‘Exorbitant Privilege’ to Continue

Much is being made out of the piece by Professor Barry Eichengreen in the Wall Street Journal on the eventual replacement of the US dollar as the global reserve currency by another system in which the US dollar shares the honours with the Euro and the Chinese renminbi. One thinks that this piece is nothing but a short summary of his book, ‘Exorbitant privilege’. I have not read the book but just purchased an electronic copy. 

The US dollar monopoly reserve currency status might well give way to a multi-polar reserve currency world. But, it is not about to happen any time soon. Professor Eichengreen himself gives it a 10-year time-frame. I think it could be longer. China might be able to persuade a few countries to settle in Renminbi but not much. I think this issue goes to the heart of how the society and the government in China is organised. It is unlikely to inspire much confidence in the world at large barring a few. China’s banking system remains its biggest achilles heel. Read this good and brief research piece by Deutsche Bank. It is available for free download. My ‘take’ on Barry Eichengreen’s article is that it is more of a warning for the US than a prediction about the multi-polar reserve currency world.

I have not read the book yet but it appears that ‘Red Capitalism’ written by two former investment bankers paints a fairly grim picture of the state of health of the banking system in China. That they were practitioners and not academics and that they had lived a long time in China lend additional authenticity to their work. You can read some reviews here and here.

Originally published at The Gold Standard and reproduced here with permission.