As the dollar shrinks and becomes worth far less tomorrow, than the price paid today, China and other major developed Asian economies will continue to intensify their efforts on an exit strategy from the U.S. currency. David Goldman of the ‘Inner Workings‘ [IW] blog has a few comments on the subject. Here area few excerpts from his post.
From IW: The Asian exit from the dollar will be turtle-slow and gradual. China and Japan between them have nearly $2 trillion worth of US Treasury securities and will do nothing to jeapordize their existing investment. But the collapse of governance in the United States and the Obama administration’s response have turned the US into a zombie economy, and the dollar into a zombie currency. The Euro offers no alternative. Demographically Europe is dying, and Europe’s economic misery is worse than America’s. Robert Mundell, the 1999 Nobel Prize winner…told Bloomberg News June 1 that the Euro will decline substantially in the near future.
Apart from the problem of protecting a massive existing investment in the dollar, Asia has another problem in existing from the dollar: there exists no natural alternative. An alternative would have to be constructed.
Asia may have passed a milestone in monetary cooperation, but China, India and Japan never will establish the sort of political rapport that allows for currency union along European lines. To link their currencies would require an agreement to employ an objective benchmark for monetary policy, and the obvious choice would be some basket of commodities.
This is a five, perhaps a ten-year project, to be executed very gradually and very carefully as the Treasury’s largest foreign investors gradually reduce exposure to the US market and create their own financial markets.
Japan, China and India remain particularly concerned about the current weakness of the dollar, which relative to real economies, and combined with the implications of the fiscal and U.S. monetary policies, keeps depreciating. At the same time all three economies see the piling up of paper-dollars at current levels as unsustainable, since they can’t continue with the actual rate of growth in buying while knowing that they are throwing their money down the drain. This pattern will eventually and unavoidably push them toward a more accelerative exit strategy in the near future.