DR editors weigh in on the "nuclear option"
All day, the DR's editors have weighed in from around the world on the news that China is threatening to dump its U.S. Treasury holdings in the event Washington imposes trade sanctions to force the yuan to rise relative to the dollar.
It was DR Australia's Dan Denning who first alerted some of us to the news with the link and just a sentence of comment, but one that put things in some needed context: "China says: you smear our export quality, we smear your dollar?"
Ian Mathias from the 5 Minute Forecast speculates on the possible timing of China pulling the trigger:
I wonder not if, but when they'll start diversifying. Think a Chinese selloff will begin the end of the dollar's stance as the world reserve currency, or will they wait until the dollar has clearly lost its footing and deliver the "death blow" so to speak? Either way, I suppose their timing would truly reveal their belief in the Chinese economy's ability to survive without the U.S. consumer and the dollar, no?
Strategic Investment's Dan Amoss figures it won't happen for a while yet:
I've always thought that the Chinese will maintain the status quo (banker to the
U.S. Congress and consumer) as long as it's in their best interest.
As cracks begin to form around the status quo, the Chinese priorities will
change. The status quo will be shattered once a "currency manipulation" bill is
enacted into law (more likely after Bush). Social stability being their number
one priority, you can bet that the Chinese will feed and fuel their population
before bailing out the U.S.'s fiscal situation. How could they ever spend this
amount of U.S. dollars on U.S. goods or services (or at Disneyland) anyway?
They'll never need THAT many Boeings or GE turbines!
As I read the financial markets now, once Bernanke enacts a big round of rate
cuts in an attempt to save the housing market, I expect 2 things to happen:
1) the rate cuts will stimulate the housing market with a lag of at least a year
— mostly due to the overwhelming stats on ARM resets published in The 5 a few days
ago (and remember how bad the stock market remained after Jan 2001 when the
first post-tech bubble rate cut was enacted?)
2) we'll see a spike in LONG-term yields as anything in fixed income (and
denominated in dollars) gets trashed. This is the opposite of what occured
during the 2001-2003 rate cut cycle. Gold should soar as the world wakes up to
the US$ inflationary endgame.
Like Dan, I tend to think the destructive protectionist wave won't overtake us until the next president takes office. My own (admittedly pessimistic) take on how the debate will likely take shape is here.