Oil’s up, Gold’s up but the dollar? Down, down, down

October 26th, 2009

Oh mighty dollar, where are you?

What’s happening? Could this the beginning of the demise of the US dollar as the dominant currency in the world? Is it about to be to be replaced by the next big thing in the history of economics and finance, namely the Chinese Renminbi or Yuan? What’s going on?

International trade

International trade is traditionally carried out in dollars. Suddenly things are changing. The Chinese government is making agreements, first with Brazil and now with Malaysia, in which trade will be conducted in the currencies of the countries concerned: renminbi and reals, or renminbi and ringitts. The US dollar will be standing outside the fence and watching.

The dollar

The immediate impression is that the dollar is imminently doomed, consigned to the proverbial garbage can of history, whereas the relentless rise of the renminbi is inevitable. But before you race off to enroll in “Mandarin for dummies” classes and mastering the use of chopsticks, let’s consider a few aspects of the “renminbization” of global finance.

We’ve been there before

The Western world went through a similar bout of angst and pessimism exactly 20 years ago with the Japanese yen, and the outcome was that the Japanese economy imploded in 1990 and has never recovered, whereas the American economy did recover and went on to much bigger and better things.

China is different

There are many arguments why China is different from Japan and why America is also different today. Very simply Japan committed national suicide by failing to procreate and so allowing their population to age and decline. This has sapped the vitality of the economy and continues to do so.

America

In contrast, the American economy is the beneficiary of fresh blood pumped in, both by natural growth and by new immigrants. The massive immigration of the 1990s and early years of this decade will be a strong influence on the American economy for many years to come.

I am dollar linked

I live in a dollar-linked economy and with the fall of the dollar, I am suffering. Look at this example. An article I wrote in April 2009 brought me about $25. In my local currency that was equal to 106.25. A similar article, which I hope will also bring me $25, will, at the exchange rate quoted by the bank today, bring me only 92.29, 13 percent less. And there is no way I can cut the link!

Dollar linkage

I know that 13 percent is not serious, but the point is that everything is linked and everything has fallen by that same 13 percent between those two dates. When it comes to buying an American car, for instance, we are talking about major money. If it is an apartment, and there are apartments priced in dollars, it can easily put an end to the deal. Of course there is a good side to linkage, but I’ll save that for another article.

This entry was posted on Monday, October 26th, 2009 at 9:29 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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