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A Fistful Of Yuan I

After the sudden collapse of the USSR perhaps the next most dramatic story in recent world history has been the dramatic rise of China from a third world nation mired in poverty to the status of a major player on the global economic stage. Many Americans see this change primarily in terms of its impact of the US job market. However, it is far more pervasive than that and is reshaping global economic relationships and power structures. This diary is the first in a series that will examine how this state of affairs came about and how it is changing the world.

The great depression followed by WWII was a colossal upheaval for the world’s economy. The US emerged as the dominant world power while the USSR attempted to isolate itself and the satellites under its control as much as possible from the global economy. At the end of WWII the US sponsored an international monetary conference at Breton Woods NH. From this conference emerged several institutional arrangements that continue to shape our economic world. It produced plans that led directly to the establishment of the International Monetary Fund IMF and the World Bank. It established a place holder that eventually led to the establishment of the General Agreement on Tariffs and Trade GATT which later morphed into the World Trade Organization WTO. The name Breton Woods is commonly associated with the arrangement for managing international exchange rates of national currencies in which the US guranteed the convertibility of the US dollar into gold. This arrangement ended in the 1970s when President Nixon unilaterally pulled the plug on it.

Many things have changed since 1944. The world is a much more globalized place. It is more closely linked by air travel and telecommunications. Fresh blueberries from New Zealand arrive in New York in January and billions of dollars/euros/yen/rubles/yuan can be whisked around the globe with the click of a mouse. One way to get an overview of the present economic world is to look at the relative positions of international currency reserves of the major powers.

In theory trading relationships are supposed to be balanced arrangements. Country A sells chickens to country B and buys bananas of equal value and all is nicely in balance. However, things don’t work out that way in practice. Developments like colonialism and very uneven industrialization have produced economic winners and losers. As of 2010 the world is in a state of rather severe economic imbalance and some of the countries that look like losers are those that have historically been considered the most wealthy and powerful.

Countries by foreign exchange reserves

The total pot of all international reserves is $10T.  The breakdown of major nations is as follows.

China  $2.6T

Japan $1T

European Monetary Union $750B

Russia $500B

Saudi Arabia $400B

United State of America $136.5B

The linked chart above will provide the information for other countries. This gives a rather striking picture of just how out of balance trading relationships have become. These imbalances result from certain nations exporting far more goods and services than they import.  It is clear that China is sitting on a humongous pile of cash. With this diary as background we will look next at what they are doing with the money.

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Richard Lyon

Richard Lyon