Saturday, 4 July 2009

What Follows The Dollar?

The pattern of international settlements is not the sort of topic that will have you sitting on the edge of your seat. It is, however, quite important – as we have recently found out. We have recently seen the recycling of excess East Asian savings into an excess of borrowing on the part of the G8. This was not sustainable. It lowered interest rates to undue levels, which fuelled speculative bubbles in key asset markets (the Stock Market and the global property market), until we reached a point where the loans being made took on a reckless air as lenders gave credit to those who had little hope of repaying their debts. And then the bubble burst.

We first had the Credit Crunch, which spread contagion into the financial system causing it to come grinding to a halt. This provided the mechanism whereby the turmoil in the Financial Economy spread into the Real Economy leading to our present recession. As we work our way out of recession, the root causes - those financial imbalances - have not gone away. Taking a futures perspective, one wonders how this might play out.

There are long term adjustments that are currently playing out. We often hear about how the balance of geopolitics is shifting eastwards from the US, but we rarely are told how this might occur. One mechanism by which it occurs is through the shifting pattern of international settlements. As the US – both in the private sector and in the public sector – becomes dependent upon East Asian finance, so the East Asian nations will have more say in geopolitical affairs.

It is through the exercise of financial power that the balance of geopolitics will be shifted. In the near future (the next decade), we can reasonably expect China to move away from a reliance upon US Dollar assets and towards a more broad currency base. When it does, it will be laying a claim to be a dominant global power. At that point, we need to look to the Inner Island Chain for potential flashpoints between the US and China.

Buttonwood: Birth pains | The Economist

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