…the hurdles to non-dollar currencies gaining reserve status loom as large as they have ever been, albeit – thanks to the exertions of the Trump administration – they are no longer as insurmountable as they once seemed. It helps to recall that long before January this year, markets were being spooked by concerns over the US’ deteriorating fiscal position: net debts at approximately 100 per cent of domestic output nestle untidily with a budget deficit, last year, of 7 per cent of GDP.
The foundations of the global finance architecture had already begun to shift long before Donald Trump’s second term as president of the United States of America. China’s accession to the World Trade Organisation (WTO) in December 2001 could considerably be thought of as one of the most significant milestones in this transition. But long before this episode, the resurgence of the Chinese economy from 1979 posed far bigger questions to everything from global trade to its financing. China’s emergence as the world’s second largest economy, its growing share of global mercantile trade, large foreign currency holdings, and progress along the forefront of new technologies, fed into concerns that the yuan was poised to edge out the greenback as the world’s reserve currency.
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After Maastricht in 1993, there was the spectre of the European Union (EU), too – although this has proved to be all potential and little actual progress. As large as the United States, both in terms of the number of its people and the size of domestic output, it was inevitable that the euro played an increasingly significant role in settling cross-border transactions and in fund managers’ portfolios. Still, up until end-December 2004, were we anywhere near the possibility of either the Chinese or European Union currencies – or both, indeed – replacing the US dollar?
There were major hurdles to this outcome. As of end-June, this year, the State Administration of Foreign Exchange (SAFE), an arm of the People’s Bank of China (PBOC), held about US$3.317 trillion in total foreign exchange reserves – half of this in US dollars. Add to this, China’s tight scrutiny of foreign acquisitions by Chinese companies, its restrictions on foreign exchange purchases by individuals and firms, quotas on outbound direct investment (ODI), limits on cross-border portfolio flows, and the yuan’s path to reserve currency status was murky. Through these measures, China may have squared the circle of the “impossible trinity” of fixed rates, free capital, and independent monetary policy. But capital controls of this nature are also one of the biggest barriers to the yuan becoming a true global reserve currency.
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The EU is undoubtedly a more open economy than China, and its governance framework far less opaque. Yet, without the free movement of capital and labour, and with no mechanisms for transferring funds from a central budget to struggling regions, a shared currency can create more problems than it solves. And the EU has been no exception to this rule. Add the penchant of the 27 members of the EU for mollycoddling favoured industries and sectors, and the union’s thicket of red tape to this and the euro’s inability to currently bear the global financial and investment burden is as clear as the yuan’s. Neither Japan (a small economy) nor Switzerland (an even smaller one), both of whose currencies have played the role of safe haven investment destinations in times of global crisis qualify for this role, alas.
Today, a fast and loose approach to fiscal policy, and the devil take the hindmost take on trade policy is driving global economic uncertainty in unusual directions. A falling dollar and rising treasury yields in the US underscore the main worries. Were the global economy to end up down Shit Creek, with no paddles, what will the non-Americans who hold a third of the US’ US$8.5 trillion debt do? And how will markets respond to the US’ need, over the next 12 months, to refinance US$9 trillion of its debt?
And the hurdles to non-dollar currencies gaining reserve status loom as large as they have ever been, albeit – thanks to the exertions of the Trump administration – they are no longer as insurmountable as they once seemed. It helps to recall that long before January this year, markets were being spooked by concerns over the US’ deteriorating fiscal position: net debts at approximately 100 per cent of domestic output nestle untidily with a budget deficit, last year, of 7 per cent of GDP.
Today, a fast and loose approach to fiscal policy, and the devil take the hindmost take on trade policy is driving global economic uncertainty in unusual directions. A falling dollar and rising treasury yields in the US underscore the main worries. Were the global economy to end up down Shit Creek, with no paddles, what will the non-Americans who hold a third of the US’ US$8.5 trillion debt do? And how will markets respond to the US’ need, over the next 12 months, to refinance US$9 trillion of its debt?
Most commentators argue that a general policy course correction is possible in the US next year, were the Democratic Party to regain either or both houses of Congress. Even given this best of possible outcomes, a period of stasis following today’s crisis would simply mark the first stage of the failure of the greenback’s reserve currency status.
How fast will this transition happen? No faster than how long it will take the rest of the world (China and the EU in particular) to improve its governance frameworks.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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