You should read Nouriel Roubini’s op-ed on the ascent of the Chinese remnimbi (commonly known as the yuan, though remnimbi is the more encompassing term) from a few days ago. Roubini limns out some of the long-term economic implications of the world’s likely drift away from the dollar as the global benchmark currency:
“[I]magine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.”
This transformation is not imminent; it would take a period of years. And we should all pay particular attention to Roubini’s prescription for U.S. policymakers seeking to delay the day of reckoning: “The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable.”
In other words, there’s a period of pronounced austerity in government spending and U.S. fiscal policy ahead once the government’s largesse in the matter of financial bailouts has run its course. And much of the talk about “reforming” Social Security and Medicare sooner rather than later stems from concern about the global fate of the dollar.