With Treasury Secretary Tim Geithner in Beijing last week kowtowing to the largest foreign owner of our national debt, the prospect of the dollar’s demise as a reserve currency has once again reared its ugly head.
Will people pleeease stop incessantly nattering about the possibility of China dropping the dollar as a reserve currency? What else are they going to use? Monopoly money? Taiwanese dollars? Collectable postage stamps?
At $3.6 trillion and rising fast, the Middle Kingdom’s reserves are so enormous that no other currency in the world could accommodate the switch, and no other security offers the necessary depth and liquidity but US Treasuries. China only needs to breathe on any other market for it to skyrocket, we have seen in the relatively Lilliputian commodity markets in recent years.
And really, how likely is it that China embarks on radical new monetary policies that suddenly halves the earnings of its exporters, as well as its 30 year hoard of accumulated savings? The demise of the dollar has been predicted more often than the ditching of Microsoft’s Windows as the global PC operating system, and is just as likely. Hate the greenback as much as you like, but there just isn’t any other alternative.
I have been hearing these arguments ever since the US went off the gold standard in 1971. First there was a perennial Arab threat to price crude in a basket of currencies. Gee, they never seem to complain when the buck is going up. Then there was the speculated emergence of the “Yen Block” in the eighties, back when Japan was dominating international trade and the yen was bumping up against ¥75 to the dollar. Remember the book “Japan as Number One?” What a laugh.
Next we got all that European whining after the launch of the euro, when the weak dollar was every trader’s free lunch. Let’s face it, Europeans hate using someone else’s currency as their primary reserve instrument. Before the dollar, sterling was the de facto international currency, and was equally despised. So rather than waste time discussing this issue anymore, let’s talk about something more important, like who is going to win the World Series this year. I’m wearing my Yankees hat.
From the Diary of a Mad Hedge Fund Trader.