#reservecurrency

Is the U.S. Dollar Really on the Brink of Collapse?

This article is about China’s position in the world economy. Eichengreen provides a detailed explanation of the notion of a reserve currency. I found this very useful because my knowledge about the reserve currency is very vague. I liked also that he goes further than the theory of the reserve currency and explains how we use it in our financial system today.  Although he explains why the case for the American dollar as the reserve currency is strong he also presents the argument for the possibility of China’s currency becoming the global reserve currency which acts as a foundation for the rest of his article.

The possibility of China’s renminbi replacing the United States’ dollar as the reserve currency highlights the idea presented in Brett Scott’s book ‘The Heretic’s Guide to Global Finance’ that the financial system of one country is interlinked with the financial system of another. Andrew Gamble goes further than this in his article ‘The Political Consequences of the Crash’ suggesting that changes in a country’s systems affecting that of another can alter the global economic balance.

My knowledge of the Chinese economy is relatively limited but I find that Eichengreen’s article is both easy to understand and easy to read. The ‘blueprint for renminbi internationalisation’ is very interesting. The different stages and the several steps towards internationalisation that China has already achieved emphasises how real the threat of China’s renminbi is to the existence of the American dollar as the reserve currency. Despite this however, the time limit of ten years that Eichengreen imposes in his article may be too far-fetched. There is still a lot to be achieved before the renminbi can be in a position to replace the American dollar as the reserve currency.  

Eichengreen pinpoints several factors that China needs to address in order for the renminbi to be internationalised. Increased liquidity in the financial market and the liberalisation of their capital account are examples of these factors. What I like is that Eichengreen presents these factors in theory and then presents historical accounts of these theories in practice. The differing results from what one expects would happen to what actually happens highlights what we already know about the financial system; that the financial system is riddled with uncertainties that one cannot always anticipate.

Furthermore, Eichengreen emphasises the importance of China’s political system as to whether the renminbi will be able to replace the dollar as the reserve currency. The relationship between politics and finance is extremely complicated; as much as politics can effect economics and finance so to can economics and finance affect politics. No matter how effectively China internationalises the renminbi, if China’s political system cannot be democratic then the renminbi as the reserve currency will never be achieved. Although there are some who would belittle the importance of the association between democracy and international currency status (such as Gelbach and Keefer, or Haggard) it does not dispute the influence politics has on the financial system and vice versa.

Ultimately, Eichengreen presents an interesting article that although concludes that the renminbi may not replace the dollar as the reserve currency, by the end of the ten year time limit the renminbi will be a ‘consequential international currency’ that may not be ‘co-equal’ to the American dollar but will rival the Euro as the second leading currency in the world.