China Selling Dollars

In this Washington Post article (registration required) I saw the early signs of what George Soros refers to as the “boom-bust cycle”. (See his book, The Alchemy of Finance .)

The value of the US dollar has been supported (and long-term interest rates have been depressed) by US fiscal policy as well as by an imbalance of trade between the US and other countries. This imbalance has been desirable to US importers and American consumers of foreign goods. Exporters have been hurt by the strong dollar, and banks have been adversely affected by the flattening yield curve. Foreign countries have continued to buy American debt in the face of “downside pressure” on the dollar, meaning the situation becomes more likely to correct itself abruptly. I see in the article an international game of “chicken”: countries will be motivated to dump their dollars suddenly, cutting their losses instead of seeing the value of their assets declining over time.

This may hurt foreign countries exporting to the US, but if US consumer spending slows as suggested previously in Transcendental Generalization, the market for foreign goods will have shrunken anyway.

Tags: Business, Economics, Politics

Updated at: 12 January 2006 12:01 AM