Wednesday, December 29, 2004

The dollar's fate no longer America's call

From the New York Times:

(open quote)

China has pegged its currency, the yuan, to the dollar. When this peg is either relaxed or tossed out, the dollar is likely to plunge sharply against it.

Some economists argue that if the Chinese do not allow the yuan to trade more freely, the dollar will not fall enough to reduce the nation's record current-account deficit.

That deficit, which is the broad gap between the nation's exports and imports of goods and
services, is expected to top $600 billion this year. A weaker dollar could reduce it by making
foreign imports more expensive for Americans while our exports are more competitively priced abroad.

China's possibly pivotal role in next year's dollar story is a reminder of its burgeoning economic importance, said Robert J. Barbera, chief economist at ITG/Hoenig.

"The adjustment to the dollar that all the economic models say we need to reduce the current-account problem is in the hands of China," he said. "It is not a U.S. call, and that is a profound change."
(Close quote)

Comment:

Is America's power on the wane? I have had the feeling for some time now, that America's halcyon days are behind it rather than ahead of it. For the last 60 yeras or so, America has been able to go her own way and do pretty much as she pleases. As the strongest and by far the wealthiest economy in the world, the U.S. has, as the expression goes, been independently wealthy.

In today's more open global economy, America is much more vulnerable to external factors and influences. The globalised economy has encouraged countries like China and India to open up their economies to inward investment. This has ignited phenomanal economic expansion in these and other Asian countries.

As they grow bigger and stronger, America's slice of an admittedly larger pie is being eaten into. This is not what the Federal Reserve had in mind when it contemplated the benefits of globalisation. The idea was that America, as the driving force behind globalisation, would be the biggest benificiary.

As ever, the best laid plans of mice and men often have unforeseen consequences. The fact that the fate of the dollar now no longer rests in the hands of Alan Greenspan but in those of China's ruling elite, is surely one of them.




1 comment:

CathiefromCanada said...

I agree with your thoughts on this -- America doesn't seem to realize it is in decline, but this will accelerate in the next few years.