If the end of history were at hand, the dollar, the Fed and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we’d put our money on history. Most likely, history will trundle forward. And the renminbi will join (or replace) the dollar as the world’s leading currency sometime before the 21st century comes to a close.
But how, exactly, will that happen? No one knows … but few imperial elites give up the No. 1 position without a fight. As they see their power, their status and their wealth challenged, they typically find a casus belli, hoping to stomp the newcomer before it is too late.
When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, “It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable.
Note that Thucydides identified two factors: a rising rival and fear of that rise. China is rising. The US power elite fears its rise. And for good reason. Having the world’s reserve currency is an “exorbitant privilege,” as Charles de Gaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as reserves. Or it is lent back to us.
From an economic point of view, the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer . . . based on promises to settle up sometime in the future.
To pay off these claims, the US would have to run a surplus. (When? How?) But instead of running a surplus, we run deficits. The federal government’s deficit, for example, is expected to be $744 billion this year. And the current account deficit is running at about $500 billion. Neither is near a surplus.
Kim DotcomThe End of Growth?