Robert Zoellick, President of the World Bank, believes America's days as an unchallenged superpower are numbered and the US dollar will lose favor to the euro and the Chinese renminbi (NY Times, September 28, 2009). Whatever Mr. Zoellick's motivation in making such a statement, the implications if he is correct could be staggering for the United States.
As the world's main reserve currency, the US dollar trades or figures in transactions many billions of times per day. Governments, successful businesses and wealthy individuals keep excess cash in dollars because these can easily be converted into euros, renminbi, rupees and rubles. The dollar's preferred status enables the US Treasury to issue dollar denominated treasury bonds, which are gobbled up by the Chinese, Germans and Japanese – countries that run a significant trade surplus. This is very desirable for the US as it finds itself needing to borrow more and more money to offset its ever-growing debt. With the Obama administration’s response to the current economic downturn, US debt levels are likely to grow even larger. If the world's creditor nations ever choose to reduce their holdings of US dollars or bonds, Mr. Zoellick's prediction could come to fruition.
While the euro has virtually eliminated the challenges of currency conversion, and has simplified internation commerce among the EU's member nations, it still does not offer a riskless alternative to the dollar as a reserve currency. Anti-dollar proponents may argue that the euro clearly has helped to strengthen European economies and to raise the standard of living throughout the continent. However, the euro only gained legal tender status in 2002, and is yet to be tested over significant periods, or in a variety of economic crisis situations. For these reasons, the euro is not a strong candidate to supplant the US dollar.
The argument against the Renminbi becoming the world’s reserve currency is even stronger. Before the renminbi can assume a greater role among the world's currencies, the Chinese government would have to allow it to fluctuate freely on the world market. But we know that if the Chinese government were ever willing to allow the renminbi to trade freely, it would immediately strengthen vis-à-vis other world currencies, thus severely impacting the strong emphasis on exports that dominates Chinese economic policy. With a stronger renminbi, Chinese goods and services would become more expensive in world markets thus reducing exports and slowing an already fragile Chinese economy. Therefore, before China can seriously consider untethering its currency, it must find a way to increase domestic consumption. This is not something that is likely to happen in the short or even mid-term.
In The Tipping Point, Malcolm Gladwell tells us about a magic moment when an idea, trend or social behavior crosses a threshold, tips, and spreads like wildfire. In the hands of Connectors, Mavens and Salesmen, social epidemics can suddenly tip. According to Gladwell, Connectors are people with a special gift for bringing the world together. Mavens have the knowledge and the social skills to start word-of-mouth epidemics, and Salesmen have an uncanny ability to persuade others with subtle and seemingly effortless connectivity. So, the bigger question is not whether creditor nations will choose to reduce their holdings in US dollars in favor of the euro or renminbi, but rather is Robert Zoellick a Connector, Maven or Salesman? While Mr. Zoellick may possess capability in all three areas, his experience and expertise make him an excellent candidate to be a Maven.
If Mr. Zoellick's prognostication begins to take hold, other Connectors, Mavens and Salesmen may begin to agree and spread the message. Suddenly nations, businesses and individuals might choose to convert their local currency into euros or renminbis instead of US dollars. If this happens, America's days as an unchallenged economic superpower and the US dollar's role as the world's reserve currency could well be numbered.
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