China's challenge is good news
Thank you for visiting my site. I am taking a sabbatical to research a new project so will not update my website for the next few months.
Suffice to say that nothing governments or central banks have done since the crisis has changed the analysis or policy recommendations I offered in The Money Trap – nothing comes close to getting us out of the trap. We have a long way to go. As Mervyn King said recently on BBC Radio 4, the problem is systemic and international – nothing can be done by one government acting alone to get us out of the trap. Under the present iglobal financial system and set of ideas behind it, central banks and governments are fated to repeat the same policy cycle again and again.
Another seasoned observer to understand this is Stephen Roach, whose excellent contribution in Project Syndicate is significantly entitled, “The Fed Sets Another Trap”:
“The unprecedented financial engineering by central banks over the last six years has been decisive in setting asset prices in major markets worldwide. But now it is time for the Fed and its counterparts elsewhere to abandon financial engineering and begin marshaling the tools they will need to cope with the inevitable next crisis. With zero interest rates and outsize balance sheets, that is exactly what they are lacking.”
One encouraging development of the past seven years is the way China has mounted a growing challenge to the status quo.
As Andrew Sheng has observed, this will be a long haul. The last global standard it created, the silver standard, served China well for 500 years; constructing a new global currency standard will not be a quick fix. It will be based, he thinks, on hard assets and they are setting about building the infrastructure needed:
“All these suggest that China has a grand strategy to develop global infrastructure and
trade via the New Silk Roads, financed through the BRICS Bank, the Silk Road Fund
and the Asian Infrastructure Investment Bank. Yuan internationalization becomes real
trade and hard investment driven, rather than through the capital account. These
would aid not only global recovery but also Chinese structural reforms.”
There is a pattern forming on yuan internationalization. History suggests that global
currencies have to be founded on real trade and business, supported by liquid
financial markets, efficient institutions and robust infrastructure.
“The last Chinese global currency standard served China for over half a millennium.
Creating the next global currency will not therefore be a short-term journey. “