The World Prepares to Turn

Something of immeasurable importance, but which has hardly been mentioned, seems to have happened. The Chinese government, according to reports, has announced a staged introduction of the Yuan renmimbi currency into international markets.

I expect that matters will be confused for the next year and a half, barring events, as the flows between the euro and the dollar, manipulated by the banks desperately trying to move loans and government support around distort the picture.

Then, well, the future starts on a new page.

A dollar crisis is coming. The options of the west are now three; maintain national currencies and desperately try to inflate debt away; adopt a global system, based on the IMF's SDR-note; or accept a world balanced between a declining dollar, a deeply flawed Euro, and the Yuan. I suspect that the latter is going to be our lot, but am glad the Chinese are advancing cautiously, if relentlessly.

This matters because the monies the governments of the west are paying out, to stave off depression, are enmeshed in a global system. This global system for some time has been a husk, which is the shell of scaffolding built around the dollar.

The dollar cannot now bear the weight. International trade, such as it is, depends upon the dollar and the euro, and China until now has used them internationally rather than its own currency; similarly, international investors have had to hold them rather than Chinese currency if they want to invest in that country. This has kept the dollar up, and let the Americans buy and borrow more. When the dollar has been in trouble, it has led to the euro going up, and vice versa.

There will now be a gradual pressure on those currencies to go down. There is now an alternative to the euro-dollar game, and it isn't the sick, declining Yen. If the governments behind the EU and the USA want to keep borrowing, they will have to raise interest rates on their bonds.

This will gradually raise interest rates or taxes within a country, and put great pressure on manufacturing industries that are already under pressure. That in turn will mean more unemployment and more unemployment spending, and less tax revenue.

If the governments that have encouraged borrowing in dollars and euros, or other currencies--the largest part of eastern european mortgages are in dollars and swiss francs, for example--want to continue buying or borrowing, their borrowing will become distorted and unpredictable. Swiss Franc mortgages, which I think are the majority in Poland, will be more expensive. Eastern Europeans, and then Eastern Europe, will start defaulting on bonds and borrowing, and this will place critical pressure on the Germans, who are holding up the euro, because they lent a lot to the east, and south.

That means spending cuts and tax rises and defaults all over the place. At exactly the same time as the Indian Ocean countries start trading amongst themselves more than Europe, and as America and Europe deflate because of a crisis of debt, unemployment and bankruptcy.

I revise my views from time to time, as readers know, and I'm happy to admit when I get things wrong. I think now that the frantic money-printing and bail-outs of last year and earlier this year could have bought time; I think the sadness is, that no one knew what for, and that the money is being wasted. We needed the radical reform of government and the lowering of individual taxes, and a clear-out of bloated private banks and utilities last year or the year before.

The Chinese are clearly not going to wait on the west to reform much longer. They are spending their savings and surpluses buying commodities and energy globally whilst the going is cheap, and they are preparing for a multipolar and then an Indian Ocean world.

I wish that we were not run by muppets.