Today the 21st Century Business Herald published a highly partisan editorial outlining the economic challenges facing the United States and why it believes the Covid-19 Crisis could be the start of the decline of the dollar as the world’s reserve currency or de-dollarization.
For many years China has been uncomfortable as it saw its own increasing role in trade, yet during that same period, the dollar became an even more dominant reserve currency. Despite the country’s Belt and Road initiative pumping vast sums of money into other economies, its share of Belt and Road trade denominated in renminbi is just 14%.
As we highlighted in another story, since the 2008 crisis, the amount of U.S. dollar-denominated non bank debt has almost doubled, while other leading currencies have stagnated their proportion or declined.
The Chinese article starts by outlining various predictions for U.S. economic contraction as a result of the Coronavirus Crisis, including a 24% decline in April to June predicted by Goldman Sachs, a 14% shrinkage forecast by JP Morgan and 30% by Morgan Stanley.
The U.S. economy’s dependence on consumption is highlighted, as well as the knock-on effects of reduced demand on other economies.
But the most damning commentary is the conclusion that neither fiscal nor monetary policy from the U.S. will be effective during the Coronavirus Crisis. It argues aggressive monetary policy will only impact the stability of the markets. And while many economies are resorting to fiscal stimulus, the newspaper claims that stimulating demand will be inflationary as a result of supply chain disruption, reduced production and declining trade.
Editor-in-chief, Wang Chao, asserts that the U.S. stock market was a bubble because of the ten year monetary stimulus, and believes there could be a bond market crisis and market runs. He states that the United States is undergoing de-globalization because of its confrontation with China. And he believes the U.S. has failed to play a uniting role during the crisis and has “harmed other countries for its own interests”.
Despite the smaller role of the U.S. economy in driving world growth, because of the role of the U.S. dollar as a reserve currency, the U.S. financial bubble has been harmful to the global economy.
The article concludes that the world is losing confidence in the ability of the U.S. to provide a global public good. It states the Coronavirus Crisis is “the beginning of the ‘de-dollarization’ of the global economy because people have seen that the Fed has derailed and that the U.S.’s credit has been exhausted”.