Losing Control: Emerging Threats to Western Prosperity

Stephen D. King suggests the days of the US dollar's supremacy may be numbered in Hong Kong on June 7, 2010. (4 min., 3 sec.)

HONG KONG, June 7, 2010 - The dollar could lose its reserve currency status to the renminbi, according to Stephen D. King, HSBC's group chief economist and global head of economics. He told the Asia Society Hong Kong Center, "The dollar's reserve currency status is under threat in the years ahead. What will replace it? In the very, very, very long term, it may be the renminbi, simply because it is the biggest and most successful economy in the world that tends to be the issuer of the world's currency."

King continued, "But I have to say, it's a long way away. I'm not suggesting this year or the year after. It is also worth stressing the renminbi could replace the dollar only if the dollar loses its way beforehand. Reserve currencies are not displaced, simply destroyed. We are nowhere near the point where the dollar will fall away, but it's a big long-term risk in the years ahead."

King noted the ongoing decline in Western prosperity. "If you look at current trends, it's clear that the West's role in the world economy is shrinking and shrinking rapidly. Asia, Latin American, even sub-Saharan Africa are going to be more important in the years ahead."

He observed, "It's likely that China will be the biggest economy in the world in 20 or 30 years' time. It may not be the richest but it will be the largest." As the economic giants of Asia and elsewhere have awakened, Western leaders have increasingly struggled to maintain economic stability.

"For the West, the world is changing in an awkward way. Economic power will diminish, and this gives the West two choices. The sensible choice has to be to grow old gracefully and accept that the West's place in the economic sun is fading, and that the baton of economic growth should be passed on to other nations. The other alternative is to choose to disengage and adopt much more isolationist policies and go into a more protectionist mode to extract itself from China and rest of the world."

King warned Western economies against shutting themselves off from the world. "My prediction is, if the West does this, it ends up with much more expensive imports, much higher costs of capital, higher unemployment, and much higher levels of economic and social stress."

He noted the Western world, due to high debt levels, is likely to be faced with a multi-year period of economic austerity. "The US and Europe are about to go down the path that Japan has already explored—one of very weak growth constrained by debt. It is a kind of poor longer-term outlook, while at the same time the emerging nations will do quite a lot better."

He concluded that the Greek debt crisis had forced the world to face up to a new reality. "That is, Western governments with lots of debt could contemplate default. The possibility of this happening was completely absent until now. Up to now government bonds were seen as safe. The question now is, are they really safe? It creates great uncertainty around the entire financial system."

Reported by Penny Tang, Asia Society Hong Kong Center