69,456,897
Posted on 05/05/2009 8:59:46 AM PDT by SeekAndFind
Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.
The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn (€7,552bn, £6,721bn) in foreign exchange reserves, mostly in dollar assets. Any other country with America’s problems would need the Paris Club of creditor nations to negotiate with its lenders on its monetary and fiscal policies to protect their interests. But the US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse.
The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese, including those in the mainland, Hong Kong, Taiwan and overseas, may account for half of the foreign holdings of dollar assets. You have to check the asset allocations of wealthy ethnic Chinese to understand the dollar’s unique status.
The Chinese love affair with the dollar began in the 1940s when it held its value while the Chinese currency depreciated massively. Memory is long when it comes to currency credibility. The Chinese renminbi remains a closed currency and is not yet a credible vehicle for wealth storage. Also, wealthy ethnic Chinese tend to send their children to the US for education. They treat the dollar as their primary currency.
The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. The $2,000bn fiscal deficit, for example, could have gone to over-indebted households for paying down debts rather than on dubious spending to prop up the economy. When property and stock prices decline sufficiently, foreign demand, especially from ethnic Chinese, will come in volume. The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out.
The global environment is extremely negative for savers. The prices of property and shares, though having declined substantially, are not good value yet and may decline further. Interest rates are near zero. The Fed is printing money, which will eventually inflate away the value of dollar holdings. Other currencies are not safe havens either. As the Fed expands the money supply, it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence, major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.
Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. China’s bulging foreign exchange reserves reflect the lack of private demand for dollars, which was driven by the renminbi’s appreciation. Though this was speculative in nature, it shows the renminbi’s rising credibility and its potential to replace the dollar as the main vehicle of wealth storage for ethnic Chinese.
America’s policy is pushing China towards developing an alternative financial system. For the past two decades China’s entry into the global economy rested on making cheap labour available to multi-nationals and pegging the renminbi to the dollar. The dollar peg allowed China to leverage the US financial system for its international needs, while domestic finance remained state-controlled to redistribute prosperity from the coast to interior provinces. This dual approach has worked remarkably well. China could have its cake and eat it too. Of course, the global credit bubble was what allowed China’s dual approach to be effective; its inefficiency was masked by bubble-generated global demand.
China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.
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The writer is an independent economist based in Shanghai and former chief economist for Asia Pacific at Morgan Stanley
Obama must think the Chinese are stupid.
I think Obama is collapsing it fine on his own.
Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves,the obama plan in fail mode no more ATM left.
***though highly beneficial to the US national interest in the short term***
Exactly why we’re in the current mess. We *never* have to worry about the long term because all that matters is now. We can supposedly deal with the long term when it comes.
Today’s crisis was yesterday’s “solution” to that problem. And yesterday’s crisis was the “solution” to the prior crisis. How long can that go on?
Obama doesn’t think China is stupid. Right now China is inextricably lashed to thedollar and the US economy.
really, now
69,456,897
Not such a crazy conspiracy whacko concept anymore, is it?
Obama will probably sell out Taiwan for a 2-4 year commitment by China to continue purchasing US debt.
Oh... and a blind eye to proliferation of nuclear tech too.
>>>it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse
Yes, and the exports by China will thereby fall precipitously. This is why China (stupidly) links to the dollar. It won’t let the market forces moderate trade and currency flows. China wants a one-way street that is favorable to them... but the market won’t allow it.
They hold all the “old maids” and we have the goods.
What they need to do is spend those “old maids” on American goods or services. One good thing they have done recently is to use their excess dollars to buy commodities.
As long as they export to us, they have to take US dollars. As long as borrowers here borrow in U.S. dollars, inflation will be their friend. But if we every start borrowing in other (harder) currencies, then we’ll be in trouble.
O's "immortal" popularity will take a dive when a twenty no longer buys a loaf of bread and a gallon of milk at the local convenience store.
I have my doubts on that. Yes, if we get into hyperinflation, Obama is finished. But, I think the country (meaning a nation ruled by a written constitution and protecting individual freedom) has a better chance with hyperinflation than it has with today's marginally stable economy and Obama giving orders.
Don’t underestimate him. While it’s true that he’s clueless about how the capitalist system works, he’s a skilled Marxist. His Marxist training has served him well.
If China ever heads for the Treasury bond exit door first, they will start a stampede of all the other buyers that will cause the dollar value to collapse almost immediately. If that happens, we’ll have hyperinflation overnight.
SEEMS THEY ALREADY LOST FAITH...
http://bluelori.blogspot.com/2009/05/china-cancels-us-credit-card.html
I would not put that much faith in the Constitution with the majority of people in the United States today. John Adams observed:
"Our Constitution is made only for a moral and religious people. It is wholly inadequate to the government of any other.”
I agree; hyperinflation would be terrible and would risk the same outcome that Obama will impose if we have a strong economy. I'd rather face the risk than the certainty.
China’s economy will collapse also, leading to turmoil in China.
Kenya vs. China. Hmmmm
When your small change starts to disappear (melt value > face value), the end is near.
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