Kwasi Kwarteng, a British member of Parliament who previously worked in finance, raises an intriguing idea. Could China, he opined in a July 24 article for the New York Times, decide one day to wield its foreign-exchange reserves to transform the yuan into something the world hasn't seen for more than four decades -- a gold-backed currency?
As the author of "War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt," Kwarteng understands the history of the world's previous efforts at underpinning the financial system with the precious yellow metal. As a former analyst at Crispin Odey's asset-management firm, he also knows something about China's dependence on currency devaluations to boost exports, a strategy it relied on for several years until it finally allowed the yuan to appreciate against the U.S. dollar from 2005 until 2008, and again in 2010.
Although Kwarteng says China is unlikely to attempt financial hegemony in the near future, the nation may decide at some point to both abandon and undermine the dollar as the world's reserve currency:
It could eventually -- in, say, 20 years -- peg the renminbi to gold, considering it preferable to the dollar as a store of value, because of its permanence and longevity. With a balanced budget and a gold-backed currency, China’s economy could be even more formidable than it is today.
Here's a chart of the financial firepower at China's command:
In the aftermath of the financial crisis, the number of smart people who mistrust fiat currencies, indebted governments, fractional reserve banking and meddlesome central banks has been steadily increasing -- and they don't all wear tinfoil hats and believe in black helicopters.
Kwarteng does acknowledge the difficulties faced in the past by countries attempting to maintain a gold standard, although he suggests that his China scenario "would, in many ways, be a more secure basis for an international monetary regime system than the system of floating exchange rates."
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Mark Gilbert at firstname.lastname@example.org