Is the post dollar era coming ?

First edition of ‘The Currency War’ have primarily criticized the system of Dollar and claimed it to be unstable to be used as reserve currency. In addition, second edition illustrates and elaborate the mechanism of the currency (dollar) and analyzed the causes of financial crisis 2008-9 in structural manner and anticipated how this crisis would end under the influence of conspiracy theory based point of view. Author, Soon Hong Bin- he is one of prominent economists in China; His main argument was made on whether dollar would be still stable reserve currency and also outlined pessimistic outlook on global economy. He also has somewhat forecasted that this global economic recession will take place by emphasizing the fundamental problems of volatile derivative market whether it has been used to hedge the level of risk or intentionally taken the position to make speculative profits.  

Author’s view on dollar as global currency; dollar is not functioning properly with right intention and dollar is increasingly being manipulated by invisible powers. He urges the global economy will soon need an alternative key and also expressed his sincere concern if dollar loses control completely. On contrary, many economists collectively do not agree Yuan as the next global currency as this is one of the wish list for China, not really in favor of global economy. There are so many unstable variables embedded in Yuan if this currency is considered to be key global currency. Author also brings the spotlight to Yuan being the key currency for global trade (goods/services) and looks at the possibilities. 

Having seen recent global economic recession and European Sovereign debt crisis, I personally think that it would be the case for the global economy to seek for an alternative ‘post-dollar currency’. This review of ‘The Currency War’ highlighted some key events such as this current economic recession would persist until 2024 which author find this current economic meltdown will have almost similar impact as The Great Depression 1930. He gave an assumption that new post dollar currency will be based on gold and certified emission reduction and he strongly encouraged Chinese nationals to have a great understanding on how the Western countries have been developing during last three decades instead of being ignorant. Roosevelt once said ‘There is no such coincidence’ on every event that take place. It is meticulously planned and executed’.

There are too much information everywhere that due diligence is sometimes required to identify the quality of the information. Our impulsive and unethical behaviors in generating profit and use the policies to make the life easy and favorable for 1% caused this crisis rather than blaming on people who could payback their loans. Also, perspective of The Currency Book is pessimistic on the US economy. Yet, this alternative key currency in post-dollar era; that must be something we should all be keen to study about although I have no doubt that dollar would still remain strong as the global currency.

Further Reading
http://competitiveintelligencejournal.blogspot.com/2008/08/currency-wars.html

I-L-L-U-S-I-O-N

(Source: Top foreign stock, 2011)

About ten years ago, it is not too long ago that IMF has been very spiteful on Asian financial crisis in July 1997. In 2011, IMF is so affable that majority of Asian slightly start forgetting about Asian financial crisis. Yet, Asian countries do not really welcome this friendly gesture taking their painful lesion from financial crisis (1997) into account. When you generally talk about China, what is the first thing that comes to your mind? Is it the largest population, cheap labor or the next leader of global economy? If we look at closely at ‘Export growth by trade partner in 2010’, this graph illustrates an important view that economic growth of majority of Asian countries are based on the exports, mainly to China, except Philippine and it was also interesting to see exports to the United States was less than China in comparison amongst trade partners as shown below.

We often read the articles with the title such as China: stunning growth? ‘Is China in recession ‘ Large part of Chinese economic growth was obtained by the export activity, in which this different level of exports can be monitored by the index, called ‘Baltic Exchange Dry Index (BDI, in short). This index tracks worldwide international shipping prices of various dry bulk cargoes and provide an assessment of the price of moving the major raw materials by sea. When this index goes up, this would mean that there is high demand of moving raw materials from one country to another. In opposite, this show the falling demand of raw materials (or commodity) the line graph above, please refer to blue line. Second half of Year 2008, the rate dropped from $11380/day down to almost $ 330/day (approx.) shown below.

(Source: Investmenttool.com, 2010)

In my own perspective, Asian countries might be exposed to ‘knock-on effect’ risk if China reaches the point where economy can’t grow further growing then. Then, what could be the driving force of stunning Asian economic growth that we have been hearing and seen so far?  It is certain that Asian economies will grow in certain size. Sustainability of the growth still is questionable. So, the illusion of China – is it still there? I think not. BDI has temporarily been raising right after the financial crisis 2007. This was because China had a substantial impact on rising demand of moving raw materials, most commonly iron ore from other countries to China (inbound transport) There was also a huge of wave of constructing new apartments, real estate buildings in China which even pushed demand even higher. This means that China has been importing raw materials rather than getting this within their country. 

