The Gold Standard  

In recent weeks, there has been plenty of talk about the renminbi replacing the dollar as the global reserve currency. It was primarily triggered by the New York Times Op-Ed piece by Prof. Roubini, after his visit to China. It can be read here as well.

I suspect that the piece had more to do with warning the Americans to get their house in order than to actually predict the arrival of the Chinese currency as the international reserve currency.

Otherwise, the pessimism on the dollar – which might be more justified – does not, need not or should not translate into optimism on the Chinese unit. Both are two different issues.

Couple of days earlier, David Leonhardt did a good job of sketching the dynamics behind the imbalance between/in China and the US. But, it is important to note that he did not offer solutions. He cannot. By definition, it is not a facile job and second, most situations do not have an easy ‘happily ever after’ answer.

At this stage, my best guess remains that if both America and China were to get out of jail together without much damage to their economies, the rest of the world has to fear a return to status-quo of 2007 with disastrous consequences for energy usage, oil price, climate change, etc.

Paul Krugman posted a comment on DL’s piece in his blog. There, he dismissed concerns about funding US deficits if China ‘ceased and desisted’ from buying US Treasuries. You can read his argument here.

America may have enough ‘incipient savings’ for now. But, deficit spending does not stop with this year. American policymakers also seem to think that they should restore the world (like you can do in some Operating Systems) to pre-2007. In other words, they want the American consumers to save and spend at the same time. So, it is not clear that enough domestic savings are there to go around in the US.

In any case, I have to do a separate post on his spat with Niall Ferguson on this one. On that one, he overdid his exasperation. But, that is another one for another occasion.

Be that as it may, Paul Krugman gets it right here that America, for now, needs a weaker dollar and that it might be better off if China did not purchase US Treasuries to stem the dollar’s decline.