Global strife revolves around the yuan's emergence

Government borrowing to finance spending, monetary inflation, bank credit and debt-financed investment and consumption has created an illusion of prosperity – overriding productivity and debasing currencies. 

The Chinese yuan is emerging as an antithesis to the crumbling status of the euro and the dollar as reserve currencies. This is the main root of the geo-political tensions we are now confronting. When London caved in to New York as the global financial centre, with the dollar replacing the British pound as the global reserve currency of choice, we had the Second World War. The transition from the dollar regime to the yuan regime is not likely to be smooth either.

The situation in Europe is quite startling. The bubbles have burst. Europe is experiencing virtually zero, if not negative growth of 0.3 per cent. The banks, with an exceptionally high leverage ratio, will wobble and eventually collapse when economies head into negative territory for an extended period. Bad debts will rise and eat the capital base.

The EU is facing unsustainable financial- and public-sector debt. Let’s take a look at the financial institutions’ gross debt as a percentage of gross domestic product in the key EU countries. For Portugal, it is about 65 per cent, compared to 99 per cent for Italy, 66.4 per cent for Ireland, 21 per cent for Greece, 113 per cent for Spain, 73.5 per cent for the UK, 148 per cent for France, 95 per cent for Germany, and 148 per cent for the EU as a whole.

Now we move on to the gross government debt to the GDP. In Greece, it is 130 per cent, compared to 118 per cent for Italy, 100 per cent for Belgium, 94 per cent for Ireland, 84 per cent for France, 77 per cent for the UK, 75 per cent for Germany, 70 per cent for Austria, 66 per cent for the Netherlands, 63 per cent for Spain.

From the Thai experience in 1997, when the economy goes downhill, the banks go broke, and the currency tumbles. This is the grim prospect for the euro. Over the next few months the euro might not survive in its present form if Europe can’t fix the debt crisis and reinvigorate growth. For now, the EU is being kept in a box.

If the euro takes a beating, the dollar will also get hurt because the US economy and financial system are being propped up by the Federal Reserve’s money printing scheme. There has been talk that the Fed will be printing more money for the third round of “quantative easing” in the third quarter of this year. The UK is contemplating border controls to prevent economic migrants in the event of a Greek collapse or further euro turmoil.

China is watching on the sidelines. It is preparing to float the yuan, now fixed to the dollar. It has struck currency agreements with several countries such as Russia, Iran, Chile and Brazil, thereby bypassing the dollar in the transactions. The BRICS countries have also agreed to form their own currency arrangement to bypass the dollar. If dollar demand decreases, the US will lose its global superpower status.

When the yuan is floated, it will become another global currency to challenge the dollar’s supremacy. China will be in a situation to buy out cheap assets in Europe and the US. China is also keen to develop a yuan bloc in Asia. This money game is the source of the current global geo-political conflict. For the US has initiated a policy to contain the rise of China in the Asia-Pacific region.

The following are scenarios in global currency realignments that could happen over the coming months:

1. Germany might go back to the Deutsch mark, as it does not want to shoulder the debt burden of Europe.

2. France, Italy and other EU members might have to foster closer union to stay alive. The European Central Bank, without the “nay” vote from Germany, could be free to print the euro to bail out the EU banks and governments. Money printing will lead to massive devaluation. 

3. The International Monetary Fund is tempted to introduce Special Drawing Rights to help recapitalise European banks. By doing so, the SDR could be a rival as another global currency. 

4. The US and the UK will print money in yet another round to prop up their financial systems. They are idle, while Europe is badly in need of fresh capital injection. 

5. China will float the yuan as another global currency. It is forming alliances with members of the Shanghai Cooperation Organisation to counter US supremacy.

Against this backdrop of new monetary arrangements, we are witnessing growing geo-political tensions in Syria, Iran and the Middle East as a whole. In the Asia-Pacific region, the confrontation between the US and China is becoming more apparent. And Thailand’s U-tapao base has become hostage to this geo-political power play between the US and China.