Did you know that in the past few weeks the dollar has lost 4% against the British Pound and 3.6% against the Euro? The sharp drop in the value of the dollar was the cover subject of the Economist this past week. And today, the news from China got much, much worse.
The Standard is reporting that China’s Central Bank is sounding an serious alarm about the dollar:
China’s central bank issued a warning Thursday about the risks of dollar weakness, piling fresh pressure on the US currency after a steep drop over the past few weeks…
“If external capital stops flowing into the United States, a significant drop in the US dollar may occur with consumption and investment shrinking, interest rates rising and financial markets experiencing turbulence – endangering global financial and economic stability,” the report said.
I’ve written about Chinese warnings to the US before, and this one is no different. It’s not a declaration of economic war, it’s a “get your shit together, quick” hint that China is going to stop financing the American debt.
As a chief holder of American dollars and debt, it is not in China’s interest to tank the dollar. It is in China’s interest, however, to try and get the dollar back on track, and it is in American interests as well. Before the days of globalization, currencies could fluctuate in value slightly, and a dip in the dollar would mean American manufactured products would be more desirable, leading to increased demand.
But now, with a decaying manufacturing center that is largely immune to currency shifts, thanks to a race-to-the-bottom mentality in terms of labor rights and wages, a drop in the dollar will not help the American poor. Rather, it will minimize their purchasing power, forcing them to go deeper into debt to maintain their current standard of living.
Also from the story:
The world economy has been enjoying the strongest sustained growth in 30 years, even as the US current account deficit steadily widens and surpluses grow in Asia and oil- producing countries. But the People’s Bank of China said the longer the imbalances persist, the greater the risk of a disorderly adjustment and of damage to the world economy.
“If the US current account deficit continues to grow faster than GDP, then the investment value of US assets may be subjected to doubts and challenges and the willingness of investors to continue holding and buying US financial products may weaken,” the central bank said.
If China decides to stop being a principle purchaser of American debt, the current budget imbalances will quickly become untenable, forcing our hand on a number of current programs.
Importantly, this may also render the entire debate about Iraq moot by making it fiscally impossible for us to maintain a troop presence.
