The dollar's death by a thousand cuts

Australian DR editor Dan Denning checks in from Melbourne with more thoughts on China, the dollar, and the "nuclear option"…

It seems like one of the assumptions from U.S. based pundits is that China could never afford
to really upset the U.S, it's largest trading partner. Except the U.S.
isn't its largest trading partner. Europe is.

Still, it's not clear that gradually selling down its
dollar-denominated assets would be a MAD-type event for China. For
one, if it did result in a recession in the U.S. because of higher
import prices and rates, the oil price might come off. China imports 3
mbpd. It would probably welcome lower energy prices, even if it came at
the cost of lower exports to the U.S. market.

Second, the composition of China's export growth is shifting
anyway…towards higher-end manufactured goods.

Third, the composition of China's growth is shifting to more balance
between exports and imports anyway. A stronger currency (no need to
buy U.S. Treasury bonds to manage the yuan) increases domestic
purchasing power, containing inflation and unleashing demand!

Well, that's how it might work on paper. Anyway, I don't think China
has any interest in talking down the value of its dollar assets. But
it probably doesn't have any interest in adding to those assets
either. It doesn't need to sell them all off. It just needs to stop
buying, or rolling over the debt, gradually reducing exposure month by

Death by a thousand cuts for the dollar.  Meanwhile, Dan has some thoughts about how the Fed has become "an upper-class pawn-shop for well-dressed bankers" in today's Rude Awakening.  Oh, and some late news from China: The monthly inflation rate just hit a ten-year high.

The Daily Reckoning