One of the big scares out there is there will be a shift away from the U.S. dollar into the Chinese Yuan, and this shift will drive U.S. interest rates dramatically higher. Here’s the Economist throwing in a rather silly statement:
“The good news for the dollar is that the Chinese yuan is not yet widely accepted and suffers from higher inflation, reducing its usefulness. But a shift in the world’s reserve currency could be swifter than many assume.”
This is simply silly. A multi-trillion real value shift can’t happen quickly. The United States still has a huge proportion of valuable real assets. Foreigners want access to those access, and that involves getting U.S. dollars at some point. The value of the dollar is tied to the getting access to U.S. markets.
Imagine the consequences of a shift to the Yuan on the price of the Yuan and the consequences for the Chinese economy. People trade in several trillion dollars of USD for Yuan. Suddenly, all of the benefits China supposedly has over the United States vanish – no labor cost advantage, no pricing advantage, unable to export it’s extremely expensive goods.
Under the “reserve currency shift” scenario, China no longer has another 40 years of 8% real growth, but rather 2% real grown. The U.S. real growth rate jumps to 6%.
It might not be impossible for the reserve currency status of the United States to vanish over a decade, but it’s extremely unlikely. It’s far less likely for this shift to happen in less than several decades.