The Gold Standard  

Some have chosen to focus on the fact that some students in the University where Mr. Geithner made a presentation chose to laugh when he said that America would maintain the value of the dollar. See here for example.

The real issues are covered by Simon Johnson at Baseline Scenario. See his posts here and here.

This push by China, if true, is audacious and breathtaking:

China seems likely to push for more.  Their main idea is that some part of their US dollar holdings be transfered to a claim on the International Monetary Fund, which would shift it from being in dollars to being in Special Drawing Rights – and therefore a claim against (a) the IMF’s whole membership, and (b) presumably, the IMF’s gold reserves.

Then, what about other countries that bought US Treasuries and Agency debt?

As Simon writes here, I find the American acquiescence rather strange:

First, where would China move its reserve holdings?  The other reserve currencies are generally considered to be the pound, the yen, and of course the euro.  Which one would you definitely prefer to the dollar these days?

Second, any shift in the Chinese portfolio would also tend to depreciate the dollar – depending on what else is going on at that time – and this would likely push up inflation.  However, the administration might welcome some inflation right around now, reducing real debt burdens, and helping banks’ balance sheets and their operating profits.  And a depreciated dollar would raise exports, greatly facilitating our economic recovery.  It would be awkward for this to be explicit US policy, but any Chinese move would provide the administration with plausible deniability.

That is exactly what I had argued in my three posts on the Dollar vs. Renminbi: that America holds the aces.

What is happening is strange, very strange.

In the meantime, I wonder whether Mr. Bernanke’s warning to the Congress to act to reduce the budget deficit and China warning of a grim job market were the covers needed for China’s domestic constituencies to resume more vigorous purchase of US Treasuries at longer maturities too, now that the 10-year Treasury Note Yield is heading towards 4.0%?

In this regard, the last line in the post by Simon Johnson was not a question. It is the answer.