By Carl Delfeld
This was just one of the politer emails I received after publishing an article predicting that the U.S. dollar would remain the world’s key currency for a long time.
Many others contend that before long, the Chinese currency will eclipse the dollar as the world’s reserve currency.
Nonetheless, I noticed that governments continue to park their precious cash in the greenback — now trading at a three-year high. For example, the UK and France increased U.S. Treasury holdings in recent months.
And the Bloomberg Dollar Spot Index, a measure of the currency against 10 major peers, jumped 6.7% in the quarter for its biggest advance in six years.
Why are U.S. Treasury bonds more attractive than gold, the Swiss franc, or the Chinese yuan despite all of America’s budget and debt challenges?
It’s certainly not income, as five-year Treasury bond yields are at 1.69%.
A Global Power
My view is that America’s strengths greatly outweigh its weaknesses, but it appears I have more confidence in America’s future than most.
A recent poll by the Chicago Council on Global Affairs indicated that 55% of those polled believe the U.S. will be equaled or surpassed as a global power over the next 50 years.
A group of Chinese polled believes China will catch up to America in terms of global influence within 10 years.
And don’t think I ignore the tremendous challenges America faces. More than half of my most recent book, Red, White & Bold: The New American, outlines these significant speed bumps and how to turn things around.
But when a country decides which currency to use to safeguard its billions, it is looking beyond the headline news of GDP growth, budget deficits, or the latest job report.
It is looking at a bigger and deeper picture to find institutions that promote stability, openness, flexibility, mobility, and transparency.
Here are the 10 benchmarks I have come up with to measure America’s relative strengths compared to other countries such as China:
* Protects citizen’s political, religious, and economic freedoms
* Provides educational opportunities for all
* Ensures a strong defense and conducts a foreign policy based on the broad national interest
* Nurtures a culture of risk-taking and second chances while accepting inequality of results
* Protects an independent judicial system and enforces the law in a fair, transparent, and consistent manner
* Prizes a tradition of service and philanthropy
* Conserves and uses natural resources wisely
* Demonstrates fiscal discipline and puts in place a low, fair, and simple tax system
* Maintains a quality health care system open to all
In my view, China, as a semi-market, state capitalist country, would rank rather poorly on many of these benchmarks. We take for granted what is sorely missing in much of the world: due process, property rights, a free press, and especially the transparent and smooth transfer of political power.
Of course, America could use improvement across the board — its glaring weakness is fiscal discipline and tax complexity, and it needs to move aggressively on both of these fronts immediately.
But on balance, America is an open, confident, flexible, and transparent society with the deepest and most sophisticated financial markets in the world.
And despite its faults, the U.S. political system is the most transparent and stable in the world and preferable to multi-party parliamentary systems such as in India, where a small Communist party coalition member can stall market reforms.
Then there is the demographic angle.
The U.S., in large part due to immigration, is still growing, while most of Europe, Japan, and especially Russia are rapidly shrinking. While most of Asia has a relatively youthful population, China is an exception, which will put tremendous strain on its budget.
But don’t just take my word for it. Singapore’s $100 billion sovereign wealth fund has one-third of its assets invested in America, and then-CEO and now-President of Singapore Tony Tan Keng Yam stated in a Wall Street Journal interview:
(Americans)… don’t see the potential in their own economy, which is one of the most innovative, open economies in the world. Foreigners seem more optimistic.
America sure looks like a winner to me.
Until next time,
Carl Delfeld for Wealth Daily
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