partypup, thank you for the link to the story about China calling for a new reserve currency. That little tidbit of course didn’t show up in the usual US news channels. It strikes me as about the most relevent piece of news out there. I have long thought that China was just waiting until after the Olympics. They took 50% of the cars off the road in Beijing to try to cut down on the smog. Now that the camera crews are gone, back to business as usual with their need for oil (and other commodities) back on the upswing. And it served to play the nice guy politically while taking lots of money from tourists attending the games. Now, they can give us the big middle finger if they want.
stockstradr, your scenario of an orderly transition from the dollar as reserve currency is certainly possible. But it is also possible that it would happen very suddenly, without all involved parties holding hands. People do not coordinate their withdrawls from a bank when there is a run on that bank. It’s panic behavior. Likewise, there could be a “run” on the dollar, with all holders of dollars panicking to exchange them for something else before they become worthless. A simple, and likely catalyst might be China unpegging its currency. Since commodities are currently priced in dollars, China could swiftly move to buy all the oil, steel, copper, etc. that they might want to continue expanding their industrialization, divesting themselves of their dollar reserves to let their own currency float freely. All other holders of dollars would see commodity prices spiking, and commodity supplies running out, and would run for the exits as well. Such a scenario could force the adoption of another currency almost overnight. It would also trigger hyper-inflation here in the US. Although this doomsday scenario is not a complete certainty, and trying to guess the timing would involving reading the minds of the Chinese officials, it is definitely plausible, and at any moment, tomorrow or 5 years from now.
I hope for an orderly unwinding of this situation, but it would be silly to ignore the possibility that it will be sudden and violent.
