World Bank Head: Dollar will lose its place to the euro and renminbi

Funny that we talked about this just yesterday in regard to a relatively obscure article, and now it is the 2nd leading story on the front page of the NY Times. Get a load of this:

The president of the World Bank said Monday that America’s days as an unchallenged economic superpower might be numbered and that dollar was likely to lose its favored position as the euro and the Chinese renmimbi assume bigger roles.

“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” the World Bank president, Robert B. Zoellick, said in a speech at the Johns Hopkins School for Advanced International Studies. “Looking forward, there will increasingly be other options to the dollar.”

Mr. Zoellick, who previously served as the United States trade representative and as deputy secretary of state under President George W. Bush, said that the euro provided a “respectable alternative” for financing international transactions and that there was “every reason to believe that the euro’s acceptability could grow.”

Over the next 10 to 20 years, he said, the dollar would face growing competition from China’s currency, the renmimbi. Though Chinese leaders have minimized their currency’s use in international transactions, largely so they could keep greater control over exchange rates, Mr. Zoellick said the renmimbi would “evolve into a force in financial markets.”

Read the article. It is beyond extraordinary that the US-appointed head of the World Bank would be so in-your-face provocative, casting doubt on Obama’s strategy to lead us to financial recovery under the supervision of the Fed (as opposed to the Treasury) and openly questioning whether we can pay our debts without igniting inflation. I personally don’t think so, and it’s clear Zoellick doesn’t, either. All of these points were discussed here yesterday, and it’s clear Zoellick read this site before presenting at Johns Hopkins.

The Discussion: 14 Comments

RMB is already a major currency in many parts of Asia. When you travel to places like Thailand, Vietnam, Singapore, the Russian Far East, Hong Kong, and now Taiwan. RMB is just as popular as the dollar. China has completed deals with resource rich countries like Brazil and Chile so the bilateral trade between them will be settled in RMB, therefore bypassing the role of the dollar.

September 29, 2009 @ 8:56 am | Comment

I think China economy is a bubble, however, the burst or no burst may not give a huge impact as long as there are mass of population live a life of peasant and farmer. No way RMB could compete with USD and Euro now or next 10 years but can’t say for sure in the next 50 years, American is not that naive.

Ignore whoever head the World Bank and their bla bla bla.

September 29, 2009 @ 10:29 am | Comment

Thanks for the detailed response in yesterday’s post Richard. As always, I’m drawn to the econ articles. 🙂

I agree with you that America’s (or Obama’s, depending how you want to look at it) choice to increase national debt by printing money in the midst of (dare I say it?) stagflation is risky. The question, which the neocons have been harping on endlessly is “Can we pay it back?” I guess I’m less concerned about the long term implications, and you mentioned, more concerned about the short term ramifications. I talked about this with my maco economics prof about two years ago. He had worked at the St. Louis fed for 11 years and did the whole Harvard PHD in Economics and he was remarkably accessible, so we used to idly talk during his office hours.

At some point I think I actually asked point blank: what if China dumped all their dollar-denominated reserve currency on the open market in a bid to use another reserve currency? His point of view was that doing so would irreparably compromise the ability of the Chinese government to keep the renminbi from floating freely in the market, which would in turn destroy their export-oriented economy. So he thought the likelihood of that was very small. That said, it didn’t seem possible then that Lehman Brothers wouldn’t exist.

If I had as many dollars in reserve as China does, I’d be starting to migrate away too.

I’ve always had trouble thinking about macroeconomics in a macro sense, ie, it’s always been embarrassing to me that my country is a debtor nation. If America were a person, I’d never loan them money. It really makes me frustrated to view the last 30-40 years and see how America has turned from a nation with the largest trade surplus to the largest trade deficit.

Ah well, sorry for the long post! Nice reading as always.

September 29, 2009 @ 10:31 am | Comment

Everyday billions, probably trillions of USD get traded. Only a fraction of that is for real business, meaning financing exchange of goods. The rest is speculation. I heard that about 10 years ago only 4 % of all USD transactions are for goods and services.

All major commodities are traded in USD, South America has more or less the USD. Like it or not, the USD will remain the major currency in the world. The EUR will have some impact, but my guess is, that the RMB will have no significant role to play, except being the money for 1.3 billion people.

