China Is Killing The Dollar
The comments below are an edited and abridged synopsis of an article by Alasdair Macleod
In the wake of the Fed’s March 23 promise to print money without limit in order to rescue the Covid-stricken US economy, China changed its policy of importing industrial materials to a more aggressive stance. In examining the rationale behind this move, this article concludes that while there are sound geopolitical reasons behind it, the monetary effect will be to drive down the dollar’s purchasing power, and that this is already happening.
More recently, a veiled threat has emerged that China could dump all its US Treasury and agency bonds if the relationship with the US deteriorates further. This appears to be a cover for China to reduce its dollar exposure more aggressively. The consequences are a primal threat to the Fed’s policy of escalating monetary policy while maintaining the dollar’s status in the foreign exchanges.
Up for discussion: introduction; China’s commodity strategy—it’s also about the dollar; the monetary consequences for America; China’s forward planning; and the implications.
“The certain victim will be the dollar. And as the dollar sinks, China will be blamed and tensions are bound to escalate between China and her Asian partners on one side, and America and her security partners on the other. The start of this additional crisis was the turning point last March, when the Fed publicly stated its inflation credentials. With nearly $3 trillion in its reserves, it is not surprising that China is acting to protect herself.”
“With so much dollar debt and dollars in foreign ownership, it is hard to see how a substantial fall in the dollar’s purchasing power can be avoided and the Fed’s funding of the budget deficit badly disrupted.”