It is important to realize that inflation had been the curse of economies in developed and developing countries, but that largely ceased to be an issue in rich countries with low consumer prices of Chinese goods and availability of credit for almost anything and everything.
Partly, of course, the credit availability was the China magic with their surpluses invested in US dollars and partly, a number of Western countries and the US deciding to float all kinds of credit instruments, creating an illusion of ever-increasing economic prosperity.
Former US Federal Reserve chairman Alan Greenspan called it irrational exuberance, but he kept the credit flowing as if the economy was on autopilot, not needing any regulation or direction. The resulting global financial crisis is still causing havoc, with periodic political and financial gridlock in the US. China, though, has so far weathered the global crisis relatively well.
Ever since the Sept. 11, 2001, terrorist attacks in the US and the subsequent invasions of Afghanistan and Iraq, things have not gone too well for the US. In the midst of it all, the US experienced the worst recession since the economic depression of the 1930s.
Even as the US has been preoccupied with these wars, China has been consolidating its position and expanding its political horizons, particularly in the Asia-Pacific region, laying claims to a number of islands and waters around them in the South China Sea and the East China Sea.
However, its claims are contested by a number of countries, some of them with security pacts with the US. Except for the US presence and involvement in the Pacific, China would hope to sort the disputes out with its regional neighbors.
China seemed to be cruising along well in its region with the US stuck in its wars in Afghanistan and Iraq. However, US President Barack Obama’s announcement of the US “pivot” to Asia with a renewed and expanded commitment to the region complicated China’s regional strategy.
Beijing would hope that the US’ financial and political problems, over time, constrict it increasingly from over-extending its reach into the Asia-Pacific. It is not so much a matter of the US presence and involvement, as the perception of its seriousness and capacity to stand by its allies against China.
And this recently took a hit when Obama could not even attend the APEC summit in Indonesia and the East Asia summit in Brunei because of the crisis at home over the budget and the debt limit. Even though Obama’s absence was understandable, the US image as a dysfunctional superpower did not go down well in the region.
It is this perception that might push regional countries into making peace with China on the latter’s terms.
Even if this were to happen over whatever period of time, China is not yet prepared to replace the US dollar as the world’s reserve currency or a basket of currencies.
With European economies in the doldrums and Japan still seeking to emerge from 20 years of economic stagnation, it would be difficult to put together a credible basket of international currencies to replace the US dollar.
And, as for China, it is economically and politically not yet in a position to become the world’s currency repository. In other words, the world might have to live with the US dollar as the world’s reserve currency for an indeterminate period.