September 09, 2009

Dumping the Dollar

I’ve noticed a shift in rhetoric over in Beijing: 

Back in February, FT reported on Luo Ping, the American-educated director-general at the China Banking Regulatory Commission, and his valley girl-like quip, “We hate you guys”—which was actually very reassuring to Washington and Wall Street: 

Mr Luo, speaking at the Global Association of Risk Management?s 10th Annual Risk Management Convention, said: ?Except for US Treasuries, what can you hold?? he asked. ?Gold? You don?t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.?

Mr Luo, whose English tends toward the colloquial, added: ?We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.?

This week, Ambrose Evans-Pritchard (who’s the best financial reporter in the world for the simple reason that he actually understands economics) has indicated that the “Chimerica” party just might be over: 

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”.

“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China’s reserves are more than?$2 trillion, the world’s largest.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

I’ve heard some paleo-protectionist types make the argument that if only the dollar would sink vis-?-vis the RMB, then American exports would surge and manufacturing would be saved. Be careful what you wish for, as, historically speaking, run-away inflation has never yet coincided with economic prosperity. 

UPDATE: Steve found a hilarious image from Idiocracy, which he sent along with his latest column, but which I couldn’t fit into the article (due mainly to formatting issues.) Anyway, I think it’s highly relevant to my blog post as well. Behold, America’s coming Idiocratic Currency:


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