How long will China support the US dollar?
China says it is continuing to buy US bonds 鈥渆very day.鈥� It doesn鈥檛 have much choice. It earns money by selling things abroad. In fact, exports in February were up more than 40% over February 鈥�09. This leaves it with a lot of foreign money 鈥� most of it in dollars. What can it do with so much money?
China has quietly bought stakes in America鈥檚 leading companies鈥nd in various businesses all over the world. But the only way large amounts of US dollar cash can be readily and safely deployed is in US bonds.
That said, China could also cause one helluva problem for the US if it ever chose to do anything else.
No worries on that score, said the Chinese official in charge of its $2.4 trillion worth of foreign reserves. He says China鈥檚 holdings of US debt are normal and that there is no intention of reducing them or playing politics with them.
He surely means it. And when the dollar goes down鈥nd when the market turns, and China feels compelled to get rid of its US bonds, he鈥檒l be totally sincere when he explains that to the international financial press too.
Markets make opinions, as they say on Wall Street. The market in bonds and the dollar has been very good for a very long time 鈥� since 1983, to be exact. As a result nearly everyone 鈥� including the Chinese 鈥� are of the opinion that US bonds are a safe place to be. When the market changes, so will opinions.
So far, no problem. But there鈥檚 no telling how long the foreigners will continue to support the dollar. Then what? Well鈥t leaves quantitative easing鈥n which the US central bank lends the money itself. Where does it get the money? It just invents it.
Which is why you can鈥檛 trust paper money. You have a dollar. You have it. You hold it. And you expect to keep it 鈥檛il death do you part. But then, along comes another dollar that looks just like it鈥resh鈥oung鈥ull of vim and vigor. So why not? Everybody does it.
Pretty soon, there are a lot more dollars running around. And they change hands fast. In economists鈥� lingo, the velocity of money goes up鈥nd the value of the dollar 鈥� like a faithless lover 鈥� goes down.
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