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Ride The Bull Short The Bear
CS Tan
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This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
Posted by IDQWE001 > 2023-03-28 08:45 | Report Abuse
In 1944, during the Bretton Woods conference British economist, John Maynard Keynes proposed BANCOR a new neutral reserve currency that would be used for settling international accounts. However, the US overruled this proposal in favor of a system of fixed exchange rates using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency. Now if commodity-rich nations such as Saudi Arabia and Russia suddenly decide to not use the dollar for global trade, then the trillion-dollar question is that what would be the next global reserve currency? Looking back at the history over the past few centuries, one has seen that the global reserve currency has changed hands every ~80-100 years. The dollar is nearing the 80-year mark also so a change of the guard in the next few years would not mean a deviation from the historical norm.he global reserve currency has been closely aligned with the overarching power in the world at that moment in history. China being a rising power sees itself as a Great Power (in its own mind at least) and would be in the mind of many as “calling the shots” in what the next global currency would be. While in theory, China would not mind having most of the world trade be conducted in yuan but given the Triffin dilemma that the US faces today this would be an obstacle. The Triffin dilemma is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. The use of the US dollar for global trade creates a big demand for dollars from all around the world leading to the dollar strengthening relative to other global currencies. This dollar strength made US exports become uncompetitive compared to their peers overseas. This has led to the hollowing out of the US manufacturing sector and a flight of jobs over the past few decades. This has imposed heavy costs on those who worked in blue-collar jobs across many areas of the US including the so-called “Rust Belt”. China being an export-led economy would not want to fall into the same trap as the United States. While they would like to have global trade denominated in yuan in principle (as a matter of national pride) one doubts if they want their exports (which are a big part of their economy) to become more expensive. Also, for all trade to settle in yuan China would have to export yuan to many other nations that would need yuan to settle trade with their trading partners. Given the strict capital controls in China, it would be surprising if China allows a lot of yuan to go out of the country to foreign shores. China has benefitted from the dollar system (running up trade surpluses year after year) where they can have their exports cheaper due to dollar strength so they would not mind having the reserve currency as something other than their own currency. Even if China wanted to set up the yuan as a default reserve currency the question is would other states fully embrace it?Today due to tensions with the West, Russia is forced into a friendship with China but they were not on the best of terms always including a military skirmish in 1969. Chinese from time to time bring up their territorial claims in the Russian Far East including Vladivostok which they say were given up by China as part of unequal treaties during their “150 years of humiliation” with foreign powers and now they want it back. Many other Asian neighbors including India, Vietnam, South Korea, Japan, etc. with which China has adversarial relations would also be wary of adopting a yuan-based reserve currency where they would be dependent on China to obtain yuan for their trading. Also, in event of military hostilities with China or its allies, they can (like what Russia is facing right now) could be “cut off” from the reserve currency yuan which would be determinantal to them. A return to a system like BANCOR (neutral reserve currency) proposed by Keynes in 1944 would require active cooperation between many nations across the world. With active geopolitical tensions among various sets of nation pairs: Russia and USA, USA and China, Europe and Russia, Saudi Arabia/UAE and Iran, etc. the chances of another “Bretton Woods” kind of consensus are next to nil.