Don't Underestimate the Hegemonic Power of the Dollar

On Sept. 12 and 13, the Federal Reserve will hold a policy meeting on interest rates. Because Federal Reserve Chairman Ben Bernanke tipped off the meeting agenda beforehand, people generally believe that the Fed is planning to push QE3 (the third round of quantitative easing.) However, currently the Chinese public has an inadequate technical or detailed interpretation of the subject. The Fed has the best environment to implement its policies, in light of the fact that compared to other currency systems the U.S. system is more complex and difficult to deal with. The Fed’s currency policy adjustments need to show initiative, appropriateness and effectiveness.

First, due to the unique position of the dollar and the special nature of the U.S. economy Chinese people must adjust their views when discussing and researching the U.S. central bank. The U.S.’s global strategy determines both the distribution and proportion of its currency supply volume. On one hand, a higher proportion of currency supply is allocated worldwide, with 60 percent going to various parts of the world. On the other hand, the supply of the dollar follows the fluctuations of the global market. As the global financial market grows larger, the U.S. dollar supply volume is no longer enough to fulfill global demand, forcing the U.S. to continue to expand its supply volume of the dollar even in the midst of financial crisis. This does not simply signify that the American economy is not able to cause the dollar supply to increase. In essence, because the supply is insufficient, America must obtain the dollar’s hegemonic coverage and gain the ability to monopolize in order to increase currency issuance. The Chinese public deduces that the U.S. currency policy has gaps. Their interpretation is that errors and blind spots will reveal themselves —this leads to their skepticism.

Second is the underlying cycle of the Fed’s currency policy. The cyclical nature of the policy places particular emphasis on promoting U.S. multinational companies around the world, and assisting their long-term considerations and strategic design. The U.S. dollar depreciation strategy assists multinational companies to acquire shares internationally, and even foreshadows a new era of economic monopoly throughout the world. This thought is not founded the basis of the limitation of the traditional U.S. economy but is based on the U.S.’s new strength in being able to corner the high-end of the market. By and large, manufacturing of intelligent technology and wireless Internet represent the third technological revolution. Currently, this revolution is brewing in U.S. and just emerging. Apple’s signature platform is accelerating economic growth in the global market and expanding, even to the extent of becoming a monopoly. In 10 years, the U.S. will have created a super industrial system from this new engine of economic growth. The re-industrialization of the U.S. and the re-industrialization of the world are not on the same level nor do they have the same standards. At present, the Chinese public is confused and clouded about the subject. As a result, there is no advantage for them to replicate the U.S. economy or any other part of the world economy in their own economy.

Aside from this, the Fed’s currency policies provide guarantee and protection for the global competitiveness of U.S. financial institutions. The sophisticated nature of the U.S.’s financial sector is certainly a market advantage. Until now, the major global banks’ ability to monopolize depended on the number of American characteristics they possessed. The classic representation of this was the world being stranded in financial crisis as Lehman Brothers filed for bankruptcy. The international community has had no means to delve deeply into the details of the Lehman Brothers bankruptcy. This preserved the reputation of the multinational companies that acquired the Lehman Brothers’ assets. Now, the assets of the company are regaining value, as expected. Their cash flow increments have followed the course of the financial crisis, and have not only increased but increased by spectacular numbers. In 2008, cash flow was $6 billion and today it has already risen to $65 billion. The strange combination of methods that make up U.S. policies and strategies come from high-end financial maturity, skillfulness and strategy. Serious consideration should be given to the Fed’s foundational factors. The Chinese market’s interpretation of the Fed’s currency policies has become convoluted and misinterpreted because of its use of a completely roundabout discussion of numbers.

Third, the Fed’s currency policy is highly visionary. Its currency policy’s insight is worth consideration and study, especially since it is not focused merely on the current issues. Its designs and plans are aimed at more long-term issues and markets. From 2001 to 2003, interest rate adjustments were the same as those from 2008 to 2009. They both went in the same direction, but the results were sharply different. The first resulted in speculative arbitrage of different interest rates, while the second resulted in speculative arbitrage of resources and commodities. Therefore, considering the outcome of the Fed’s QE1 and QE2 currency policies, we think in relation to QE3 a big change is required. The Fed, however, would not change currency policy simply because of the U.S. economy itself. Its currency policy’s assessments are not limited to U.S. factors but also consider global factors. This is the greatest misunderstanding of the current expectations and market assessments of the Fed’s QE3.

The Fed’s meeting, which is undergoing scrutiny, will come out with new results to conform to expectations. However, the results will not be as simple as the original QE1 and QE2. QE3 will be a new version, a newly created form. The dollar’s high-end hegemony cannot be simplified as a one-currency policy implication. The Chinese public must be diligent and use practical explanations in its interpretations. The comprehensiveness and effectiveness of the Fed’s currency policy is yet to be seen — it’s not that simple.

The author is the head of China Foreign Exchange Investment Research Institute.