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  • Dollar’s Fate in Our Hands, Not China’s

    Today’s New York Times op-ed page features two columns on the dollar and the Chinese currency, the RMB. Nouriel Roubini concentrates on American policy. Victor Gao gives a somewhat depressing lesson in personal Chinese economic history.

    It’s a better discussion than standard claims the PRC is trying to ruin the dollar. Gao correctly suggests that, cheap talk aside, China is a primary supporter of the dollar. As Roubini points out, it’s the U.S. that’s ruining the dollar.

    There’s no official figure on this, which is important, but Gao puts the PRC’s dollar holdings at about $1.5 trillion. Brad Setser agrees. Individual Chinese may be less enthralled, but the Chinese government hasn’t lost the gleam in its eye for dollar assets. Beijing’s continued willingness to accumulate dollars and use them in ever growing trade and investment is a pillar of the dollar system.

    Of course, the PRC does this for its own benefit, chiefly to locate as many jobs at home as possible. In the process, China created a system for itself that leaves no choice but to buy American bonds. Calls for inflation protection or collateral for Chinese investmentcan thus be ignored; no reason to offer discounts when the buyer can’t shop anywhere else.

    Gao’s request for greater transparency from the U.S. spotlights the wrong side. While American policy toward foreign investment could be clearer and more consistent, the PRC does not acknowledge even basic facts about its holdings and behavior.

    That’s one reason Roubini overstates the RMB’s threat to the dollar: any appeal of holding the RMB is greatly reduced by not knowing the assets and policies behind it. Perhaps the critical violation of transparency applies to Roubini’s claim that China has low public debt. China’s public debt is hidden — in bad loans at state banks, a pension system still largely just a façade, and, most important, in local governments that rarely are truthful about economic circumstances.

    Roubini and Gao are right that the dollar is weakening, and we are weakening it. As the global economic leader, the U.S. has the power to shape the dollar’s future. Our fiscal and monetary policies right now point to an ugly fate.

    Posted in International [slideshow_deploy]

    8 Responses to Dollar’s Fate in Our Hands, Not China’s

    1. Spiritof76, New Hamp says:

      How about some common sense application on this debacle or we have to look for experts who always seem to be surprised when the real data shows up.

      Chinese are not dumb. They have realized that the dollar is being trashed by our government. How can you not mount an argument that the dollar will lose a big chunk of its purchasing power? The US economy is being punished by the Obama policies- easy money, record borrowing and spending in consumption, tax increases, Cap and trade with skyrocketing energy costs, socialized health care,killing of automobile manufacturing and nationalizing the banks. When inflation hits the roof next year, the Feds will have to jack up the interest rates to a healthy double digit figure to soak up the tsunami of dollars washing up our shores. The economy will suffer and the employment with it. The government deficit will grow but will not be able to sustain it because a major portion of the budget will have to be spent just on the interest on the debt alone. Just today, S&P reported that the AAA rating of the US is not assured.

      Chinese are attempting to buy all the gold reserve of the IMF. Since the US has veto power, it may not happen unless Barney Frank gets his way. He is urging the IMF to sell the Chinese all the gold that it has in exchange for dollars.

      The Economist claims that the US business represents only 5% to the Chinese economy. However, we depend on the Chinese to finance our debt. They can afford to lose our business. It may hurt them but not fatally.

      The NYT article sounds more like happy talk.

      By the way, what will we do if the Chinese forcibly take over Taiwan? The government expansion by both parties has weakened the US not only in the economic sphere but more importantly in the national security sphere.

    2. Pingback: » Financial News Update - 05/14/09 NoisyRoom.net: “Extremism in the defense of liberty is no vice. Moderation in the face of tyranny is no virtue.” Barry Goldwater

    3. donald jarry saco ma says:

      Being a democrat I cannot believe the following of the main stream media on how great everything is going on.we will not get out of this recession because all the factories are no longer in the U.S. They are all overseas and the is no where to work right now.Very few jobs manufacture items right now so there is no way that we are getting out of the recession for quite some time- spend one dollar per second 24 hours per day 5 days per week for 60,000 years and you will have spent 1 trillion dollars. How many generations will it take? money may be in our hands but spending a trillion dollars per month since he's been in office does not bid good for his presidence. Good luck senior citizens you will suffer the most out of all of this.

    4. chuck, wy. says:

      Spirit of 76, you hit the nail right on top of the head. pls consider another path in conjunction with yours, it's the socialists dream to bankrupt us just to prove that their system is "superior" and correct for the rest of the world to follow under the New World Order. Buy the base of the money system, flood the market with their money(now worthless), and take over…. carl would love this.

    5. LW, Newport News VA says:

      Hey, how about the U.S. government's fiscal policies being held to the same standards that are being debated in Congress for the credit card companies? And how about the U.S. Government's fiscal policies being held to the same standards that the president is asking the American people to adhere to, i.e. spend responsibly and live within our means. Yep, he actually said that. I'm too disgusted at this point to laugh at the irony.

    6. phil, hawaii says:

      the only long term solution is to end the federal reserve and go back to constitutional money.

    7. Ross Writes, Bradent says:

      What has happen to commonsense in monetary policies. First it was FDR's outlawing American citizen from owning gold or silver coins and bullions. Then JFK changing the redeemable gold and silver greenbacks certificates to Federal Reserve Notes(based on the US economy and bullion reserves). Then Nixon took the US off the gold standard. Then the mess started.

      Next we'll hear that the US Government will start removing "In God We Trust" from our currency! . . .Wait a minute! They already have! Look at the new $1 coin with George Washington on the front, it's not there! On either side!

    8. Pingback: The Hill’s Blog Briefing Room » DAY’S END ROUNDUP

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