Sunday, June 11, 2006

In Which S9 Links To The People's Daily Online...

Read this highly enlightening opinion in The People's Daily, the official newspaper of the Communist Party of China. (Yes, I used the "rel='nofollow'" attribute in the link, because I'm still livid over June 4, 1989— and I expect to maintain my lividity until the day I die.)
How To Deal With The US$ As A "Spoiled Child"

The average exchange rate (middle price) of RMB Yuan against US dollars Monday broke 8:1 mark and hit 7.9982:1. This is a new record in the exchange rate of RMB since the reevaluation of Yuan on July 21 last year. Clearly, it is an important symbol of the increasing flexibility of RMB exchange rate mechanism.

However, people should not ignore the fact that when China is rapidly advancing the reform of RMB exchange rate mechanism and actively promoting the trade balance through expanding domestic demand, the US dollar simply continues acting like a "spoiled child" within the international financial system, selfish and self-indulgent, not willing to be responsible for its dominant reserve status in the international financial system, for the excessive issuance of the currency, and for its low saving rates [emphasis mine —s9]. All it expects is to let developing countries like China assume the consequences of the economic imbalances, just like what it did in dealing with the currency relations with the Japanese Yen in the last century.

China is facing an increasingly conspicuous problem: how should it deal with the US dollars as such a "spoiled child"?
Part of me wonders if this "spoiled child" rhetoric is a reference to the famous description George W. Bush used of Kim Jung Il of North Korea, i.e. that the wacky dictator there is a "pygmy" who acts like a "spoiled child at a dinner table" and is “starving his own people” in “a Gulag the size of Houston.”

Nah, probably not. Nevertheless, it would be very wise for American readers to remember that the phrase "spoiled child" is a translation into English of a concept originating in a culture steeped in teachings of Confucius, who had more than a little bit to say about the "right" relationships between children and their parents. Think about that for a minute.

Here we have the People's Daily drawing an analogy between a spoiled child in need of discipline and the almighty greenback, currently the world's only reserve currency. I continue to be amazed at the number of otherwise seemingly intelligent people I meet who seem not to understand that the US Dollar is facing a dramatic correction in its value in relation to the major currencies of the rest of the world. The writing is on the wall for everyone to read. The only question remaining is whether it will be a rush to the exits, or if Brad DeLong's optimism is really warranted, and a course to a gradual readjustment is negotiable according to some economic model that has heretofore not been accepted into the consensus of mainstream economists.

I'm not optimistic about the latter. I have an irrational hunch that investors will be bolting for the doors and dumping the dollar in a panic sometime in the next five months. (Some readers know that I've been bearish on the US Dollar for a long time, and my hunches have turned out to be wildly wrong in the past— much to my relief— but those hunches were qualified with a lot of hemming about uncertainty and contingency, and my predictions were over longer time intervals. The hunch I am writing about now seems like something much closer to a sure thing, and my predictions are for a much shorter interval.)

We will quickly know if my crystal ball is cracked. Feel free to mock me with extreme prejudice when I turn out with egg all over my face. I'll be too relieved at being wrong to feel much hostility toward you for mocking me over it.

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