Monday, December 03, 2007

Der Spiegel: Why America's Currency is the World's Problem

This is an in depth and excellent piece from the German mag that explains the fall of the dollar and how it's losing its place as the world's reserve currency. It's a good history of how the United States went from being the largest creditor nation to the largest debtor nation. Finally, it explores the role of China and what it means when people say they are our banker:

A key role now falls to China. Ironically, this (officially) communist state now has the power to determine whether the bastion of capitalism will implode. If China were to unload even just a portion of the dollar reserves it has accumulated over the years onto the market, the dollar's exchange rate would crash.

But in doing so China would inflict great harm on itself. Its remaining reserves would be almost worthless, and who would be able to pay for the vast quantities of consumer goods its factories pump out every day? Both sides, the Americans and the Chinese, benefit from the current system, which provides the former with cheap consumer goods and the latter with dollars in abundance.

Nevertheless, this mechanism appears to be reaching its limits. Recognizing this, Western politicians have been urging the Chinese leadership for years to abandon the artificial undervaluation of its currency, but with little success. Aside from a few minor revaluations, nothing has happened so far.

Question: At some point, China may decide it's in its best interest to dump the dollar, take the hit on what it can't sell off and go to some other currency as its reserve. Whom among the current presidential candidates is even talking about this? Duncan Hunter? Ron Paul? Those are the only ones I can think of off the top of my head.

Read the whole article here.

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