Pettis develops the issues to which I alluded in passing in. Basically, the RMB is not ready for prime time because China has pressing internal issues that prevent it from coming a key global player in the near future. He also notes that the euro is beset with problems, which he does not see clearing within five years.
Pettis concludes by showing how being the issuer of the global reserve currency is actually a cost to the US, and it would be better for US growth if a substitute where deployed. But he doesn't see that happening in the foreseeable future.
This is a straightforward post and easily understood until the end, where Pettis talks about US "borrowing." This jargon should be understood in MMT terms of Treasury securities issued in offset of budget deficits, which is imposed as a political decision rather than being an operational constraint inherent in the present monetary system. Budget deficits arise from demand leakage, one source of leakage being the current account deficit.
The capital account surplus is equivalent to the currency account deficit as an accounting identity. What this says essentially is that what a country spends (current account) externally it what is owes the rest of the world in terms of foreign ownership of domestic assets minus domestic ownership of foreign assets (capital account). The capital account includes foreign ownership of such domestic assets as foreign direct investment (FDI) in real assets, portfolio investment (stocks and bonds), reserves, and "other," such as bank accounts. US Treasury securities held by foreigners are part of the capital account.
If China wishes to export to the US, then it has to receive ownership of US assets, financial or real in return, unless goods are traded in equal exchange. The fact of there being a current account deficit makes China an owner of US assets that the US "owes" to China. Presently, China wants to save in liquid financial assets. It could hold reserves in its Fed account for this purpose, but Treasury securities pay interest, so that is the preferred choice.
Thus, it is somewhat confusing to say that the US is "borrowing" from China when China is actually "funding" purchase of its exports to the US through the capital account. At any rate, the end result is that US consumers and business get real resources from China, and China receives claims on US resources that it can exercise in the future, or sell to someone else through the foreign exchange market in return for another currency.
It is in this technical sense that foreign saving "funds" the current account deficit, often equated with the trade deficit, although the current account also includes net factor income (interest and dividends) and net transfer income (aid). It is this willingness to save in dollars that makes space for the US to increase its imports of real resources in excess of a direct exchange of goods.
It is a tautology that in a closed global economy not all countries can be net exporters or net importers at the same time. There has to be a balance between these, in which net exporters offset net importers, at least until Earth begins trade with other planets.
At present, only the US has the capacity to absorb the level of saving desired by net exporters, which is a fundamental reason for the persistence of the USD as the global reserve currency. The president's plan to export the US out of its problems by doubling its exports in five years looks unrealistic in today's world.
"It's the demand, stupid."
The US is the key source of demand in the world economy. Pettis observes how difficult it is going to be for China to increase consumer demand other than in small increments. This is true of most of the emerging world, because of institutional constraints. It is also true of the two most economically powerful countries beside the US, that is, Germany and Japan, because they are net exporters and bent on remaining so.
While Pettis does not draw this conclusion, the result is that only the US is capable of carrying global demand on its shoulders at this time. But since global capacity exceeds the demand that the US and rest of the world can absorb, the world is faced with a demand shortage, which manifests as massive unemployment and underemployment, as well as sub-optimal economic performance resulting in massive foregone opportunity. The present approach is not working and cracks are widening in the foundation. The fact that the dollar is a source of controversy shows this. On one hand, China wants to export to the US, and on the other, fears dollar depreciation that would affect its savings in dollars.
The challenge is to increase effective demand in order to grow the global economy. Ideally, this would evolve from a democratic new world order based on interdependence in a way that is sustainable financially, economically, politically, socially, environmentally, and ecologically. For this to happen, a fresh approach to globalization based on a new vision of possibilities and a grand strategy for achieving this vision are required. This is the discussion that we need to be having now. Neoliberal austerity is leading to economic underperformance and social unrest.