Thought this might be of interest to some of you:
Tibetan Monks May Hold Clue to Dollar's Future: Amity Shlaes
Commentary by Amity Shlaes
April 9 (Bloomberg) -- These days, nobody seems to doubt
that the U.S. dollar will lose its status as the world's reserve
currency. To watch the financial news channels you would think
that the dollar-yuan relationship is so unstable that the only
question is whether it will be Ben Bernanke or Chinese monetary
authorities who will determine the details of the breakdown.
Perhaps the dollar won't surrender its anchor role so soon.
And perhaps that loss, if it comes, will happen because of
events that take place nowhere near men in suits at a central
bank. Maybe the answer to the dollar's riddle can be found in
the cellphone photo image of a Tibetan monk in crimson and
orange squaring off with a Chinese soldier.
Two economists at Deutsche Bank AG, David Folkerts-Landau
and Peter Garber, and a colleague, Michael Dooley of the
University of California at Santa Cruz, are making the case that
the dollar will remain an anchor. Their research concedes that
the old dollar order, that of Bretton Woods, may be past. But it
suggests we are in a second order, a Bretton Woods II, one that
can be surprisingly stable.
The Deutsche Bank argument starts with facts on which we
all agree. The Chinese regime made a deal with its people: It
would give them jobs and cars. The people would allow the regime
to stand.
The Chinese leaders used exports to drive the growth that
created those jobs. Their success put upward pressure on their
own currency. To keep its own workers' exports cheap, the
Chinese government resisted that pressure and intervened heavily
in exchange markets, snapping up U.S. Treasuries.
Wile E. Coyote
Years ago, commentators began saying that Chinese monetary
authorities would soon abandon the dollar for other currencies
-- the euro, say. Such statements are based on the belief that
the most important number in the world was the U.S. current
account, which was in deficit, i.e., unbalanced.
Shortly, the rest of the world would realize that the U.S.
bought more than it sold and withdraw its cash from the debtor.
Paul Krugman of the New York Times calls this the Wile E. Coyote
moment -- when you fall because you suddenly realize that you
are past the cliff's edge and are standing on thin air.
Somehow, that realization hasn't come. The reason, the
Deutsche Bank scholars say, is that other numbers are more
important than the current-account deficit. Indeed, that deficit
may be a good thing.
``Contrary to almost universal opinion, successful economic
development is powered by net savings flow from poor to rich
countries,'' they wrote.
Race With Time
A number that does matter is the real interest rate in the
U.S. and elsewhere, lower than it would otherwise have been
because of Chinese growth and demand for dollars. Today,
Americans can borrow more than they once expected thanks to
China. Bernanke's predecessor as Fed chairman, Alan Greenspan,
wrote about this in the Financial Times this week.
Another key number in the Deutsche Bank story is the
Chinese government's growth target. That's important because the
authorities are in a breakneck race with time.
There are still more than 100 million unemployed or
underemployed Chinese workers to whom the regime has yet to
deliver the promised employment. The authors calculate that it
will take the regime many years to create jobs for those people.
In that period, the Chinese need dollar-denominated capital to
fund such an expansion.
If that government ceases to generate stupendous growth
each year, those underemployed people will start joining
demonstrations in places like Tibet, they will begin to find
Internet censorship intolerable, and will think more about
challenging Beijing.
Olympic Lifesaver
American and European mayors see hosting the Olympic Games
as a good way to get fame and some pricey infrastructure for
their cities. Beijing sees the games as a lifesaver, the
greatest advertisement ever made for a nondemocratic regime's
commitment to its side of a jobs contract.
What could break Bretton Woods II? Politics. In the U.S.,
new protectionist laws passed by angry Republicans and narrow-
minded Democrats could shut out imports from places like China,
and the Chinese would no longer have any use for their dollar
deal.
In China, the monetary authorities could lose their race
against time. After all, in the past decade, instances of
demonstrations or other forms of public unrest in China have
risen tenfold.
A new regime in Beijing might pull the country left, and
confiscate or redistribute all that new wealth. The old anti-
capitalist laws are probably still on the books. Or new leaders
-- the monks -- might make democracy, or even religious faith, a
priority.
Ethnic Chaos
Or China might recede into years of ethnic chaos. In any of
these cases, the new Chinese government won't be forced to
deliver the same growth, and therefore won't spend commensurate
energy tending the dollar.
This is just a sketch, but you get the point. Watch
Bernanke, watch the European Central Bank, watch the Chinese
authorities -- but also watch the rest of the country. The flash
of orange in the robe of the monk is important enough to change
the picture for the greenback.
To contact the writer of this column:
Amity Shlaes at
ashlaes@bloomberg.net
.
Last Updated: April 9, 2008 00:01 EDT
Last edited: 09-Apr-08 10:09 AM