The rise of China and the decline of the dollar?

A question from Yahoo! Answers:

Do you think china is going to replace america as the world power and the dollar wont be the world standard ?

Will China be a world power? I don’t think so. Historically, politically unified China was an exception, not a rule. Every time someone attempted to unite China, they ended up with an awkward arrangement somewhat akin to the Holy Roman Empire in Europe. In my opinion, it is likely that China as we know it today will not exist in 2050.

Look at how China “manages” its dysfunctional relationship with Taiwan. So far, China did a lot of saber-rattling, but took no action. And it is easy to see why; in 1980s, China tried to invade Vietnam, twice, and got beaten back both times, so the Chinese government has every reason to doubt the true strength of its armed forces.

Will the U.S. dollar remain “the world standard” (whatever that means)? Depends. The acceptability of a currency in international trade has a lot to do with its propensity to be inflated. Inflation, in turn, has a lot to do with budget deficits and the size of government debt. It is true that the fiscal shape of the U.S. is worsening (government debt is currently equivalent to about 70% of GDP), but it is also true that most European countries are in an even worse shape (80% of GDP seems to be the norm), while Japan is the worst (150%).

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