- Joined
- Jan 3, 2009
- Messages
- 2,605
- Points
- 0
China's may start losing its reserves !
According to Mr. Krugman (2009), China had fallen into a trap of its own making due to its reluctance to adopt a more flexible exchange rate policy in the past.
Since any attempt by China or any other country to diversify away from the dollar too much or too quickly would be self defeating, there was no immediate threat to US or world financial stability, hence no need for the US government or the IMF to intervene on China’s behalf.
He is not alone. Kenneth Rogoff, the former chief economist of the IMF, has recently written that “a sudden burst of inflation would be extremely helpful in unwinding today’s epic debt morass.” Put in other words, by increasing inflation, the US would “solve” two problems at once. On the one hand, it would debase the value of its national debt, hence preventing it from growing too much relative to GDP. On the other, it would reduce the real value of the debt (unsecured and secured) of financial institutions and other US corporations, hence diminishing the need for explicit haircuts or public bailouts.
However, the most important drawback is that it does not really protect US official creditors from a persistent fall in the dollar.
This is because in the event of a protracted dollar depreciation, it is highly unlikely that the central banks of Europe, Japan, and the UK will stay put and let their currencies appreciate.
More likely, these countries will resist appreciation by engaging in a process of competitive devaluations, the end result of which will be an increase in global inflation.
If so, the reserves of China and other emerging makets will lose real value whether they are in dollars or SDRs. More importantly, inflation will be high everywhere in the world, and it will take years of high real interest rates and low growth to bring it down.
.
According to Mr. Krugman (2009), China had fallen into a trap of its own making due to its reluctance to adopt a more flexible exchange rate policy in the past.
Since any attempt by China or any other country to diversify away from the dollar too much or too quickly would be self defeating, there was no immediate threat to US or world financial stability, hence no need for the US government or the IMF to intervene on China’s behalf.
He is not alone. Kenneth Rogoff, the former chief economist of the IMF, has recently written that “a sudden burst of inflation would be extremely helpful in unwinding today’s epic debt morass.” Put in other words, by increasing inflation, the US would “solve” two problems at once. On the one hand, it would debase the value of its national debt, hence preventing it from growing too much relative to GDP. On the other, it would reduce the real value of the debt (unsecured and secured) of financial institutions and other US corporations, hence diminishing the need for explicit haircuts or public bailouts.
However, the most important drawback is that it does not really protect US official creditors from a persistent fall in the dollar.
This is because in the event of a protracted dollar depreciation, it is highly unlikely that the central banks of Europe, Japan, and the UK will stay put and let their currencies appreciate.
More likely, these countries will resist appreciation by engaging in a process of competitive devaluations, the end result of which will be an increase in global inflation.
If so, the reserves of China and other emerging makets will lose real value whether they are in dollars or SDRs. More importantly, inflation will be high everywhere in the world, and it will take years of high real interest rates and low growth to bring it down.
.
