China. Currency is a major element at the heart of any international debates. China’s suggestion that the world should begin moving away from the dollar changes the dialogue away from demands to see its own currency, the yuan, move higher which would reduce the competitive price edge of its products. Obviously this could in turn very negatively impact its exports. From the U.S. perspective, a rise in the yuan would aid in reducing its mounting deficit with China.

China purchased dollars and will probably purchase more of the Obama packaged U.S. debt. While it can clamor for a move away from the dollar, China has every incentive to see the dollar’s value remain strong, and will not sell its dollar reserves.

So what are we to make of China’s current grandstanding just before the upcoming G20 meeting in early April?

It is understandable that this populous country would want to increase its influence on the world’s financial affairs, and feels emboldened given its almost $1.5 trillion in U.S. securities, nevertheless, the world’s business is done, and continue to be done in U.S. dollars. China and Russia might wish otherwise, however trade is very dependent on the safety and security of the method of payment.

Although there have been abuses in America’s capitalist community, the vast majority of the country’s businesses are well managed organizations who present reliable balance sheets. The Euro has been touted as a potential alternative to the dollar, however the current economic state of countries like England, Italy and others, suggests that they are having difficulty putting their own and collective houses in order, affecting long term confidence on the common European currency. Some of the European member nations also present little reliability as worthy credit risks. For countries such as China and Russia, it would take two or three generations to establish confidence through the evolution of independent, authentic, trustworthy, and transparent organizations populating their economic landscapes.

The Knights Templar became extremely powerful in the middle ages because they could do what others, including whole countries, could not. Their influence was rooted in their reputation as a fighting force. They could guarantee letters of credit paying for goods moving across borders in a disorganized medieval world. America is not in a position to be losing it’s power and influence any time soon. Even as it goes through the process of recuperating from the abuse of its financial system, America remains the principal safe haven for the world’s cash, and the world’s principal trading partner.

America holds two critical elements standing in the path of any change to the current status of the dollar; military power, and international confidence in its business sector. It is at this point inevitable that we will see a devaluation of the dollar as the U.S. government prints dollars on its way into unprecedented spending. This action will impact all of America’s creditors, however, it is difficult to envision an unseating of the dollar as the dominant reserve currency and the preferred currency of trade. It is also not likely that Americans will be unseated at the world’s foremost consumers, and they buy in dollars.

No matter how much China beats the drums for change, SDRs will remain tools for the IMF to account for its aid to debtor countries, the IMF will not be creating a new super-reserve currency, and the dollar will maintain its position in trade.

James Raider writes  The Pacific Gate Post


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