The latest hot topic in the press is the potential assumption of China's RMB as a reserve currency, perhaps even replacing the US$ as the world's global currency. Roubini wrote an op ed piece in the New York Times. Successful speculator Jim Rogers is "sure" the dollar is finished to be replaced by RMB.
The logic goes like this. The US$ assumed its central role after WWII as the monetary equivalent of the Sterling when Britannia Ruled the Waves. One empire fell, a new one took its place. Money went with the power. They went hand in hand, in fact. But Pax America is also over as it had squandered its resources.
Empires always fell when their economies declined. America's economy has seen its best days. The reasons are well-known. Insufficient savings by both the public and the private sectors. Insufficient investments. While hi tech is still alive and well in Silicon Valley -- but America is no longer the only place where hi-tech thrives -- not much else is.
Basic infrastructure in America is a sham. Education is a scandal, apart from the tiny elite circle of high schools and universities sought after by the world's elite families. The national average of a number of measurable indicators has been falling over decades compared to a large number of foreign countries.
China on the other hand is a big saver, a big investor in infrastructure and is aiming to catch up and overtake America. The drive and the energy of a nation starved for global recognition only makes America look tired.
The latest Wall Street bubble from years of incompetent national governance and less than honest private sector governance is just another sign of a nation lost in its own self-absorbed admiration of a past gone.
Question: is RMB ready to replace the US$?
There are signs that the Beijing government is keen to do so. But they are not in a hurry because they know more than outsiders that China continues to have a number of serious structural issues to deal with.
China's domestic legal structure exists more in name than in execution. Judicial independence is years, decades away from reality. The ranks of world class corporate management is still thin. Corporate governance is still subordinate to national policies as many senior managers are proxies of the ruling Communist Party.
The currency, increasingly credible, is years away from being a convertible currency. Its convertibility itself depends on the strength of its legal structure.
Can the currency of an authoritarian country assume the role of a global currency? It would indeed be a first if it did.
More on the RMB in future postings.