Obvious Dollar Statements, Chinese Strategy, and the Last Great Investment
Dr Doom (Captain Obvious, in this particular example) has officially declared that China will likely attempt to overthrow the supremacy of the US Dollar. Not today, not tomorrow, and really not any time soon, just eventually.
I am truly grateful to Mr Roubini for stating the obvious just in case we might have missed that part.
Via NYT (op-ed even, classy):
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.
But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.
Gold, a barbaric relic? Well at least we know who Dr Doom gets his soundbites from.
I actually found this piece from Gold News slightly more useful than Roubini's played out "I can predict the obvious financial future" act:
"As the US Fed expands the money supply," [former Morgan Stanley analyst Andy] Xie writes, "it puts pressure on other currencies to appreciate. This will force other central banks to expand their own money supplies to depress their currencies. Hence major currencies may take turns devaluing. The end result is inflation and negative real interest rates everywhere. Central banks are punishing savers to redeem the sins of debtors and speculators."
So what is the end game?
"China is aware it must become independent from the Dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects its anxiety over relying on the dollar system. The US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate reforms to float its currency and create a single, independent and market-based financial system.
"When that happens, the Dollar will collapse."
I'm curious to find out just how many warning shots China has to fire before we take the threat seriously. If the United States is suddenly forced to unceremoniously digest the $2 trillion in dollars China is currently squatting on (more out of necessity than strategy, I imagine), Ben Bernanke and the rest of the Economic Demolition Team over at the Fed can't possibly brace for the fallout. It would be akin to nailing down New Orleans 3 minutes before Katrina descends; too little, too late. Again, the United States has been crippled by the control it willfully handed over to China so what should we really expect?
On the other hand (did you hear the one about the one-armed economist? Pfft), we have put China in a precarious position as well. Without insatiable American consumerism to feed, what do they have left?
So I would guess that the real question here is who will be the first to call the other side's bluff?
Summary: Roubini is an attention whore, currencies around the world are imploding one by one (oh and a hint: it's not just Zimbabwe, kids), and China is still playing cat-and-mouse.