Behind the US Dollar’s Hegemony

Since China is a major consumer of many international commodities and a critically concerned party in the United States and the European Union’s debt issues, our country’s economic development suffers from serious threats caused by Western competitive monetary policies. We need to firmly maintain the stability of our exchange rate, economic growth and society. Since 2009, the U.S. Federal Reserve has been secretly injecting of dollars into the market. This has has created an excess supply of dollars from the former shortage. As a result, the three price indexes have all started to rise again.

There are only two weeks left before the opening of the 2012 Group of Twenty Submit (G-20), which will be held in Los Gabos, Mexico. In the beginning of May, U.S. Treasury Deputy Assistant Secretary Mark Sobel responded to the debate about the possible injection of $430 billion into the International Monetary Fund (IMF): “Continue to raise the shares and voting rights of the rich economic vitality of the emerging economies within the International Monetary Fund (IMF) has become an international consensus.” In fact, in March, the BRIC countries made a joint announcement, “We stress that the ongoing effort to increase the lending capacity of the IMF will only be successful if there is confidence that the entire membership is truly committed to implementing the 2010 reform faithfully.”

The international economic crisis has lasted for nearly four years. The G-20, including the one to be held in June, would have been held eight times. Nonetheless, the reality we are facing is still extremely challenging. Any reform that involves substantial changes to power and to the current beneficiaries of the international financial order is difficult to implement.

There is no doubt that reforming the international financial order is a long and tough journey. It is neither easy for the old financial regulations to recede nor smooth for new ones to launch during the reform. The game around the international financial order will continue. We must not only pay close attention to each step of the game, but be mentally prepared to fight a “protracted war.”

Therefore, we must first clearly understand and acknowledge that a shift and division of interests must be supported by a power shift. Before a shift in power is strong enough to change the pattern of interests, we shall focus on enhancing our economy, deepening financial reforms, strengthening financial security, promoting financial innovation and upgrading China’s financial strength to a competitive level of international influence.

Secondly, we shall strive to obtain and maintain an orderly reform of international financial regulations. Under the big picture of globalization in which “we prosper or perish together as one,” the construction of a new international financial order is continuous rather than disconnected. Consequently, we must unswervingly protect and maintain the interests and stances of an emerging economy and developing country. At the same time, we must follow the basis of mutual respect and common development, playing a “rational, beneficial and appropriate” game with the beneficiaries.

In this great game, “differences exist in harmony” will be the guiding wisdom for coordinating interests. “Fight without hurt” will be the principle of enforcing strategies.

Focusing on the New Direction of the “Dollar Strategy”

The dollar’s aggression is increasingly strong. This results in a higher chance for the global economy to enter a stage of high inflation, high risks and high volatility. As the major consumer of many international commodities and a critically concerned party in American and European debts, our country’s economic development is being seriously threatened by the completive monetary policies of the West. We need to firmly protect our core interests of a stable exchange rate, economy and society.

“In the name of preventing economic depression, the U.S. recently freed the transferable risks of dollars in circulation on a large scale. To get out of the financial predicament, it is very possible for developed western nations to continue to release large amounts of dollars into circulation. China’s relevant regulation and supervision department must stay alert,” says ZaiBang Wang, the vice president of the China Contemporary International Relations Research Institute, in an interview with the Outlook on May 8. “The recent news from the Western media revealed anew the direction of U.S. dollars’ hegemony.”

According to Bloomberg at the end of November 2011, the Federal Reserves (the Fed) secretly injected $ 7.7 trillion into the global financial system at unimaginably low interest rates (at 0.01 percent in December 2008) between 2007 and 2009. This exceeded more than half of the U.S. GDP for that year and five times the two “quantitative easing” scales. The Fed argued that the secret capital injection prevents bank runs. However, according to disclosed figures, the main beneficiaries are the large international banks, not domestic savings banks. However, beneficiaries are not limited to Bank of America, Germany and England, but also include some banks in Taiwan.

　 　

“In fact, the Fed’s capital injection has a twofold intention: First, it is to avoid the global financial system’s dollar liquidity collapse — trying to defend the dollar system. Second, it is to bail the large U.S. banks out of subprime debt distress, strengthening the financial advantage of Wall Street.” Wang says, “With the Fed’s help, Wall Street recovered rapidly, started aggressive asset growth and continued to stir up trouble in the international market.”

