Thursday, October 02, 2008
The dollar and American strength
The dollar has continued to strengthen through the current financial crisis, especially against the Euro, which now fetches a bit over $1.38 (down from a peak of $1.60 in April). This surge in strength has come in the teeth of scary revelations about the United States financial system and the prospect that our government will have to borrow hundreds of billions of dollars even to have a chance of getting things right again. One reason for this is that United States Treasury securities are still the safest port in a storm, and you have to own dollars in order to buy T-bills. Say that again: The credit of the government of the United States, a proxy for the long-term health of our economy, is such that Treasury securities are attractive even after taking into account a massive new requirement for U.S. government borrowing.
One of the reasons for this may be that the United States has, in the tradition of Alexander Hamilton, backed its implicit guarantees:
As for this country, the Chinese now regard us as "battle tested." We have been through some truly major bumps, yet no major U.S. politician has called for "not paying back the Chinese." We've even guaranteed the $350 billion in agency securities held by the Chinese central bank and without a stir. I think the Chinese are shocked by that and in many ways they now trust their investments more than before, not less.
The Chinese do not have comparable trust in "Europe." If something went wrong in the financial realm, who would they call up on the phone? Which country? What do they think is the power base of the head of the ECB? What political party does that person belong to? What favors can be traded and with whom? Whose answer would count as definitive? Keep in mind that for all of China's modernity, their leaders are still communist party functionaries.
The negative scenario for the dollar is where the Chinese economy collapses, not where the Chinese become too afraid to buy dollar-denominated assets.
Bush, Bernanke, Paulson -- we call them leaders. The Chinese think of them as the customer service department. I suspect the Chinese get straighter answers from them than we ever do.
The poetic symmetry, of course, is that Bush, Bernanke, and Paulson are serving America by serving the Chinese. We ship hundreds of billions of dollars abroad for goods made in China and oil to power our economy. Our trading partners will only take our dollars if they know they can trade them back to us for other assets, including investments in our companies and real estate in this beautiful and free country. We need to value the dollar before they will value the dollar, and the first requirement is that we sustain the great American tradition of honoring our national obligations. George W. Bush does not have a great record in this regard, but he has done right by the dollar this year.
2 Comments:
By 
commoncents, at
Thu Oct 02, 07:20:00 PM:
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By SR, at
Thu Oct 02, 07:40:00 PM:
TH:
Which "national obligations" are you referring to which have had a negative effect on Bush's "record in this regard?"
