Photo: Shannon Stapleton
Is the US about to do it again? Is it really about to give China a wonderful free gift?
When a financial crisis engulfed south-east Asia in 1997, the major Pacific countries funded the bailout coordinated by the International Monetary Fund. Australia, Canada, China, Hong Kong and Japan all contributed equally. China, as itself Hong Kong, effectively gave twice. There was not a cent from America. The region noticed, and remembered.
When George W. Bush came to power in 2001, his focus was on the Middle East, his back turned towards Asia. The events of 9/11 turned this focus into a fixation. In the eight years of the Bush presidency, China took full advantage of America's neglect to strengthen its role as regional leader. In 2009, when President Obama and his secretary of state, Hillary Clinton, were struggling to rebuild US influence in the region, China announced clearly and repeatedly that it wasn't happy with the US dollar as the only global reserve currency.
Ever since, China has been establishing swap agreements with a range of countries, Australia included, so that its trade with these countries can be denominated and settled in the currency of either the trading partner or of China. Historically, most trade with China was denominated in US dollars. China is working steadily towards the day when most trade will be denominated in either its own or its trading partner's currency. This is part of its push for a world with a basket of reserve currencies, not merely one.
When China was generous in its support for the region in 1998, it must have expected it would take a long time for it to supplant America's influence. President Bush gave China a huge gift when he turned his focus away from east Asia. Is the US about to give China another massive present by failing to lift its debt ceiling and thereby defaulting on its debt?
Many commentators are saying that China, as the world's largest holder of US Treasury bonds, must be praying that the US lifts the debt ceiling and doesn't default. I disagree. China regularly takes the long-term view - and in the long-term a US debt default would play right into China's hands.
Some members of the Republican Party in the US are arguing that a US default would not be catastrophic. That it would, somehow, merely be ''technical''. Financial markets don't work like that. A default is a default, even when the party in default has the means to pay. If towards the end of this month the US proves unable to repay US Treasury bonds as and when they fall due, the impact on global financial markets will be cataclysmic and make 2008 look like a picnic. The short-term damage to economies around the world, particularly America's, will be very substantial. But in the longer term the impact of this failure of US governance will be profound and far-reaching.
For if the US government defaults on its Treasury Bonds, it will have taken the first major step in the dethronement of the US dollar as the global reserve currency. America has benefited enormously from its currency being both its money, and the world's money. America today consumes and invests a trillion dollars more each year than it produces simply because central banks and other foreign investors have a voracious appetite for US dollars that America effectively prints for free. This has been rightly described as America's ''exorbitant privilege''.
If the US dollar is not the global reserve currency, the US will no longer be able to import some $1 trillion more each year of goods and services than it exports. The US will either have to become a whole lot more efficient very quickly, or its living standards will fall significantly. Is the US Republican Party really going to put this enormous benefit at risk for the sake of blocking the implementation of healthcare reforms that have been previously enacted into law, withstood a Supreme Court challenge, and received the political mandate of President Obama's re-election last year?
It remains to be seen if commonsense or ideology will triumph in Washington. But make no mistake - the stakes for the United States could not be higher. The role of its currency in the world, and the enormous benefits that flow from this for the US, are at stake.
Ross Buckley is professor of international finance and regulation at the University of NSW.