Again, if they stop importing, where will the rest of demand come from? Is it sufficient enough to grasp well-balanced global trade? Does China need continuously have their economic growth with bubble in their economy to maintain current positivism? Huge cheering from trade partners, IMF, World Bank – who are they in favor of?  I personally don’t think that cheering gesture of IMF towards Asian countries is sometimes in favor of 99% of global economy. I suppose it is mostly for 1 % for advanced economies without truly knowing what these countries are after and perhaps they still conduct such impulsive behavior after being saved from this crisis. All economies (countries) should really have the mindset of fostering their economy, not heavily relying on a particular country (e.g. China). Independence; that is something that we all have been lacked for some time.

Image 1 – US Economic Crisis Climate

Source: http://topforeignstocks.com/2011/09/06/u-s-economic-crises-since-1990/

Image 2 – Baltic Dry Index

Source: http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

The West vs The East

Sorry, folks – Global economy is still in recession

It is not surprise that global economy is still in recession. There have been two major stages of the most serious crisis since the Great Depression. BNP Paribas firstly made an announcement that they were ceasing activity in three hedge funds that specialized in US Mortgage debt. The banks did not how big the losses were. On 15 September 2008, this was the time that the US government allowed the investment bank ‘Lehman Brothers’ to go bankrupt. There was also an interesting mindset among the major investment bank houses saying – they are ‘too big to fail’ and expected the government bailout.  This held no longer true that the threat of a domino effect through global financial system was forthcoming.

Furthermore, On 5 August 2011, there was whooping new that S&P downgraded triple rating (AAA) of the United States during the weekend and was no longer classed as top-notch and the American bond yield will unlikely rocket in coming times. It came to my mind that it would be seen as opportunity for rapid growing economies such as China and India mainly. These economies will bounce back from a part of global recession with substantial economic growth and constant developments.  This assumption is based on conditionality of “Any country with mountains of foreign reserve and the possibly lowest budget deficit will position themselves.” (Naroo Kim, 2011)  The Economist published an interesting article on September issue what $ 3 trillion Chinese foreign reserve could do. (The Economists, 2011)

Threatening the West ?

If you ask me whether these growing economies are dangerous. My cynical answer is ‘Yes’ – watch out. Why? Look at the list of shopping list for China with their foreign reserve? Buying off all Portugal, Ireland, Italy and Spain debt? Or Buy this year’s projected oil output and drive the oil market as they wish? This raises very important points for Europe and the United States. The economy need to bring their intervention with an acute eye to re-shape the economy to prevent European Credit Crunch, which I believe that is imminent. Hence, rapid growing economies will have somewhat a huge impact on rebalancing the global economy outlook of global economy and may lead the economic growth. For Europe and the US, it is a real time without further postponement to restore their confidence and work hard beyond their expectation to fix what has gone wrong for a long time. 

Oh, My God! - It’s really happening

Danny Quah, a professor at London School of Economics and also a member of the World Economic Forum on Economic Imbalances. One of his studies grasped my attention with a headline of ‘The Great Shift East’. His study argues that there is clearly more economic activity in Asia and also mapped out the evolution of world’s economic centre of gravity from 1980 through 2049. According to Professor Danny Quah;

                                                                                                                                      (source: Danny Quah, 2011) 

Economic centre of gravity is defined as the spot within the globe, which represents the “average location” of global GDP. For example, if there were only two locations anywhere in the world producing any GDP, New York and Beijing, and they produced the same amount of GDP in each city, then the centre of gravity would lie within the surfaces of the globe exactly halfway between New York and Beijing. The first dot on the left is where the centre of gravity in 1980s, somewhere between Europe and US. The black dot on the far right is where it was located in 2008. And the red dot shows where is projected to be in 2050. It has moved a long way east already, will move a lot further east in future decades. (Danny Quah, 2010)

                                                                

But, Western economists (e.g. William Easterly and Greg Mankiw) says, “ West should not be worried” based on their thought that the west and the East are not competing for a fixed amount of Global GDP, and free trade between them will mean that both can become richer than they would be without the free trade. Also, rapidly growing economies are growing at breathtaking scale and is happening so quickly as it is shown on the graph below.

                                                                                                                                           (Source: FT, IMF, 2010)  


I do not totally believe in the collapse of financial sector in 2008 did cause widening gaps in GDP growth between emerging countries and developed countries. There was an obvious tipping point from beginning of 2001. I do not say with confidence of course. But, if these two lines show interconnections, the global order and economy will see many issues that has not ever discovered, yet with an same objective of all – A great era with more growth as one economy within all countries on globe rather than classifying the global economy as the west and the east as if they are competitors for a death. 

Source 1- FT

http://ftalphaville.ft.com/blog/2011/03/23/523231/the-worlds-economic-centre-of-gravity/

Source 2- Danny Quah, LSE

http://econ.lse.ac.uk/~dquah/p/GE_Shifting_CG-DQ.pdf