Weakness = Strength? Lasting Prosperity Cannot Occur Through Currency Depreciation

[Written for the Borsen-Kurier]
Perhaps the most under-reported story in the US is one that hints at the future of the dollar: China plans a technical change in the way international transactions are made by its multinational corporations, allowing these transactions to be settled in its own currency, the Yuan, rather than in dollars, Euros, or another ‘hard’ currency. Though the move does not affect the exchange rate between the Yuan and the US dollar, it is a move that undermines the dollar’s reserve currency status; No doubt China would like to put the Yuan in the dollar’s place.
These days a curious idea seems to hold sway: that a country can get economic growth by destroying its own money. Currency Depreciation Can Spur Boom In Exports, Lead to Economic Recovery, reads the subtitle of a recent Wall Street Journal article, which cites the US in 1933 and the Asian tigers (and Russia) during the 1990s. All of these economies supposedly reached prosperity through reducing the value of their currencies.
The US accuses China of holding the Yuan ‘artificially low’, giving Chinese products an unfair advantage in the US market. As the US dollar weakens against the Euro, and the unwinding of the Yen carry trade causes the Yen to strengthen, Europe and Japan can no longer count on exports to the US to produce growth.
Each country wants their currency to be both strong and weak at the same time, as weakness helps exports, while strength leads to increases in foreign investment and the ability to issue bonds at attractive rates.
Since we live in a world of fiat money, where the value of a currency depends on little more than the resolve of central banks to defend it using their foreign exchange reserves coupled with their reticence (or lack thereof) to create more money, weakening a currency against the US dollar simply requires the rate of money creation be greater than the rate of growth of the US money supply.
Clearly, the entire world cannot employ this strategy. There must be some anchor. That anchor, of course, has been the US dollar for the last 60 years. But now the US wants to play the same game; but how can the world’s reserve currency survive a regime of massive indebtedness? As the dollar fades, some of the benefit of a reserve currency may also be lost: the anchor that helped world trade flourish during the eras of Bretton Woods I (1945-1971) and what some have called ‘Bretton Woods II’ (1971-present) will be lost. Will the distrustful beggar-thy-neighbor trade policies of an earlier era return? It seems likely that there will be a period of chaos which will disrupt global trade until a suitable substitute is found. There is one choice for a medium to conduct international settlement that is widely seen as ‘the gold standard’, which is… uh… the gold standard.