I have been on the road for a couple of months. I asked a professor who taught financial analysis at Darden School of Business, University of Virginia a question that bugged me for the past 4 months. “Should we start diversifying from USD? And if yes, what would be the safest bet?” I was not very surprised by the answer I got. “I Don’t Know!” A true American answer I thought. The professor being an American would never want people diversifying from USD. I can understand the implications on her job.
I have debated much with a few professors over the declining value of US Dollar. There is not one who does not agree with it. Everyone agrees but the conflict of thought comes when it comes to “time”. Should we depend on President Obama to be the savior of our economic crises? This question is difficult to answer.
The great Debt Crises of our times:
I recollect a few cool stories I read about ancient Greek. The Great battle between Achilles and Hector somehow always stayed in my mind. The great Greek Gods favored the fall of Troy.
I somehow see similar events today. I would not want to debate over theology and concept of God but the fact that there is a certain great fall of Greece in the near future. Greece has amassed a mammoth $550 billion debt on it shoulders, which is close to a whooping 160% of its GDP.
The EU sits still. It observes all the austerity moves by Greece promising them help if needed. I do not blame them to show such indifference to a fellow EU member. Greece lead itself to this situation and should come out of it on its own. It should learn the lesson the hard way. However there is one small flaw to this theory. What if Greece sinks and with it sinks the EU pride and the EU economy? We already hear rumors of the PIIGS and their debt.
USA is not far behind. Its total debt of $12 trillion has been a matter of high concern not only in USA but all across the world.
Here are a chart and a graph showing the PIIGS' and the United States' indebtedness -- more specifically, their public debt and 2009 deficit relative to GDP.
Just glancing at the chart, and remembering that the PIIGS are among the weakest economies in Europe, it seems that the United States isn't in great shape either. It's just on par with Spain, whose economy is struggling.
Note: The debt mentioned here is the national debt.
Are we going to witness the shift in the economic power of our times?
Now, we need to understand the shift will not be overnight were the markets come crashing down in USA and the Chinese celebrate? Imagine little Chinese jumping and dancing seeing the USD fall and Chinese Renminbi Yuan as the next global currency.
The recent US – China battles clearly shows a rise in Chinese power. China stands right in front of USA defying its trade policies and the US can’t do anything about it. Can they?
Round 1: The Copenhagen Summit where China fought hard with India by its side to have no cap emissions and the result was China won round 1.
Round 2: Imposing restrictions on Google over the search content. Google threatens to walk out of China if they prick further. China says “Who cares! You wanna stay here, abide by the Chinese rules otherwise F*** off!” China wins round 2.
Round 3: China starts diversifying their investments from USD to Gold. They know USD is not going to profit them in the long run. China has steadily (and surreptitiously) increased its gold bullion reserves from 600 tonnes in 2003 to 1,054 tonnes today. China makes the rules for round 3 and wins.
I say Chinese are one heck of smart people. Thankfully India brought 200metric tones of Gold Bullion from the IMF for $6.7 Billion. Learn from your neighbor.
Round 4: USA sells arms to Tibet, dead against the policies of China. USA says we still have the arsenal. President Obama also invites Mr. Dalai Lama to White house. I wonder how this helps USA but who cares! Ok! Finally USA manages to clear a round.
Round 5: China keeps its currency rate stable against foul cries by USA. 130 democrats and republicans join to vote against Chinese keeping their currency devalued. Finally republicans and democrats come together so what if it’s against China? (Pun intended) China has made it clear that it will not appreciate its currency due to foreign pressure.
(For my friends who do not understand these implications: By undervaluing their currency China is able to get price benefits in the international markets. Their goods are priced low because their currency is low and hence they are able to sell more. This hampers business in USA. The companies in USA cannot afford to price their products as low as China and China eats away the market.)
The most crucial factor in this battle is there is no referee. USA has repeatedly cried foul and demanded a red card be given to China. China still plays.
Do we see the global power being divided?
No doubt the Chinese have stepped up their engine but how long will they last this battle is crucial question. Their huge economy certainly is their major driving force, but they have a lot of money in USD. They would not want USD to fall off. They have a lot of money coming from US markets, they would not want to cut these trade relations and suffer. US will suffer as well, but it can always come back with its rich economy. China on the other hand has taken a good start but needs to be careful not to upset the elder brother of the world less it comes under scrutiny.
The battle is still ON!
P.S. Charts and data courtesy Internet! J
