An interesting article in the Financial Times got me thinking once again about the popular notion that the Yuan is about to replace the dollar as the global reserve currency.

Please consider a couple brief snips from Beijing in fresh TV censorship move

The Chinese government has stepped up censorship of local television in a sign of the broadening of a political crackdown that has landed many dissidents in jail.

China has severely clamped down on activists since February when an anonymous online appeal called for demonstrations along the lines of the “jasmine revolution” sweeping north Africa and the Middle East.

Authorities have detained scores of human rights lawyers, activists, and writers. They have also arrested Ai Weiwei, the contemporary artist.

Reserve Currency Requirements

So what does this political crackdown say about the likelihood that the Yuan will soon replace the US dollar as the world’s reserve currency? First consider what it takes to be the world’s reserve currency.

  1. Deep, liquid, open bond markets
  2. Floating currency
  3. Property rights, civil rights
  4. Political stability
  5. Political freedom

China flunks on at least 4 of 5 points, and arguably all 5. It may be a decade before China even floats the Yuan. How long before China has a deep, liquid, bond market? You tell me, because I don’t know, but I assure you it is not in the next three years.

For further discussion please see Bogus Threats to US Reserve Currency Status: No Country Really Wants It!

Yet somehow hyperinflationists persist in spreading nonsense that the Yuan is somehow on the verge of replacing the dollar as a global reserve currency and that may cause hyperinflation.

There certainly may be more local trading in the Yuan. In fact, it is likely. That does not imply the death of the dollar or the loss of reserve currency status and it certainly does not portend hyperinflation.

Hyperinflation is the complete loss of faith in a currency. Should that happen to the US, the entire global banking system blows up. Global trade blows ups. If China refuses US dollars, then China’s exports to the US stop, overnight. So do Japan’s.

So what does that do to the economies of Japan and China? What would that do to the economies of Canada and Australia? Think about Chinese and Japanese exports and the demand for commodities.

Whether they realize it or not, that is the story hyperinflationists peddle. It simply is not a credible story as noted in Hyperinflation Nonsense.

Hype Sells

No Virginia, the US Dollar is Not Headed to Zero any time soon. Might the dollar slowly decay over decades? Sure why not? It already has. However, that is not hyperinflation.

Yes, the US has problems, so does Japan, so does China, so does the Euro-Zone, and so does the UK. Indeed global currency problems and insolvent banks are everywhere one looks.

However, myopic eyes are primarily focused on the US. Here’s the deal. The US dollar is not suddenly going to zero vs. the Pound, the Yen, the Yuan, or the Euro, yet that is what hyperinflation implies.

Why is the “hyperinflation is imminent” scare everywhere you look? The answer is simple: Hype Sells.

The bigger the hype, the sexier the story, and the more people are attracted by it.

Mike “Mish” Shedlock
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