The US dollar has been the most important currency in the world. Now, China has to challenge it if they want to overtake the United States as the global hegemon.
The United States have been the global hegemon for almost 80 years. Despite all the attempts from Soviet Russia, the geopolitical relevance of the US has always prevailed. There have been two things that made the United States so extremely powerful: their army and the US dollar.
China is the second largest economy in the world. China, as it became increasingly clear in the last decade, wants to overtake the United States and challenge their hegemonic position. To do so, China either has to win a war against them and has to destroy the power of the dollar.
Winning a war against the United States is obviously out of the question. In fact, even waging a war against them is fictional uchronia at best.
The dollar, on the other hand, is a much more vulnerable asset for America, and China now shows a strong will to seriously challenge it.
The power of the dollar
Since the Bretton Woods Agreements in 1944, the US dollar has been the undiscussed global reserve currency. The agreements declared the value of any currency linked to the value of the dollar, which was in turn linked to the value of gold.
Essentially, the US dollar was the currency anyone exchanged with, like English is the language two foreigners speak with each other.
Richard Nixon detached the value of the dollar from that of gold in 1971, but the dollar remained established as the global reserve currency. That was because oil, by far the most important commodity traded on the market, was always traded with dollars.
Any time a nation, either the US, China, the Soviet Union or the Seychelles Islands bought oil, they traded it with dollars. Any oil transaction, and as consequence any commodity transaction, had to pass through the American Federal Reserve.
This immense power allowed the United States to prosper for decades. The dollar was a currency traded anywhere in the world, and it allowed the US to incur increasingly higher public debt.
Essentially, any nation was willing to invest in the United States (therefore increasing the American public debt) no matter how much the US were already indebted. After all, the United States cannot possibly fail, they have the dollar! Right?
Enter China
As the United States incurred more and more debt, the dollar’s purchasing power started to decrease drastically. According to Venture Capitalist, the dollar has lost 98% of its purchasing power since 1971.
As we said, China wishes to overtake the United States. To seriously threaten its dominance, China knows they have to start trading oil in yuans instead of dollars.
Indeed, China started making serious commitments with Saudi Arabia, the world’s largest exporter of oil, to start trading in yuans. And Saudi Arabia is interested.
China already “forced” Russia to trade with the yuan. In March, the Chinese currency officially overtook the dollar as Russia’s most traded one.
Finally, China is the world’s largest producer of gold. Its goal is to create a new standard similar to Bretton Woods, just with the yuan. If the yuan is officially linked to the value of gold, more and more oil would start to be traded in yuan. And then it would be just a matter of time before the dollar finds its first true rival in history.
If the yuan becomes a second “gold standard”, suddenly there will be a lot of dollars coming back to the US coffers. Dollars that foreign nations are not using anymore and are coming back to their maker.
This would be an absolute disaster for the American economy. Not only would inflation reach double digits, it would also be the end of the comfortable debt level the US enjoyed so far.
And then, China would have a truly scary possibility of challenging the United States.
Argomenti
