Saturday, May 23, 2009

If China loses faith, the dollar will collapse

Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the US Federal Reserve's policy of expanding the money supply to prop up the banking system and its over-indebted households. Because the magnitude of the bad assets within the banking system and the excess leverage of its households are potentially huge, the Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyperinflation and cause great damage to countries that hold dollar assets in their foreign exchange.
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10 comments:

  1. flemingMay 23, 2009 at 6:25 PM

    Yes Moy, and IF an earth-killer asteroid hits us we are all dead.  China needs the US as much or more as the US needs them.  Do you think China wants all their dollar denominated assets to lose value?  China's domestic consumer demand is not nearly sufficient to make up for big reductions in their huge export-based economy.  Its a symbiotic relationship, and will be so for some time.

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  2. anandMay 23, 2009 at 7:32 PM

    China, as the world's second largest economy, will do whatever it has to stabilize the global financial and economic system. China cannot allow the US to collapse. For that matter, neither can India, Japan, South Korea, Brazil, Indonesia, Mexico, Malaysia, Thailand, Hong Kong, Taiwan, Singapore, or other important countries.
     
    The US is a fifth of the global economy afterall.
     
    Fleming, Moy is arguing that over time the doubling in the US monetary base by the federal reserve since September 10th, 2008, will lead to surging inflation. I agree with Moy on this.

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  3. MoyhabinMay 23, 2009 at 7:52 PM

    Guys, please hit the title and read the whole thing. It's not my article, but someone else's, although I agree with many of its tenents.

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  4. MoyhabinMay 23, 2009 at 7:53 PM

    China, as the world's second largest economy,
    ------------------------------
     
    Yeah, but what if it can't? I don't think they will sacrifice everything for the sake of "universal well-being", right?

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  5. MoyhabinMay 23, 2009 at 7:55 PM

    China needs the US as much as the latter needs the former? Look Fleming, I know this is what you wish be true, but there are many very well informed people who think otherwise. Personally, I'm really not sure.

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  6. anandMay 23, 2009 at 8:23 PM

    The global crisis right now is a financial crisis. For the moment, the financial system is functioning. This is why oil prices have increased from $32 to $60; and why copper and most other natural resource prices have increased sharply. The global economy is slowly recovering as the finacial system unfreezes. The global economy doesn't have large vulnerabilities outside the financial sector.
     
    My view is that there remains a considerable chance of a renewed global financial crisis. However, the financial system has far more insurance against a financial crisis now than any time since 2003. The leverage ratio is near historic lows  {Assets/Net Equity}. Many assets on the balance sheets now have low valuations.

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  7. thankgodimatheistMay 23, 2009 at 8:27 PM

    That's why it would be a good idea that you just put the source's name under each post. Or just quotation marks for everything not yours.

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  8. anandMay 23, 2009 at 8:34 PM

    Actually, Fleming is right on this. The world is more interdependent than ever before.
     
    It is also true that America <span style="text-decoration: underline;">"NEEDS"</span> China, India, Japan, South Korea and other countries more now than ever before. It works both ways.
     
    Moy, if you read Father Marx, even he believed in specialization and ricardian comparative advantage in trade. He was a free trader. Marx believed in moving to a more perfect form of free market competition in the long run. Marx, however, had a very poor understanding of technological innovation; which is the true cause of living standards over time.

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  9. MoyhabinMay 23, 2009 at 8:59 PM

    Good advise! Learning, learning...thanks.

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  10. vMay 23, 2009 at 9:53 PM

    No, they want to transfer the dollar denominated assets to a more pliant and stable currency, than they will have dumped the dollar without an eye blink. In fact, soon the dollar, which is now another faulty bubble will burst, than - bye bye

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