Earlier this month, the local news was dominated by sports. The MSU Spartans were advancing to the Final Four and our Detroit Tigers were preparing for another season.
The national news, meanwhile, was focused on the debate over the Indiana
Religious Freedom Law and the international news was all about the
potential nuclear agreement between Iran and the USA.
Without question, all of these events were newsworthy. But perhaps the
most overlooked story is China related; a story Larry Summers recently
thrust into the forefront. Summers, you may recall, served as our
Secretary of the Treasury in both the Clinton and Obama administrations.
The morning of the Tiger opener he wrote that this past month “may be
remembered as the moment the United States lost its role as the
underwriter of the global economic system.”
I don’t want to go into depth to explain the machinations of the
International Monetary Fund or other aspects of global finance, but it’s
a fact that China has been instrumental in spearheading a new “World
The new China-backed bank, called the Asian Infrastructure Investment
Bank, will directly compete against the US-backed World Bank. The
founding members of the new AIIB include Russia, Brazil, India, France
and Germany. Even strong US allies like Israel and the United Kingdom
agreed to join.
The stated goal of the AIIB is strictly to help fund infrastructure
projects throughout Asian nations. Stated being the key word. But,
intent or not, the AIIB is clearly a threat to the dominance of the IMF
and World Bank.
The reason I bring this complex international issue up in a personal
finance column is because it could ultimately impact all of our
pocketbooks. Since World War II, the American currency has, in essence,
been the world’s currency. For all of our lives we have known the world
as dollar dominated.
Many experts suggest that living in a US dollar dominated world has
added as much as 20 percent to our lifestyle. Said another way, how many
would be adversely impacted by taking a 20 percent cut in their monthly
finances? I’m guessing the vast majority of my readers would feel the
impact of such a pay cut.
China’s economy is virtually the same size as ours, and by some
measures, may now be even larger. There’s no question they are an
economic powerhouse, and former Treasury Secretary Summers, now a
Harvard professor, believes the economic dominance of the U.S. has come
to an end.
Dr. Summers points to the dysfunctional leaders in Washington and
criticizes them for failure to pass the reforms that have been on the
table since 2009. Consequently, our national debt just keeps on growing.
International banking issues are not as exciting as the NCAA Final Four,
and I doubt that any Tiger fans discussed the AIIB between innings.
However, it’s important to keep in mind that we are indeed in a global
world where we can feel the ripple effect of decisions made halfway
around the world.
Only time will tell what adverse consequences may befall us if the world
shifts away from a US dominated financial system. For the past several
decades, the US has been the undisputed economic and political global
superpower. But be aware: China is on deck.