[quote=qwerty007]
Presumably it’s the Asian reserves that are the lion’s share, that would ultimately be the cause of a dollar collapse. But we are led to believe that the symbiosis between the US and Chinese economies make this unlikely? A crashing dollar sounds like a severe loss of value, but I guess that means basically it becomes unstable against a basket of currencies and can undulate, and whichever way it goes it’s bad right?
[/quote]
The Chinese-American symbiosis only needs to shift a little to have great impact. Over the last year there has been an increasing amount of grumbling from the Chinese. Earlier, when rogue speakers would complain about the situation, Party officials would quickly deny. We do not see that anymore, and the critical voices are becoming louder. The gist of the dissenting voices seems to be that the current situation is not in China’s long term interests; it has served them well so far, but now the Chinese economy needs to develop in ways that are not so dependent on U.S. consumption. Even a small bias toward banking their current account surplus in currencies other than the dollar would hurt the dollar greatly.
The Gulf states, and Japan, are also significant holders of dollar reserves. Their actions play a role. None of them wants to break the dollar hegemony, yet if that breaking starts, all will want to break first. So the situation seems unstable.
However, the interest in preserving the status quo will help. But this interest, and risk aversion, which is included in “speculation” because it implies forecasts of future risk, do not make a very strong foundation for a currency. One would prefer to see a healthy current account surplus, and a government with low debt and low deficit spending, when looking for a reserve currency. The status quo will prevail but will erode, in what we hope is not too volatile a fashion. Volatility will hurt our domestic economy – risk is bad – and shifting import prices may create deflationary expectations via risk fear.
It is difficult to see many factors, besides risk aversion and inertia, that support the dollar.
