Dollar replaced by Chinese Yuan as World Reserve Currency?

This article piggybacks somewhat on an article I posted earlier today about the mass importation of gold in China. Look over that article first before reading on. Chinese citizens are the ones buying the gold, not so much the government-run People’s Bank of China.

We hear talk these days of the US dollar losing it’s status of being the world’s reserve currency. People often speculate that the Chinese Yuan will rise to take it’s place. Gold import numbers such as the ones seen in China have led people to speculate that the Chinese government wants to replace it’s dollar reserves with gold, peg the Yuan to their gold reserves, and then lead the charge as the world’s only gold-backed currency and replace the dollar with the new gold-backed Yuan. Presumably, this would relieve the USA of much international prestige and influence, and probably elevate China to the position of the nation that steers the world.

I disagree with this assessment. There is a slim possibility this could be the case, but I do not think it’s likely. There is no good reason why the Chinese government would do this. The Chinese government is controlled by power-hungry bureaucrats. One of their most powerful tools is control over the money supply. Turning the Yuan into a gold-backed currency would take away that power.

Pegging the Yuan to gold in a real-deal gold standard would mean that they can no longer artificially expand the money supply. The Chinese export industry absolutely depends on this. Modern China is a good example of a Mercantilist system; that is, their economy depends on the subsidization of exports by the government. The Chinese government purposefully devalues the Yuan to make their exports cheaper and more attractive to the world. Pegging the Yuan to gold would force these subsidies to end. The price of Chinese exports would go up. China’s position as the factory of the world would falter very quickly. On-the-whole, this would be a good thing for Chinese citizens holding Yuan; their purchasing power would increase dramatically. For bureaucrats who want to maintain the status quo, this is not a good situation. Therefore, I sincerely doubt that the Chinese government has any intention of launching a gold-standard on the yuan.

Furthermore, I do not think the Chinese government on-the-whole wants to see the dollar disappear as the world’s reserve currency. I have no doubt there are nationalistic elements in the Chinese government that might want to see the dollar collapse, but the majority of the Chinese government is content with the status quo.

For the dollar to lose it’s status as reserve currency, other major currencies would have to be appreciating against the dollar. This is not the case with the other major currencies of the world. Nobody wants their currencies to appreciate too heavily against the dollar, because that will damage their ability to subsidize their exports. Nobody wants their currencies to depreciate too heavily against the dollar, because that will piss off citizens, destroy the credibility of the Central Bank and government, and make it more difficult to import goods from abroad. Therefore, the Federal Reserve and the other Central Banks of the world collaborate to maintain the status quo between currencies.

I do not think the dollar will disappear as reserve currency anytime soon. I do not think the Chinese government is gunning for the dollar. I think the international cartel of Central Banking is happy to let the status quo persist; that is, to subsidize exports to the American economy. Foreign Central Banks, like China’s, will continue to buy Treasury bills from the United States government because it will keep interest rates low in the US. Keeping interest rates low is what is currently preventing the USA from slipping into another recession. As long as American consumers are not hit by a recession, they will continue to spend heavily on foreign exports.

I would be genuinely surprised if China were to introduce a gold-backed currency.

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One Comment on “Dollar replaced by Chinese Yuan as World Reserve Currency?”

  1. For Real October 16, 2013 at 2:45 am #

    This would be cool if it were a video

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