At the same time, “the U.S. kept raising the pressure of China’s inflation and forced the RMB to appreciate,” Wang explained. “The Fed, with direct and indirect approaches of ‘quantitative easing,’ expanded liquidity and therefore pushed up international commodity prices. Consequently, China suffered from worsening import and input inflation. Based on the fact that China suffered two waves of inflation as a result of input pressure, the scale and intent of the use of dollar hegemony is an avoidable vigilance.”

　

“Strong Dollar Policy” to Cover the Truth of Depreciation

“Since the outbreak of the international financial crisis, the U.S. economy showed signs of recovery a couple of times. But, the overall trend of the real economy’s recovery is weak. With high unemployment, government debt and bank debt, the dollar faces enormous pressures of depreciation.” Wang states that while dollar depreciation will help U.S. exports, such a policy can easily induce a dollar crisis when the economy is extremely weak. This would alternatively weaken the dollar hegemony. Therefore, the U.S. adopted a weak dollar policy during the economic boom from 2002 to 2007, but a strong dollar policy after the subprime mortgage crisis to vigorously stimulate demand for the dollar.” He summarized U.S.’ approaches as follows:

First, the manipulation of the Treasury Bill rate is a continuation of the U.S. debt “risk-free” myth. After the subprime mortgage crisis, the Fed purchased long-term government bonds on a large scale. On Sep. 21, 2011, the Fed used a “reverse strategy” and started to sell short-term bonds while purchasing long-term ones, leading to an increased holding of $400 billion in long-term bonds. This move appears to depress long-term interest rates, but in reality creates a sentiment that the U.S. debt market is safe, thus maintaining the attractiveness of the U.S. capital market to global funds.

Second, the U.S. increased dollar transaction demand by pushing up commodity prices. In 1971, U.S. President Richard Nixon announced that after the decoupling of the dollar and gold, binding the dollar and commodities like oil would recreate a huge demand of the U.S. dollar. After the crisis, the United States pushed up commodity prices through a large-scale release of liquidity to stimulate the market demand for dollars. The U.S. even tried to modify the crude oil reserve releasing rules of the International Energy Agency (IEA) to strengthen its control on international oil prices. This resulted in two anomalies. First, the crisis originated in the U.S., but the U.S. dollar became stronger. Second, the financial crisis led to the recession of the real economy while commodity prices soared.

Third, the U.S. stimulated the demand for the dollars by enthusiastically enlarging various kinds of “crises.” The U.S. relies on the three major rating companies continually participating in the European debt crisis. These companies predict the risks of emerging markets, talk the Chinese economy into weakening and create artificial panics. The aim is to create a steady stream of international capital into the U.S. dollar market.

“It is because of America’s clever manipulation after the subprime mortgage crisis that the dollar index went through three big ups and downs, and each time the turning point was the European debt crisis, which partially covered the depreciation of the dollar.” At the mean time, Wang pointed out the price of gold, the natural value scale of the dollar, soared from $800 per ounce in the end of 2007 to $1,900 per ounce in August 2011. Its current price still lingers at over $1,500.

Exacerbating Global Systemic Risk

“In the beginning of the 21st century, the new U.S. economic bubble burst. The Fed adopted the policy of ‘light money’, and constructed strong ‘irrigation’ in the U.S. economy. Though these strategies temporarily masked the negative impact of the new economic bubble, they blew up the size and destructive power of the greater subprime bubble, ultimately leading to the American and European financial tsunami.” In an interview with our correspondents, an associate of the Department of Economic Research at the China Contemporary International Relations Institute, Ying Huang, stated her belief that the Fed’s monetary policy is still an “irrigating action,” which further exacerbates the risk to global economy after the financial crisis. This is mainly reflected in three aspects.

International commodity and global capital markets, in general, suffer from price bubbles. Ying Huang interpreted that, between July and Dec. 2008, the three major price indexes of international energy, food and metals dropped from their peaks and hit bottom. With the Fed’s completion of the mentioned secret capital injections, the U.S. dollar liquidity has been turning from shortage to excess supply since 2009. As a result, the three major indexes have kept rising again.