How the world will end

One of these days, China will collapse, taking the US down with it. What will we do then?
Let me explain the scenario I am thinking of.

When we export something, we get dollars in return. Most people think that it is a good thing. Not really. Dollars are good only if we can actually buy something with them. You can, of course postpone the buying. That is a good strategy if the economy of the US is growing so fast that tomorrow’s dollar will buy much, much more than today’s dollar. In that case, it is worth waiting.

Now, the dollar is not like any other currency.

Contrast the dollar with the rupee, for example. If a foreigner is holding a rupee and he learns that India is going to disappear tomorrow, he will buy something with his rupee double-quick. That is because he knows that his rupee will be valueless tomorrow.

The dollar is different because it is not just the currency of the United States of America. It is, in a way, the currency of the world. So when India wants to buy petroleum, it pays in dollars, even though it is buying from Saudi Arabia and not from the US. Saudi Arabia can in turn use those dollars to finance its imports of cheap Chinese goods, and China can simply keep those dollars.

In other words, atleast in theory, if the US were to disappear, the dollar could continue to be worth something as long as foreigners are willing to treat it as if it has some worth. In practice of course, the US hasn’t disappeared. But in a way, that is worse, because not only has it not disappeared, it continues to exist and print dollars. It then offers these dollars as payment for goods it is “buying”.

In a sane world, this stunt wouldn’t continue for long. When dollars flood the market, and people realise that the US doesn’t seem to be producing much to buy with the dollars, the value of the dollar would fall and the Americans would find it cheaper to make some things rather than buy them. But the world is not populated with sane men. In particular, no one has accused the Chinese government of being sane. To be fair, it isn’t just the Chinese government, but most other governments who are up to the same stunt, including the Indian government.

You see, governments love exports. They like to flaunt the dollars that their countries get from exporting, forgetting that ultimately, those dollars are just pieces of paper. When they export, it makes the exporters happy and it helps that exporters are usually an influential lobby. Governments also hate it when their countries import stuff, because they think that importing is some kind of weakness. Besides, imports benefit most people – because they get better choice and lower prices – but they hurt a small section of people pretty badly – the domestic manufacturers and their workers. Naturally, in a democracy, it is the influential lobby that gets heard, not the voice of public interest.

So as I was saying, most governments, including the Chinese government love exports and hate imports. So they give effect to their passions by buying up dollars and keeping them, thereby keeping the value of the dollar high (and consequently the value of their local currency low). The Chinese are the worst offenders in this regard, as they have around 500 billion dollars in their “war chest”. They have an entire army of slave labourers working to supply trinkets to the US at dirt-cheap prices. India is somewhat better; we carry only 140 billion though I think that even this is too much.

Of course, this cannot continue for long, and it won’t. One of these days, the Chinese will find that they can’t continue to supply stuff to the Americans at such low prices for long. The end may come in the form of rebellion in the countryside, but sooner or later the Chinese government will have to sell all the dollars it is holding. If that happens in one shot, the world is in trouble because the Americans will no longer be able to buy all the software we Indians are producing either. When that happens, people will naturally point to it as an example of the dangers of unbridled competition, just as the same people point to the Chinese now as an example of how strong government guidance is required for Capitalism to prosper. Only a few “market fundamentalists” like me will insist otherwise.

9 thoughts on “How the world will end”

  1. Heehee…. only a few market fundamentalists will insist otherwise…. Dont u think the doomsday u r pointing to might have some alternative, given that even the non-fundamentalists;) have sumthng inside their heads. Dont u think that with growing US interests rates, slowly this flight of capital from US would subside, and we will have a much softer landing than the chaotic hard one we all love to tell others;at times just to flaunt our knowledge and, but of course, our ignorance. Sorry to see u too being a part of that brigade.

  2. Coming from your post, Ravi, you say the governments love to export and they hate to import – contrary to the “voice of public interest”. Definitely, exports use domestic production to get money into a country … I can’t question a government doing that. Of late US has been consuming products from all over the world without producing much. The governments across the world are indeed happy… World produces and America consumes … money keeps flowing out of the US. The Americans are listening to the voice of their public interest, so it seems. Their deficient is high, and the interest rates are rising. My bet is, they would want to devalue their currency, to help their exports and the Chinese and the EU will try to keep it high. Hard to say who will win, but the fall may indeed not be as hard as you might want. Add to that, there are already predictions that US dollar may not be the world’s reserve currency for very long.

    So, again coming from the above, imports may also not be a very good idea… no matter what the public voice of interest say.

    India is sitting on 140 billion dollars hoping it might be good enough to bail itself out in contingency. That is what worries me the most. If the dollar continues to fall, it will not help Indian exporters, and devalue the cash reserves. We might want to continue growing our exports, and use the export earnings to invest into the economy and infrastructure. Imports for India, is definitely a bad idea.

    As far as the Chinese are concerned, the current scenario will definitely not continue for very long. But so will the rest of the world equations. As much as we all hope, that China’s capitalist practices will result in a internal revolt, causing the fall of the Chinese dragon, we need to learn form our history. I think, one of these days, Chinese will realize that they have enough money to start investing in its people. Give them more freedom and money, and become an even stronger nation with happy estate.

  3. The current world-market situation seems right out of a comic book if you ask me.

    The world (esp. China) needs excessive demand to fuel its growth.
    The US is just such a sink of consumers, and in return it provides IOUs called dollars.

    The countries of the world get these IOUs in return for the goods produced,
    and measure their wealth in terms of these IOUs. If they allow the IOUs to reduce in worth, their net “prosperity” reduces by two factors:

    a. The demand from the US sink of consumers would reduce; thus the
    countries would have to produce less.

    b. The worth of IOUs is less.

    So, the countries prefer to maintain the status quo.

    But to see the problem with the situation, replace “sending goods to the US ” with “dumping goods into the ocean”.

  4. mmm.. u fgot the 900 odd (?) billion dollars with the Japanese central bank. Then theres also the question about why would China or any other Asian country want to sell its $s in one go ? If they do that, they also bankrupt themselves in the process.

  5. I didn’t forget Sudeep, I didn’t know. Now you are scaring me. I am at my wits’ end as to how to extricate the world out of this mess.

    Nobody wants to sell all their dollar holdings at one go, just as no one wants to indulge in panic selling when the stock market crashes. But it needs just one crisis to trigger a selling spree.

    Actually Japan is a good example of what happens when when you export too much, accumulate dollars and can’t figure out what to do with them. They got a ten-year long recession for their efforts and they still can’t recover. Then it was just Japan trying that stunt. Now it is many countries, which means that the chances of a panic being triggered off are much higher.

  6. Warren Buffet probably has felt the same way as you, and is actually betting a large sum (over 21 billion dollars) against the greenback. However, this has landed him in the soup last quarter, in which Berkshire Hathaway posted a loss. I am sure he is blaming all the asian countries; as you put it, “no one has accused the Chinese government of being sane”.

    Brad DeLong has also been posting about the unbearable lightness of the dollar that keeps floating so high, while its fundamentals keep pointing downwards due to the US’s twin deficits.

  9. It would be interesting if the Euro or Pound becomes a mature enough currency to be globally acceptable tender.

    The US currently pays a lot of its loans by simply printing dollars. China and Japan together have loaned the US 40% of all of its loans. If they declare that they would no longer accept payment in dollars, that would be a disaster for the US – But, probably even worse for China !

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