Dollar Distress

This bogus Robert Fisk story is getting a lot of play today.  He claims that the Saudis, Russians and Chinese are holding “secret” meetings to price oil in something other than the dollar.   If they exist, the meetings represent a shift away from a US dominated world economy.  This has been the case since at least 1989, but the idea never fails to stir conspiracy theory. 

Quacks harbor a particular fear of China since it holds over $2 trillion in US debt.  China has long threatened to assert its growing economic muscle by abandoning the dollar altogether.  A few years ago, China switched from a currency pegged to the dollar, to one that floated against a basket of currencies.   A recent China Daily article reflects many misconceptions.  For one, they claim that the fate of the dollar is intrinsically tied to comments made by Chinese officials.  Second, it reiterates China’s call for a new reserve currency.  These policy changes and statements are just political. They only fuel conspirators misunderstanding of international monetary policy.

The truth is, as Epstein points out, China’s fate is tied to our economic policy-not the other way around.   Last year, despite financial crisis, China increased its holdings of US debt. It takes a lot more than a few meetings, secret or not, to create a new reserve system. 

Doomsday types proclaim the end of US hegemony and the fall of the empire through a weak dollar.  Again, bogus.   A weak dollar can be good for an economy.  It boosts exports, decreases costs for debtors and gives investors holding foreign investments higher yields. Most big US companies have international holdings, so they are immune to small fluctuations.  A slight devaluation can stimulate an economy. Also, this is the US, so a depreciating currency will not cause capital flight as it did in Thailand ten years ago.

One more thing about the quacks: how would a single global currency eliminate current account imbalances, inflation, risk and instability?  It makes no sense.  We still have all of these things within monetary unions. If you look at Poland or the UK, you can find both benefits and costs to joining a large monetary union.  In order for any monetary union to work, it musk have flexible financial and labor markets with a shared governing body.  An integrated global union would concentrate power even further, not democratize the global economy. 

As for the Fisk story, it doesn’t matter what we price oil in.  The Saudi’s are not actually carrying around bags dollars- oil transactions are electronic and denominated in whatever currency you like-dollars, euros or Cuban cigars.