China loves the US dollar again as America roars back … China's central bank has radically revised its view of US economic and strategic power, predicting that the dollar will remain the world's paramount reserve currency for decades to come. Dr Jin said the world was moving to a '1+4' system, with the greenback serving as the anchor of global payments … Jin Zhongxia, head of the central bank's research institute, said America's energy revolution and export revival had shaken up the global landscape and would lead to a stronger dollar over time. "The dollar's global dominance will continue," he said. – UK Telegraph
Dominant Social Theme: The US economy is fine shape.
Free-Market Analysis: China's central bankers have decided that the US economy is in fine shape, according to the UK Telegraph. This doesn't make much sense, given the US's generalized economic and socio-political difficulties but we wouldn't expect China's central planners to figure this out.
Apparently, Dr. Jin and other Chinese bankers believe the world is moving "to a '1+4' system, with the greenback serving as the anchor of global payments, supplemented by 'four smaller reserve currencies' – the euro, sterling, yen and yuan."
This is a neat dominant social theme of sorts that begins to present us with the shape of a currency-to-come. What looms in the near-term anyway is not a gold-backed yuan or even an IMF SDR currency basket. What we are being led to believe is that a new system will be one where the dollar is slightly less dominant. Here's more from the article:
"Compared with the euro area, the dollar zone has much greater resilience to shocks. The debt crisis in the euro area has demonstrated the structural weakness of this currency," he wrote in a paper for the February bulletin of the Official Monetary and Financial Institutions Forum.
The comments suggest a profound shift in thinking about the US since the financial crisis five years ago, when premier Wen Jiabao questioned if Chinese holdings of US Treasuries were "safe", and the central bank issued a paper calling for a "global currency" run by the International Monetary Fund.
The prevailing view in Beijing was that America had been toppled as a great power and was crippled by debt.
China has since begun to face its own problems as it grapples with the hangover of $14 trillion (£9 trillion) of credit growth since 2009 and surging wage costs.
The advantage is shifting back to the US. A so-called "manufacturing renaissance" is under way as US companies bring home plants to exploit cheap shale gas and lower transport costs.
We've written a good deal about the demise of Peak Oil and the resurgence of the US as an energy power. But anyone who believes this is merely an evolution of modern technology does not fully understand what has taken place, in our view.
This energy extraction technology has been around for decades in one form or another and its current rollout is a kind of directed history, so far as we're concerned.
The Chinese statements are perhaps more of the same. Money Power is globalizing the world and central banking is both an expansive and reductionist force. As it centralizes economies, the elites that wield it come under attack, especially in the 21st century as a result of what we call the Internet Reformation.
Too much centralizing, too much chaos and the apparent rush toward globalization is jeopardized. It's always a balancing act and in the past five years, as a result of the current economic crisis, that balance has been pushed out of kilter.
There is too much pushback, and those who want greater centralization and a more robust and formalized world government are probably concerned that the world – and its damaged economies – are moving too far and too fast.
The US would seem to be scheduled for resurgence, then, at least rhetorically. In reality, the tectonic fiscal and monetary plates continue to grind inexorably toward international centralization. Nothing has changed, in other words, in terms of the larger pattern.
A report by Citigroup said the explosive growth of US oil and gas output over the past year had exceeded the "wildest dreams of energy analysts". The US has halved its oil imports since 2005 and is moving "rapidly towards self-sufficiency", turning global geo-politics on its head.
Citigroup said lower energy imports and the revival of chemical industries would cut the US current account deficit by three quarters, eliminating a key cause of dollar weakness.
The US remains a keystone to globalization and too much chaos and disaffection there spells difficulties for the larger project. The real issue is whether those who we see as economic controllers are contemplating a resurgence of the US economy as an expanding rather than contracting world power.
The idea on a macro level, from what we can tell, has been to level the proverbial playing field by bringing down the West economically while uplifting the developing world, especially the BRICs. This has been the animating narrative of the past several decades.
If a reversal is contemplated because events are seen to be spinning out of control, it would have a significant impact on various economic and business interests – and investing as well.
Time will tell whether a new direction has been chosen but these developments are to be closely scrutinized. The questions are at least threefold. First, have we seen a shift in direction? Second, can it be adequately sustained? And third, are the underlying reasons the ones we have identified?
Given the amount of debt the US is carrying and the difficulties in sustaining economic viability given the volume of money that has already been printed, we are at least somewhat skeptical that the US can reverse the trends that seem to be pushing it into decline.
As usual, there are great forces at work and we are on the outside, looking in. At least let us appreciate the forces in their fullness and make our plans – and draw our conclusions – accordingly.