Dollar Dreams
After financing the twenty first century wars and other follies of the USA, the Dragon stirs, but only a little. Some quotes:
“The stability of the Chinese economy will be hurt by the huge debts racked up by the US”
“Chinese analysts believe the US government can ’spend money like a drunken sailor’ despite of the huge debts because of the dollar’s special position in the international financial market; it can transfer US deficits to countries and individuals who hold the assets in dollars.”
“…the deficits will also impact Chinese exports because as the deficit expands, the dollar may devaluate and affect exports.”
The last sentence sounds a bit naive. The reason China holds a lot of US Treasury paper is because China has a huge trade surplus with the USA. What else are they going to hold ? They got out of Fannie and Freddie, they have to spend the money on something. But if they don’t run such a large surplus, why they wont need to invest it all back in the US, will they ?
This surplus is fuelled partly by Chinese policy of pegging their currency to the US dollar.They peg their currency to the dollar to retain a trade advantage (among many other advantages). The US would love to inflate away the debt, and break the peg as well.
So… maybe the Chinese intend to relax the peg ? Because the US is quite broke, can’t buy much more, so the trade gap will diminish anyway ? So China does not need to be quite so aggressive with the peg ? And that last sentence is a tacit admission that they intend to let the dollar depreciate against the yuan?
Of course, the article might just be a stalking horse.
Interesting times, indeed.
