Recently I wrote that I see the US “continuing as unrivaled monetary power today and into the future.”
Here is an excerpt from A. Gary Shilling, writing at Bloomberg, listing six reasons to be so optimistic about the US as monetary power.
A review of history reveals six characteristics of a dominant global currency, and the dollar is likely to meet the criteria in at least five of the six for many years.
Rapid growth in the economy and GDP per capita, promoted by robust productivity growth: In the last decade, the U.S. has excelled among developed countries and its emphasis on entrepreneurial activity and superiority in new technologies suggest this lead will persist.
A large economy, usually the world’s biggest: With rapid productivity growth and relatively open immigration, the U.S. will probably continue in this role. The population is falling in Japan, a trend that will soon emerge in other developed lands as well as China with its one child-per-family policy.
Deep and broad financial markets: U.S. stock-market capitalization is four times that of China, Japan or the U.K. and is more than three times that of the euro zone. Almost 50 percent of Treasuries are held by foreigners. As noted above, just 8.7 percent of Japan’s government net debt is owned by non- Japanese.
Free and open financial markets and economies: These conditions persist in the U.S. but are more fragile in Europe after the debt crisis. China will probably continue to tightly control its financial markets and currency, which is anathema for an international trading and reserve currency. Chinese leaders are so worried about losing control of the Internet that they now require users to give their real names when signing up for online services. Also, illegal information, which can be broadly defined by officials, must be removed by service providers and forwarded to the authorities. In China, Big Brother isn’t just watching, he’s reading e-mail, too.
Lack of substitutes: The rigidly controlled Chinese economy and financial markets eliminate the yuan as a rival to the dollar for the foreseeable future. Export-dependent and inward- looking Japan doesn’t want the yen to be a primary global currency. And the European crisis eliminated the euro for at least a number of years. The U.K. is a relatively small economy, which curbs the pound’s appeal, and the solid Swiss franc is now tightly controlled.
The credibility of the dollar has been strained by its overall decline since 1985, but still is substantial. The troubling U.S. current-account deficit will probably shrink as retrenching consumers moderate imports and U.S. production becomes increasingly competitive and the nation moves toward self-sufficiency in energy.
In effect, competitive devaluations will ultimately work against the U.S. dollar. This will only add to the currency’s luster as the only haven in an uncertain world.