the future of the DOLLAR(blog 8)(part 2)

Another notable point is the development of BRIC and EU. However, the economic situation of both BRIC and EU is not simply the proof of the end of dollar as international currency. In fact, this is definitely a perfect example of a double-edged sword.

Of all the four countries in BRIC, China is the most influential one. Holding so much American debts, China has determined to vary its investment directions. And as Mr. Zhou Xiaochun has put, Chinese central bank is studying hard on how to fight against foreign vicious investments. (The contrary phenomenon will follow)

After studying a little about the economy of India, I believe Indian economy is very dynamic and vibrant. Although we can see more problems is beneath the development of India than China and nearly all the economists admit one fact that the economy is ten years behind that of China, we can see exactly the tactical advantage of India.

(First, after its narrow bankruptcy in the early 1990s, Indian government has gained many precious experiences in controlling the national debts. Under comparison, China has only several economists, most of whom may just buy several papers or degrees.

Second, although we Chinese all know that having too many people stagnates the economy, we may not have the damage of aging population clear in mind. Actually, China now is aging but less developed, which is very dangerous to a continuous development. On the contrary, India has a high birth rate and will take the advantage of cheap labor over China very soon. As for the educational level, India is not as good as China. However, Indians speak English more fluently, which India has its advantages over China in language.

Third, USA fights against China but has to cooperate with India. In terms of military enemy, China has Korea, Japan, Philippines, Viet Nam and India. However, India has only China and Pakistan. Therefore, China has to put more money into military and thus cannot focus well on economy.)

And there is some evidence that India now is working on finance to improve its flexibility towards economic crisis. Similarly, Brazil just announced to cut down US debt ownership to avoid potential risk. Therefore, as we can see, BRIC is not going to just let US control all the world.

And, as a Chinese, I prefer some sayings which stress the significance of China personally. However, in fact, when it comes to finance, this is never as simple as GDP. China is very immature in finance but its capacity of market has tempted foreign financial giants. In 2009, some newspapers even published message that Soros came to HongKong to give a strike on Chinese economy. (Actually, after a month, he just left HongKong and did nothing)  According to some estimation of IMF and the World Bank, the GDP of China will transcend that of USA in between 2016-2025. But in fact that is definitely not the end of the dollar (I mean GDP will not just decide the ownership of international currency). RMB, at this stage, is anything but a potential international currency considering about the immature finance, not so bright international image, unsatisfied scientific and technological development and highly dependent economy.

Although previously I have mentioned that Chinese government has already realized the enormous probable hazards behind the US dollar, that does not mean Chinese government /Chinese central bank will just sell most of the US debts. In fact, it is not feasible to even stop purchasing US debt instantly. A significant and unstable balance is beneath the massive trade between US and China because China needs the trade surplus to support its economic development and US need Chinese money and goods /commodities to enjoy welfare and convenience. Therefore, China cannot bear if the economy of US just declines drastically so that the investment is the insurance for US to keep the financial stability. Frankly speaking, as I have mentioned, the Federal Reserve will definitely have no problem in paying back the public debts of US but the Americans cannot afford that. So if China just declares not to support US dollar any more, the whole world will suffer and China cannot protect itself any more.

In fact, some scholars pointed out some severe problems underneath the development of China and they referred to lots of unrest /protest factors /events recently. For example, an independent author Yuan Jian has said that the political price cannot be compensated for by economic development any longer, which is indicated by many signs of unrests /protests currently in China. So whether China can manage to continue its economic miracle is not sure yet.

Then we come to the EU part. Although the economic scale of EU is still bigger than US, it is obvious EU is just a loose economic organization without many agreements in politics and diplomatic affairs. Some economists once claimed that euro has the power to replace the dollar to act as the international currency, which is apparently ridiculous at the moment. If we look at Greece in an objective perspective, we can easily find the deficiency with EU system. Greek economy is never as strong as Germany and after it joint euro in 2001, it has held the Olympics and fought against a colossal forest fire. Although its economy increased by 4.2% per year during 2001 and 2007, its ratio of the public debt to gross domestic product increased from 103% to 113%. However, with the stability of the euro, no one will doubt the credit of Greek government. By the time to clear up all the mess after 2008, Greece is dying without any doubt. So if we just dwell on the high saving rate in Germany and overlook countries like Greece, Spain, and Italy, it is impossible to draw a correct conclusion. Furthermore, although the ratio of the public debt to gross domestic product of Greece is already higher than the recommended maximum level in EU, other countries can do nothing about it but keep trying to persuade.

So as we can see from the previous analysis, euro system is deficient innately and is striving in the mud of public debts.

Another currency is yen, which is the legal currency of Japan. But with the low performance of Japanese economy, this currency is fading from the international stage.

In conclusion, the future of the dollar is not sure of course because it is relatively strong in the short term but in the long run we can see the dark side.