Tarun Dua

Everyone is noticing the rising credit of the whole world including the world's poorest involuntarily to the richest nation of the world driven up by cautious or even indifferent governments of the East. I am not an economist(IANAE) but here are a few thoughts I have on the currency paradox the world is facing today.

What makes a currency the dominant currency. The trade surplus or investment. The size of the economy and the geo-political influence of a Nation's diplomacy ably supported by its military. The economy today is based on the size of the consumer base. Human intellectual capital available. The industrial base. The natural resources and agriculture. US remains the predominant military power in the world and has enjoyed all the above advantages except now that the trade surplus has been replaced by massively huge deficit or debt.

US has the highest per captia consumption of everything. Highest amount of money spent on research to buy human capital to create IP. A huge industrial base. The natural resources.

The consumer base of the US (and western Europe) look big as compared to the rest of us in Asia simply because the dollar(Euro) is available at an inflated price. The size of consumer base in India and China is growing exponentially thanks to the huge number of people powering these economies with a real Purchase Power Parity much higher than their GDPs currently reflect. The standard of consumption that US currently enjoys will be hurt if the currency depreciates in future. The same dollars will be buying less and less of goods. The cost of creating IP in an increasingly crowded space is declining thanks to large number educated Indians doing that for cheap. The Chinese have been able to create a huge industrial base second to none at unheard of prices by stripping off machinery from dying western industrial empires warehouses. The natural resources with the current high cost of working them out in US makes it at best a medium term saviour for the economy.

US trade deficit(also referred to as US debt to the world) alone makes it looks like it is not a wise decision on part of Big Asians and others to hoard on to dollars. As I read the Asian news reports of dollar's slide in May 2005 were caused in part due to a mere rumour triggered by a translation error on the part of an overstressed journalist that Yuan would be allowed to appreciate the dollar(which was subsequently done in Sept 2005 by the chinese: too little and too late) fell against the yen i.e. in real terms and not just against Yuan.
" China says yuan revaluation news was a translation error - May. 11 - The report, coming after repeated calls from the United States and other countries for China to let the yuan appreciate, sent the dollar diving against Japan's yen"

http://money.cnn.com/2005/05/11/news/international/china.reut
PS:Interestingly this link from May 2005 is no longer to be found. However bunch of related links from this period can be found at
http://www.forexfour.info/yuan-trading-currency.htm

Contrary to popular belief a soft dollar doesn't help an economy driven by consumption and investment atleast not in a way one would imagine for a -normal- economy in the short term but maybe in the longer term it allows things that were allowed to wither away from the scratch.

The current situation of dollar as a stock supported by bull operators(Big Asians) holding on to bulk of this stock in a bearish market and in the process buying more and more of this stock to prop it up to retain the valuation of their stock is now working like a ponzi scheme designed to benefit the top of pyramid -- the consumers in the USA.

Oil Shiekhs have long wanted dollars and not Rupees or Yuans was because they invested primarily in the US. However today this investment into US carries a big foreign exchange risk which can be alleviated perhaps by a high interest rate regime which is good for safe investments but not conducive for the growth in economy needed to tide over the currently evolving situation which can soon become crises.

Today its not the past lender nations(world war II era) that can decide the new currency of the world. It is China(primarily), Japan(maybe), India, South Korea, Malaysia and Taiwan in that order who will decide how long does the dollar remain the currency of the world.
The longer the delay in implementing a market driven Asian stable currency exchange mechanism backed by gold and closer to the real purchasing power of our currencies, the greater the danger of being sucked down for once by a profiligate government in North America spending primarily on war material instead of helping its own nature battered populace.

We live in interesting times. The inevitable and irrefutable conclusion is that the dollar is overvalued and the question that needs an answer is for how long.