Fisher Investments Editorial Staff
Currencies

Short One Alien Invasion

By, 03/25/2009

Story Highlights:

  • China once again called for a move away from the US dollar as the world's reserve currency Tuesday, replacing it with a global monetary unit of exchange.
  • China's complaints about the current system are nothing new. Despite the rhetoric, they continue to buy dollar-denominated assets.
  • America remains a safe place to invest, and implementation of a global currency would be fraught with political and economic stumbling blocks requiring decades to navigate.
  • Either way, global investors need not worry overmuch—proper diversification among countries over time reduces risks such as these.

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Science fiction classic, Ender's Game, holds it'll take an extraterrestrial threat to unite the Earth. And even then a global alliance would be shaky. Pending a bugger invasion from a galaxy far, far away—some seem intent on uniting the world with words (at least economically). To that end, Chinese central bank governor, Zhou Xiaochuan, called for a move away from the US dollar as the world's reserve currency Tuesday, replacing it with a global monetary unit of exchange.

China's complaints about the current system are nothing new. The Chinese have effectively subsidized their exports by strictly managing the exchange rate between the renminbi and the dollar for years, keeping the value of the Chinese currency artificially low. To sustain this policy, China must buy and hold a large store of dollar-denominated assets, mostly Treasury bonds. And recently, they've made no bones about their concern Washington's economic policies pose risks to this massive investment. Further, China's dependence on the dollar isn't unique. Due to its wide acceptance as a safe currency, many other countries use dollar-denominated assets for international trade settlement. So it's no surprise the Chinese feel the time's right to flex their rhetorical muscle—today's climate will likely yield some support.

But what China's statement doesn't say is they have a choice in the matter (as do other countries)—even if it's implied they don't. They could float their currency and decrease exposure to the dollar at any time, and other currencies could be used to settle trade. Yet despite the rhetoric, that isn't happening—quite the opposite, in fact. Why? Because the current strategy still works to China's advantage, of course.

There's no covert elite that makes this so. The global economy is too big and complex for one group to control monetarily. The reason things are as they are is simple. America is the biggest, historically most stable country around—today's crisis notwithstanding. As long as China's export-oriented policy remains, they need a favorable balance of trade with the US, the biggest economy in the world—their choice, not ours. And nice as a global currency sounds, implementation would be fraught with political and economic stumbling blocks requiring decades to navigate. (The European Currency Unit (ECU) was first created in 1979, but the euro wasn't officially adopted until 1999. Now, scale that globally.)

The Chinese know all this—as their actions, not words, indicate. China bought $12.2 billion of Treasuries in January alone. And global investors need not worry overmuch either way. Any material changes would be years out. Further, proper diversification among countries means shifts in global economic power have little effect on portfolio performance.

Assuming our fortunate poverty in alien invasions keeps Will Smith in Hollywood—this is one topic we think investors can safely ignore for now.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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