Reply #21: Projection is bad for your cholesterol.

[JackRiddler]

Those who snark, as you have, should at least be able to back it with something meatier than a pedantic and obvious "thought experiment."

I'm well aware of why China has propped up the dollar this far: because, as you mention, it is in their interest to retain the value of their own reserves as the world's largest foreign dollar holder, and to maintain export sales to the US. Although, you should note, their trade with Japan surpassed their trade with the US already in 2004, and the objective global trend away from US consumers as the buyers of everything -- which has gone on largely thanks to high-interest credit -- is certain to continue. China is investing heavily in the Third World and establishing dozens of bilateral trade arrangements, and now apparently considering a Brazilian offer to denominate trade in their own currencies (not a huge step in itself, but a logical part of a larger strategy).

Despite China's short and mid-term interests in dollar stability, a situation of global crisis has developed due to the fiscal and financial irresponsibility of US actors and the resulting insolvency of US-based criminal banks. (Just the top US banks now are exposed to about $100 trillion in bad derivatives, having bet several planets' worth of wealth at their unregulated casino.) And in this situation, even Chinese officials and economists have joined in the public expression of doubts about the dollar's stability in the long term -- an empirical reality you don't mention, perhaps because of your preference for "thought experiment." They're talking openly about buying fewer T-bills and diversifying away from dollars (whether or not you choose to acknowledge that is irrelevant). As you know how markets work, you might concede that open talk about this by high officials already contributes to the risk of a run on the dollar. So why do it?

Chinese elites are aware of their own dollar dilemma, and appear to have determined they need to accept a drop in the dollar's value and the loss of export sales to the US as the inevitable cost of moving out of that dilemma and putting their finances and economy on a sounder footing in the future. In fact, that decision is in largely in their hands, and not under US control -- a further indicator of the crisis. That's the direction they appear to be taking, cautiously and with attempts to make the best of it.

YOU seem to be "highly invested" in the idea of other countries remaining in the dollar, as their diversifying away from it would be bad for the US economy. You argue (fallaciously) backwards from that adverse consequence: that because it must not happen (in your view), it therefore will not and cannot happen. You also project on to me the false view that I want it to happen. Quite the contrary: it's no skin off my teeth either way, thanks to my Stoic philosophy, see? I'm more into knowing the truth of the present and the likely scenarios of what may come, even if these outcomes, which I can't control, might dash my individual preferences.

But hey, I hear the DOW's up again today, so everything's good, right?