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Bogus Threats To US Reserve Currency Status: No Country Really Wants It!

Friday, April 29, 2011 - 8:23 PM
This whole article is worth a slow, thoughtful read.
My reasons are:
  • The Yuan does not float, and there is no indication China is prepared to allow the Yuan to float any time soon
  • China is a command economy
  • In China, property rights and civil rights are questionable
  • Chinese banks are insolvent because of malinvestments in infrastructure and an enormous property bubble

Michael Pettis at China Financial Markets has a similar list of reasons, phrased slightly differently. However, Pettis does add one key item I overlooked: "Very deep and open domestic bond markets"
The Fed is fighting back by attempting to force the US dollar lower. Mathematically every currency cannot be weak relative to each other. Central bank actions to achieve the impossible are behind the rise in commodities, especially silver and gold.

The reality is the US would be better off (and so would the world), were the US to lose reserve currency status. Nonetheless, don't expect it any time soon. China is not ready and Europe is in the midst of a sovereign debt crisis that will not go away for years.

Meanwhile the global imbalances between the US and the rest of the world grow. The imbalances within Europe grow with the ECB's One Size Fits Germany policy as well as Trichet's insistence there will not be a writedown in sovereign bonds of Greece, Portugal, and Ireland. Finally, China is overheating, trapped in an unsustainable export-and-build-infrastructure model that is clearly on its last legs.

How and when this mess resolves is anyone's guess, but it likely will not be pretty. Meanwhile, global complacency in equity markets is at record highs.

Mike "Mish" Shedlock

MikeMike327 posts since
Feb 22, 2010
Rep Points: 876