Can China remain an one-party Communist state with an expanding middle class and capital economy without having to make any political concessions in the next forty years? Doubtful even by the Communist Party's estimation. In the budget it has just submitted, China will be spending more on internal security than on defense for the first time ever, a sign that it is not worried about foreign enemies but it is worried about mounting internal opposition gathering momentum after the success of the Tunisian, Libyan, and Egyptian rebels.
The world knows that the US reached its zenith of political, economic, and military power when the Second World ended and it has been a very slow road downward ever since.We have come a long way from guaranteeing the dollar with gold collateral under president Truman to the current 85% of foreign-exchange global transactions in non-dollar currencies. However, the dollar remains the dominant reserve currency with 50% share of international debt securities and 60% of central bank reserves globally. This kind of muscle allows the US to write blank checks and not pay the consequences as it would have if it were another national currency like the Mexican peso. But for how long?
On 4 March 2011, the European Central Bank hinted at interest rate hikes, indicating that it is adamant on pursuing a monetarist policy, which is in line with German monetary policy. If the EU is committed to a strong euro as a reserve currency competing with the dollar for the long term, it makes perfect sense why it is forcing all of the debtor EU members especially Portugal, Italy, Ireland, Greece, and Spain (PIIGS) to adopt fiscal austerity combined with privatization of public sector assets and liberalization of the market so that it becomes easier for foreign investment to penetrate it. Clearly, the EU is looking beyond the present and down the road in competing with the US globally and perhaps overtaking the dollar as a reserve currency. Will that strategy work if half of EU members have high unemployment, weak middle class, and they are plagued by sociopolitical instability?
The US has opted for 'cheap money' as a mean to growing the economy out of the current recession, and repaying foreign debt with cheap currency. But the rest of the world, China and Russia included, is well aware this strategy comes at the expense of everyone else, and it will not work long-term. That the price of precious metals has skyrocketed reflects lack of confidence in paper currencies, especially in reserve currencies like the dollar. The US dollar still has the best liquidity globally, but for how long now that the euro has established itself as more stable and the Chinese are geared to present the yuan yet another world reserve currency.
Considering that EU members are pursuing very tight fiscal policies, combined with anti-labor and anti-public sector and anti-social welfare policies, the US will be forced to follow suit to keep the dollar strong and competitive. That EU will be issuing E-bonds backed by the credit of member states thus creating an integrated an EU bond market competing with U.S. Treasurys in so far as holding central-bank reserves is an added pressure on the dollar as a reserve currency.
The recent cooling of German-American relations is largely related to US monetary policy and pressures by Washington to have Germany contribute much more to strengthen the eurozone debtor nations, especially Greece. It is in the interest of the US to have the EU stabilize the entire eurozone and stimulate growth, which would mean a weaker euro and less competitive Germany.
There are those who have argued that the US actually went to war against Iraq and Afghanistan not because of any 'real terrorism' threat, but because the US used war as a tool to retain its competitive advantage against the EU. The same theory can be advanced regarding Libya where UK and France were in the forefront, while Germany once again clashed with the US over military intervention.
The US dollar is under fire from the entire world - from oil producing nations, Germany, and China that is carrying such a large percentage of the US debt, Russia that is concerned about the cheap dollar's artificial high value, and of course the EU that is setting itself up to dominate with the euro as a reserve currency.
This is not to suggest that the dollar does not have a future, but that as the US economy is weakening, so is the dollar as a reserve currency that has been on a long downward path since the IMF secretly warned the Eisenhower administration in the late 1950s. If the rise of the euro and yuan continue against the dollar, the purchasing power of Americans will decline even further and socioeconomic polarization will continue.
Ultimately the question comes down to how capital is utilized in the US, a debtor country, versus China that is a creditor. Under a quasi-statist regime (state-capitalism), China is investing in a strong national economy and its global network. Although China today has a mere 6% of investment in global firms, it is investing in future economic hegemony by staying focused on production of the civilian sector. By contrast, the US, and EU is not much different all, has an economy where there is immense capital concentration in few private hands that recycle investment parasitically.
Instead of creating new wealth by investing in new areas of the civilian economy, much US and EU capital is invested in market trading and in existing sectors of the economy from finance to pharmaceuticals. Besides the parasitic (non-productive, money invested to make money on existing productive investment) and stagnant vertical direction of private capital investment in the US and EU, the defense sector, also largely parasitic absorbs inordinate resources in the US economy and EU to a lesser extent.
Most of the world's largest 100 defense contractors are US and European, while only four are located in Japan, three in India, three in Israel and three in the rest of the Middle East. The combination of parasitic capital investment and defense investment contribute not only to contracting economic cycles, but it debilitates the social structure by weakening the middle class and labor. Above all, the direction of such capital becoming increasingly concentrated and 'recycled in parasitic and defense sectors also leads to lack of competitiveness, which along with rising public debt and chronic balance of payments deficits accounts for the decline in the dollar as a reserve currency.