If you were China and you wanted to start a new global currency based on a basket of currencies wherein the US Dollar was just one component, now might be a good time to start putting that into motion. In the past, China's holdings were such a massive percentage of the total number of Treasuries that selling them to move elsewhere would cause a run on the dollar and kill their remaining holdings. Now that the Obama Administration has gone completely mad and spending is totally out of control, China's exposure to loss due to sale is dropping rapidly. With the dollar still relatively highly valued, it would be tempting to start rotating out of it and into a more diverse set of currencies.
Once you'd done that, as the world's biggest creditor, you could make a good case that your particular mix of investments is the world's new currency. The dollar would no longer be king and all banana republic spending would start having banana republic results.
Oh, by the way, did you know that China's been buying gold? It's not much in the grand scheme of things, but I wonder if they're already moving in that direction.
I may be wrong here, but my understanding is that China has a problem: they need to keep the Yuan from strengthening against the dollar (estimates I've seen is that, without their measures to keep the Yuan down and the dollar up, the Yuan would be worth about twice what it is today). They need to do this because their whole selling point on exports is that they are cheap. If the Yuan appreciates to its "real" value, the prices of their goods will double on the world market, nobody will want to buy them anymore, and then they are truly screwed.
ReplyDeleteSo, it seems to me that the Chinese are not buying Treasuries as a real investment. They are buying them because it is marginally better than taking half of the dollars they get from the US and flushing them down the toilet. Is there a better way for them to basically burn money and keep the exchange rate of their currency down? Or, can they get to a state where they don't *need* to keep the exchange rate down?