The Gold Standard  

In fact, I would go one step further. America could continue to work towards dollar depreciation without the fear that it would go into a free-fall since China would keep throwing sand in the wheels of the weak dollar juggernaut. Of course, that is the world of 2003-07 except that commodities, inflation and higher bond yields might spoil the picture soon, given huge deficit spending and huge monetary stimulus with no real willingness to exit.

Again, that is another topic for another occasion. If you wish to catch something on that topic right now and not wait for The Gold Standard, you may wish to hop across to Brad Setser and read his take on the topic of reverting to 2007 here. He is right, of course, that the weak dollar is translating into weak renminbi right now. He is right to guess that, at the margin, it helps Chinese exporters. But, how far would it help Europe if we go back to the world of 2007 with an overvalued currency and a large trade deficit with China? In any case, as we said before, we shall deal with this seemingly overwhelming desire to return to the world circa 2006-07.

Then came this news item in FT with a fairly strong and emotive caption: “Brazil and China plan to axe dollar”. Well, no one can axe any one else’s currency. They can decide not to use it. That is fine. That is what Brazil and China are apparently contemplating. Well, again, if it leads to a weaker dollar, then that is fine. That suits America.

Of course, there is more to this move than that. It appears that China is approaching the US dollar broadly in two ways. One is to keep the dollar stable until it has finished diversifying its reserves enough and then (much later) to actively work to replace the dollar as the dominant global currency of invoice, store of value, etc. Or, at least, work towards sharing the honours with the US dollar as it recently proposed to the US in another area (unrelated to finance and economics).

The only problem is that as the dollar weakens, China has no option but to keep accumulating dollars if only to keep its currency from appreciating. As it tries to unload on the one side, it reloads on the other side. So, in that sense, China itself is forced to underpin the dollar’s status and the world dollar standard!