Tuesday, March 24, 2009

Never Let A Crisis Go To Waste

The Chinese are laying the theoretical foundation for a world in which the dollar is no longer the world's reserve currency.  China Takes Aim at Dollar

China called for the creation of a new currency to eventually replace the dollar as the world's standard, proposing a sweeping overhaul of global finance that reflects developing nations' growing unhappiness with the U.S. role in the world economy.

The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China's increasingly assertive approach to shaping the global response to the financial crisis.

Don't think a lot of people, including some who claim to be our erstwhile allies, wouldn't like to see this come into being.

The central banker's proposal reflects both China's desire to hold its $1.95 trillion in reserves in something other than U.S. dollars and the fact that Beijing has few alternatives. With more U.S. dollars continuing to pour into China from trade and investment, Beijing has no realistic option other than storing them in U.S. debt.

Mr. Zhou argued, without mentioning the dollar by name, that the loss of the dollar's de facto reserve status would benefit the U.S. by avoiding future crises. Because other nations continued to park their money in U.S. dollars, the argument goes, the Federal Reserve was able to pursue an irresponsible policy in recent years, keeping interest rates too low for too long and thereby helping to inflate a bubble in the housing market.

The world as we once knew has ended, but we are carrying on as if the manipulation of the bond market and our currency will suffice to bring it back to life. But, even if we were to accomplish this questionable goal, it is highly unlikely that the Chinese will willingly play this game again. And, we shouldn't want them to. Do Americans sleep soundly knowing that we rely so heavily on the Chinese gov't to fund our military and our entitlement programs? I hope not. 

It is, of course, hard to imagine that a "new" reserve currency could be willed into being through the writing of essays and attendance at G-20 meetings. Nothing short of war or cataclysm could bring about such a fundamental shift. Even under the best of conditions, Beijing Faces Big Barriers in Effort to Supplant Dollar. Then again, the Chinese are famous for taking the long view.

Developing, as they say...

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