Question: Will there be a currency war between the U.S. and China?
Nouriel Roubini: Well there are already currency tensions because of the U.S. and other deficit countries need nominal and real depreciation to improve their export growth and sustain economic growth as domestic demand is falling or is weak because of deleveraging. But then that requires China and other net exporter countries to allow their currency to appreciate to reduce their trade surpluses, and if they need then to grow they should rely more on domestic demand rather than on exports by changing policy so as to reduce their savings and increase their consumption. But China and other emerging markets are resisting this appreciation because their model of growth has always been based on weak currency and export-led industrialization and growth, so there is conflict between the need of U.S., U.K. and other deficit countries that need to have a real depreciation and the resistance that China and other emerging markets put through intervention in the Forex market to that appreciation of their own currency. And whether you want to call it a currency war or a currency tension or eventually trade war certainly that is one of the stresses of the global economy. The imbalances, we have a large number of surplus countries—China, Germany, Japan, emerging markets on one side—and a bunch of deficit countries—U.S., U.K., Ireland, Spain and other current account deficit countries. The tension is going to stay with us for awhile.
Question: Could the yuan replace the dollar as a de facto international currency?
Nouriel Roubini: Well I wrote a piece for the New York Times last year about the almighty Renminbi or Yuan saying that over the next 20 years that is a possibility. I don’t think it’s going to happen right away because for a currency to become a major reserve currency you need to have a more flexible exchange rate. You need to have elimination of most capital controls. You need to have liberalization of domestic capital markets and you need also a deep and liquid market for those securities and there is not enough Renminbi denominated bonds yet as a market, so those are the four key factors that are going to be necessary for the RMB to become a major reserve currency. That is going to take at least a couple of decades.
But it is certainly the case that the Renminbi is becoming gradually a reserve currency. The Chinese have taken a wide range of steps in the last couple of years to sort of internationalize the role of the Yuan or Renminbi as both a means of payment, as unit of account and a store of value. Those are the features of any money or any international money as well. So gradually the Yuan is going to become one of the reserve currencies and whether it could replace the dollar it’s more of a long term issue. There is a possibility, but it’s going to take a long time.
Recorded November 30, 2010
Interviewed by Peter Hopkins