Economic Warfare

[Fabius Maximus]

China is following the trajectory of by W Germany, Japan and the SE Asian Tigers. Overlaying the growth charts shows that China is at an early stage in the process. It's easy to forget how long China's predecessors sustained their rapid growth rates. And China is much larger.

Ian Flemming wrote Dr No in 1955. In the opening Bond was musing about a fellow 00 agent sent to Singapore, feeling happy it was not him. In 1955 James Bond was afraid to visit Singapore. Look at it now.

China is still in the export-driven growth stage. Despite its rapid export growth, its share of global exports is slightly less than Japan (both roughly 9%). Of course, China is potentially a much larger economy than Japan. The next stage is rapid growth driven by domestic demand; given China's incredible high savings rate, that phase could also be long and powerful.

As for dependence on the US, only 20% of Chine's merchandise exports go to US. Our share of their total exports is even lower (they export other things, like coal). To whom are their exports growing fastest? The EU.

China will participate in any global downturn, but its fate is not linked to the US. But is the reverse true? They hold almost $2 trillion in US IOU's (including Hong Kong and Macao), and we borrow tens of billions more every month.

America seems to have forgotten that creditors make the rules, not debtors. Creditors are masters of their fate, not debtors.

China's US dollar holdings are assets in the same sense as bullets, valuable only in what they can do. They can use them to exert pressure on the US or to buy our tangible assets. And they will use them at some point.

The fall of the US dollar, as your read this breaking through long-term lows, is potentially a historical event -- the end of the post-WWII global financial order. None can say how it will play out, or what lies on the other side.

[Shek]

The fall of the US dollar, as your read this breaking through long-term lows, is potentially a historical event -- the end of the post-WWII global financial order. None can say how it will play out, or what lies on the other side.

A little bit of hyperbole. The post-WWII global financial order based on Bretton Woods was ended back in 1972. The question is whether the implicit "Bretton Woods II" that emerged over the past decade will remain in effect or disintegrate. The fall of the US dollar is a market reaction to the global imbalances that have been created by the lack of saving in the US, and it is not a bad thing. It is better to see the correction take place in the form of bits and pieces as opposed to a sudden change.

[crisselvin]

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[bourbon]

The demise of the dollar, by Robert Fisk. The Independent, 6 October 2009.

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

[tequila]

Debunking the Dumping-the-Dollar Conspiracy

For at least the last decade, a persistent, recurring conspiracy theory has held that major oil exporters will stop pricing oil in dollars, which will then lead to a collapse in the U.S. economy as the dollar becomes worthless. According to some accounts, Iraq's decision to price its oil in euros rather than dollars precipitated the U.S. overthrow of Saddam Hussein, and Iran's threats to move away from the dollar is the real reason the U.S. government is raising the alarm over the country's nuclear program.

The latest item in this tradition was an article by Robert Fisk, a longtime Middle East correspondent, in the London-based Independent. The article warns of a grand conspiracy between the Arab oil states, China, Japan, Russia, and France to stop pricing oil in dollars by 2018. When this happens, Fisk says, the dollar will suffer a severe blow to its international standing and the United States might struggle to pay for its oil. The article apparently caused a shudder in the currency markets yesterday, as panicked investors unloaded dollars in reaction to the terrifying prospect of this alleged international oil conspiracy.

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States ...

[M-A Lagrange]

But they really shouldn't be concerned. Fisk's theory would make a good plot for a Hollywood movie, but it doesn't make much sense as economics. It is true that oil is priced in dollars and that most oil is traded in dollars, but these facts make relatively little difference for the status of the dollar as an international currency or the economic well-being of the United States ...

I do not want to be the devil advocate but basically US is paying oil in paper as the US print dollars. Changing the currency on oil market from $ to euro will allow Europe to pay oil in paper, just as the US.
Then the US will have to:
1) pay in foreign currency that they will have to purchase on international market. So the price variations of oil will impact directly the economy of US as even oil produced domestically will be subject to a world price in foreign currency.
2) China is one of the biggest owner of US debt. Actually it does not worst even 1$/$. As curious it can be the bonds have a lower value than the one printed on it. A change in international currency for oil would impact the value of the $ on the market exchange. Then China (for example) will ask to be payed back for all the debt they own. What is actually quoted 0.9$/1$ may in deed be quoted 1.2$/1$.
Just take the time to make the calculation of what represent 50% of US debt but with a 1,2$ value of each $ of debt.

[tequila]

... Even if all oil were sold for dollars, it would be a very small factor in the international demand for dollars, as can be seen with a bit of simple arithmetic. World oil production is a bit under 90 million barrels a day. If two-thirds of this oil is sold across national borders, then it implies a daily oil trade of 60 million barrels. If all of this oil is sold in dollars, then it means that oil consumers would have to collectively hold $4.2 billion to cover their daily oil tab.

By comparison, China alone holds more than $1 trillion in currency reserves, more than 200 times the transaction demand for oil. In other words, if China reduced its holdings of dollars by just 0.5 percent, it would have more impact on the demand for dollars than if all oil exporters suddenly stopped accepting dollars for their oil ...

China does not buy USD or U.S. Gov debt because it is a spectacularly good investment. It has not been a good investment for the past decade, if you haven't noticed.

China buys U.S. Gov debt because it would like to maintain a good exchange rate for its goods in the most important (both politically and economically) market in the world, and secondly because the U.S. remains the haven of last resort even in the face of a U.S.-generated global near-depression.

Given that the U.S. provides the ultimate guarantee of security for the Gulf countries, I doubt highly that they would give up one of their few leverages in such a relationship for euros or a basket of world currencies.