Nouriel Roubini: The Dollar’s Demise

Discussion in 'Economics' started by ByLoSellHi, May 14, 2009.


    The Almighty Renminbi?

    Published: May 13, 2009

    THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.


    Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

    But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

    China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

    At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

    If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

    Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

    This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

    Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

    Nouriel Roubini is a professor of economics at the New York University Stern School of Business and the chairman of an economic consulting firm.
  2. TGregg


    That has been the non-stop position of the left not just this year, not just this administration, not just this decade but for the past 50 years. Any day now, the world will drop the greenback as the reserve currency and replace it with the fad paper de jure. Any time over the past 10 years you can find threads about this on EliteTrader, yet the world's reserve currency remains in USD.

    And it's not surprising. Not to anybody with a brain, anyway. Are there problems at the fed? Is the US government capable of irrational behavior? Oh yes. No doubt. Thing is, who is better? For a long while the dolts in the press tried to tell us that a socialist conglomerate of Europe would wipe the floor with the dollar. JFC that's stoopid, even for this board. But all the talking heads were saying it was the end of the USD. Then it was the end of the USD when some countries would not market oil in dollars.

    But now, the corrupt communist chinese are going to be the new currecny masters. LMOA. But don't let me (or common sense) stop you from making a fortune. Sell your dollars, buy the chinese paper. It's not like you'll escape every fraud so you might as well give in to the first one and be done with it.
  3. I never said Roubini was correct in his analysis on this issue.

    I simply found it interesting, think Roubini is rather astute at spotting emerging macro trends (but not infallible), and wanted to post it because his conclusions are dramatic and sweeping.

    I actually agree that China has some major structural issues and extreme inefficiencies in their economy, and that it's not a foregone conclusion that they'll necessarily be able to straighten them out over a period of even many decades.
  4. All true, except no time in history has the United States printed such massive sums of money AND lacked the domestic industry to absorb it.

    WW2 / Vietnam were the only contemporary examples that might be drawn for comparison. Even still, America reigned as an industrial powerhouse, which makes a huge difference in the assimilation of debased money in the least destructive way possible. And look what happened after Vietnam in the 70's - sky-high inflation, Volker at 20%+ interest rates etc.

    Today is different, in the sense that % of Debt to GDP is approaching historical highs AND money printed or lent is not dedicated to some activity that large swaths of industry must sacrifice their time and labor for, but rather freely handed to out nameless Corporations waiting to be compounded endlessly through fractional reserve lending.

    When a bomb is built and paid for, the maker has to sacrifice labor and materials to build it.

    When bailouts are given, money is simply printed and handed out. There is no sacrifice of time or materials (which represents time to some other party). Its just free money for no sacrifice = inflationary.

    As we approach 20-25 Trillion in bailouts, I think the dollar will begin to crack hard.

    The relativity argument for reserve currencies is true. Although, the markets may simply abandon the USD as reserve and bounce around between asset classes looking for a new home.
  5. Also interesting to note: US bond prices tanked and rates exploded during the 70's even though the USD was still world reserve currency.

    The inference there is just because the dollar is reserve, doesn't prohibit a massive exodus from T-Bills.
  6. One thing is nearly certain (can I say 'nearly' certain?):

    Decoupling as an economic theory pertaining to developed countries and emerging economies will be proven or discredited sooner rather than later.
  7. Thats true. I don't see how China will ever become autonomous without raising their per capita GDP enormously. They need a broad, thriving middle-class to make that happen (something America once had). And from what I know, half the Country is still rural living on rice paddies.
  8. Pascal


    As soon as China allowes its currency to become fully convertible, is the day China loses its competitive advantage, and the dollar will again reign supreme. It's the history of the last century. The US pressures a country to unpeg its currency, then the multinational banks raid that country's treasury by short selling the currency. This happened to Japan in the 80's, and will soon happen to China.
  9. Actually, I think you guys are right on topic here with what Roubini is saying, but you're laying out the opposing case pretty well.

    I've thought at times that China's competitive advantage, in reality, is in its peoples' willingness to work harder, longer and for less than almost any other emerging economy, and in its willingness to subject itself to almost insane levels of industrial pollution (by water, air and even touch).

    These sacrifices are the reason you can buy durable goods for probably 30% (in real dollars, adjusted for inflation) of what we used to have to pay for them.

    How long will they continue to subsidize our consumption of inexpensive 'stuff' with their poor standard of living and compromised environment and health (and uneven, lumpy economic growth leading to societal stress)?
  10. Real estate crashed practicly globaly.

    Stocks crashed the hardest since 1929.

    All comodities crashed 50% to 80%.

    Currencies plunged.

    And yet Gold has done just fine during 'the biggest deflationary crisis of the last 100 years' as Roubini calls it himself.

    Where was the inflation that supported gold?

    Why don't you like gold, Nouriel?
    #10     May 15, 2009