And who knows, maybe the RMB will not exist in 15 years time. Maybe by that time it is just called Yuan….

September 29, 2009 @ 11:01 am | Comment

George, watch carefully what China is doing. They are notoriously shady about their investments, of course, but it’s no secret that they are determined to diversify away from the dollar, putting more investment money into gold and commodities. Just today they announced a $2.5 billion investment in an Australian farm chemicals giant. If you follow the dots, you – and your professor – can see that China is quietly but determinedly moving into other, more reliable investments. And they now have the clout and the leverage to thumb their nose at the US investment banks, having recently told them they refuse to honor certain toxic CDO derivatives.

They can’t dump all their dollars. Your professor is right. But they will taper off the dollar as much as they can, and are doing so now.

As I’m always careful to say, I am not an economist and not very smart about economics. But all the data is out there for those curious enough to look, and the trend seems to me so obvious, I am not sure how anyone can be suckered into the notion that in a year or two things in America will return to “normal,” with everyone buying stuff again like there’s no tomorrow. I’ve followed this common sense line of thinking and invested based on it, seeing pretty nice returns since late 2006. Bottom line, again: dollar will keep falling. As dollar falls, gold will go up, and new balances of power will be formed as China gains – and the US loses – leverage.

Ran, I used to think China’s economy was a bubble, and sometimes i still do. To a large extent the US economy was, too. Only it may take many years before China’s bubble bursts – and in the meantime, they just may make the necessary reforms to fix it, i.e., make it not a bubble. America had no such luxury as we ran out of credit, the opposite situation we have in China.

September 29, 2009 @ 11:09 am | Comment

The problem with the euro is the fragmentation of the eurozone. The eurozone economy is even bugger that the us but it is not homogeneous.
There is also the inflation paranoia of the central bank which make its policies extremely inflexible.
There are also no European bonds as far as I know.

September 29, 2009 @ 1:39 pm | Comment

I have been in south Asia several times. Dollars and euros I have seen but rmb was nowhere to be seen.

September 29, 2009 @ 1:41 pm | Comment

Bugger…. that was a good one!

September 29, 2009 @ 1:43 pm | Comment

Richard, I still find it very strange to walk into a marvelous built shopping complex that has very few patrons but there is another one being erect next door. Anyhow, I don’t see any contradiction between your statement and my. The bubble perhaps extends to less than 20% of the total population, hence shall have a long way to move forward. And I have great confidence toward America economy dynamism.

September 29, 2009 @ 3:20 pm | Comment

Ran, I didn’t say I disagreed with you. I actually think you may be right, at least about the bubble.

Ignore whoever head the World Bank and their bla bla bla.

Never ignore people who can influence markets. Don’t take what they say is true, but listen and try to figure out why they are saying what they’re saying (which is never the reason they say it is).

September 29, 2009 @ 3:49 pm | Comment

I have to admit, I’m kind of surprised Michelle Bachmann’s minions haven’t shown up here yet demanding a law making the US Dollar our only currency for time immemorial. I would have thought for sure the funny-sounding word “renminbi” would send the retard faction of the GOP’s radars right up. Maybe I’m just too early…

September 29, 2009 @ 11:20 pm | Comment

Katie, give them time. First we’ll watch them go bat-shit crazy over plans to light up the Empire State Building in the colors of the PRC flag on Oct. 1 (China’s 60th anniversary). Let them show their inbred ignorance one day at a a time.

September 30, 2009 @ 12:54 am | Comment

I’m curious how long you think the transition would take? I can’t really argue with the currency changes that have to happen. Obviously, the dollar has to fall and the yuan has to rise to balance out the current global imbalances. However, the timing is obviously in question. If you read experts like Pettis and other, then it seems like Beijing is doing its best to make the current imbalances even worse, putting off the date when the RMB is convertible even further to the future. Until the RMB is convertible, I don’t think we can really call it a global currency. Otherwise, thanks for keeping the blog going despite all the trolls.

October 2, 2009 @ 7:36 am | Comment

It will take several years before the RMB becomes a global currency, and I would be a fool to try to predict the timing. We’re certainly heading in that direction, but things at the moment are so fragile, it’s hard to say which way the cards will come falling down.

October 2, 2009 @ 8:19 am | Comment

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