When the Buck StopsOne question, though: Who are these financial geniuses placing themselves so reliably on the losing side of these transactions? Who are these people lending hundreds of billions of dollars to the United States and getting less than nothing as their rate of return? Funny you should ask. Maybe, in the bowels of the People’s Bank of China, there are officials who 15 years ago were flashing portraits of George Washington in the markets of Guangzhou: Somebody in that institution has been wrestling with a bad case of raging dollar-lust. In recent years, Asian central banks, with China’s in the lead, have supplied—at a loss—most of the foreign credit that has kept the American economy going. They have their reasons, of course. China’s enormous accumulation of central-bank dollar reserves is a consequence of its desire to keep the dollar dearer—and its own currency cheaper—than it otherwise would be. And that desire, in turn, is fed by China’s wish to keep its exports competitive and its workforce employed. But this cannot go on indefinitely. Recent signs suggest that the bank is already starting to diversify its reserves away from dollars. And there are intimations of a more liberal exchange-rate regime. All kinds of economic forces are nibbling at the dollar’s reserve-currency status. The euro is one factor; Asia’s economic emergence is another; improving financial technology (for a host of arcane reasons) is a third. More and more, the world will move toward a system where many currencies share in that status, and in the benefits it confers. That’s quite unfortunate for the United States, but it need not be disastrous. Still, if it happens too abruptly, the inevitable unraveling of the weird financial bargain that the United States and China have struck could be scary. If the People’s Bank dumps its dollars, and the dollar collapses, America itself might not become insolvent—but it would have a serious inflation problem to deal with, its interest rates would have to rise, and a lot of overindebted American families might go bust. No question, the United States is going to need China’s cooperation in managing this disentanglement smoothly. What will be interesting to see is how much, geopolitically speaking, China will extract in return. As the dollar becomes less special, the euro continues to catch on, and the rupee and the renminbi become international currencies, China will gain full and equal access to the positions of global economic leadership it so evidently craves. In the end, that would have happened anyway, but America’s overexuberant exploitation of the dollar’s standing has handed China a great political asset. This will surely be cashed in for a very good seat at the economic table—and, we are likely to find, for other prizes besides. Clive Crook is an Atlantic senior editor.
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