United States President Barack Obama (Barack Obama) last month in China, announced that the United States deficit needs to be addressed in order to avoid the "second recession." This statement raises people guessing, United States of major creditors China warned Obama to take care of the good of their financial situation.
Although the majority of analysts in the past year, said China was in the "dollar trap", but Obama's speech at the time and place that China has moved from the last serious dollar crisis draws some important lessons. Most importantly, they seem to understand that the "dollar diplomacy" is for United States policy more conducive to the protection of China 2 trillion in foreign reserves value of useful tools.
In order to understand this, it was necessary for United States in the late 1970s the main creditor problems make a brief historical review. In 1978, the concern with the dollar to the international economic agenda. With the gradual erosion of the weak dollar in West Germany and OPEC (Organization of the Petroleum Exporting Countries, hereinafter referred to as: OPEC) and other United States trade partners of competitiveness, or threat to the value of their dollar reserves, increasing their fears emotions. OPEC faces a particularly acute problem, because the dollar as oil currency, this means that the accumulation of petroleum-exporting countries besides the us no choice. For example, in June 1978, it was estimated that Saudi Arabia's overseas assets and reserves to 650 billion, of which 80% of US dollar assets.
Although China's dollar reserves far exceeded the Saudi Arabia in the late 1970s, but the Saudi still face substantial difficulties the "dollar trap": any will reserve from USD to another currency of major initiatives will accelerate the decline in the dollar, the erosion of the value of the remaining reserves.
However, the OPEC countries not passively accept the depreciation of the US dollar accumulating constantly, they adopted a carefully diplomatic solutions, to United States pressure, eventually led to the United States had implemented stronger inflation policy. First, the OPEC countries open discussion of the use of currencies other than United States dollars on petroleum pricing, such as the IMF (International Monetary Fund) of the special drawing right. OPEC asks to use another currency for the settlement of oil, OPEC a subordinate Committee with a basket of currencies on petroleum pricing. OPEC member countries Kuwait stated that it would accept pounds, not dollars.
Secondly, some of the OPEC Member States in cases of serious inflation with increased oil prices offset the decline in the dollar value. As has just experienced the oil embargo, which attracted the attention of policy makers in the United States.
Finally, at least one oil-exporting countries decided to reserve funds to invest in other currencies. 1978 Saudi will convert some surplus funds Switzerland franc and Germany mark, rather than hold dollars, in fact once the dollar into Germany mark. The conversion of the relative value of smaller, but it was enough to cause Washington officials concerned.
These initiatives with Saudi officials behind the ongoing requirements of United States control inflationary pressures combined together. Had a memorable scene: United States Secretary of the Treasury Blumenthal (Michael Blumenthal) and his assistant are very worried about the impact of OPEC creditors, and even broke the Saudi Minister of Finance of Disney World trip, explain the United States Government's plan for us.
Although it is difficult to separate judgment OPEC "dollar diplomacy", but almost certainly, it facilitated the Carter Administration's policy of inflation adjustments, including August 1978 and, ultimately, to defend the dollar in 1979 appointed a tough stance on inflation takes the Walker (Paul Volcker) as Chairman of the United States Federal Reserve Board (Federal Reserve).
Was in the "dollar trap" States no longer as initially as closed. China seems to be some practices adopted OPEC, calls for the establishment of a new global reserve currency, as well as Brazil and Russia discussed do not use the dollar traded.
Although the United States as the largest creditors to the United States, China's economic policies have a major impact, but it also let China vulnerable to other creditors, the conduct of the United States. Nine countries (or OPEC countries group) held a total of at least the United States national debt of us $ 1,000. You can think of one, two creditors against the US dollar lost confidence, sell a large number of US dollar assets. This behavior may cause the credit crisis, because of panic's creditors will attempt to sell the dollar crashes before the United States national debt.
May produce this kind of situation does not necessarily reflect the United States economic fundamentals. Some government bond auction-subscribed, higher than anticipated consumer price index report or display the deficit higher than expected medium-term budget evaluation may change the creditors on the expected inflation prospects.
The "dollar trap" views of supporters think that rational creditors will not be compromised by selling the asset value of the dollar. However, if the creditor believes that the United States is not really want to curb inflation, and it is expected that the dollar decline will continue, so as to maximize high prices to throw us assets to creditors, is very reasonable.
We get the lesson is that the u.s.-China economic relationship stability to a large extent dependent on the United States expected in other major creditors: it is no longer just between the two superpowers. In addition, the United States on the financial front, the longer it more vulnerable to seemingly insignificant financial events.
Although you can use the "dollar diplomacy" to find out a way out, but the United States has almost no feasible alternatives to reduce the deficit, and finally tightening. If the United States Government does not have enough will to control money supply and its national debt, it faces increasing constraints on the United States opponents of economic policy choices
, Or the global collapse in confidence to the u.s. dollar. The two cases on the United States, is not a good sign, which is the Parliament and the Government should be more serious about the issue of the dollar.(Editor's Note: Joel Harris recently completed at Oxford University Graduate School of business. Before, he studied at the George Bush administration policy officer in the Department of Commerce. )
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