What hath debt wrought?
well after my two week stint in Scotland I can tell you that the dollar is week. Against the Pound, the Euro, you name it. I actually made money buy getting pounds and selling them back … the dollar had dropped in the two weeks we were in the UK. Excessive interest cutting in order to prop up the crappy US economy is the reason no doubt. But now we have another issue to contend with … China.
Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (Â£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.
Described as China’s “nuclear option” in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.
While it’s true that the power house Chinese economy depends on a marginally robust US economy to keep it afloat there is one small thing that makes the threat credible … Chinese politicians don’t have to worry about reelection, pissed off voters, or much of anything really, it’s a totalitarian regime. Kind of gives them a few wild cards in their hand at the showdown.
“China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.
“China is unlikely to follow suit as long as the yuan’s exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar,” he told China Daily.
Now the US could start to impose trade legislation but who is kidding who? We don’t have the stones to pay for shooting wars as we go, let alone a trade war. While this is almost certainly posturing it does highlight how vulnerable we have made ourselves by following a “growth at all costs” trade policy and rushing head long into globalization with countries that don’t really share our enthusiasm for mindless consumerism.
Update: Mr. Anderson makes the reasonable point that the dollar weakening has more to do lately with printing dollars then interest rate cutting which is true. The interest rate cutting has been there of course over the last 6 years in order to “stimulate the economy”. Apparently the tax cuts weren’t enough. Also, it’s worth mentioning, the tax cuts have also contributed to the problem by creating more debt.