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Psssst, Don't Tell Sebastian Mallaby, but the Dollar Already Plummeted in Value
There is a bizarre theory circulating in high Washington circles, expressed today by Sebastian Mallaby in the Post, that China is concerned that the huge dollar reserves it holds will lose value. The reason this is bizarre is that the dollar already plunged in value over the years 2002-2008 and China just kept buying more dollars.
The euro went from being worth just over 80 cents at the dollar peak in 2002 to over $1.60 at its trough early last year. Through this whole slide, China just kept buying up more dollars. Does anyone think that China's leaders did not notice the plunge in the value of the dollar? This is not exactly secret information.
Obviously, China's central bank was fully aware that the dollar was losing value but was willing to buy dollars anyhow in order to preserve its export market in the United States. That is the reason that it continues to buy dollars even though its leaders know that they will lose money on the deal. The economy can easily afford the loss, contrary to the bizarre calculations Mallaby uses in his column.
If it seems strange that elite Washington types can push economic views that are far removed from reality, remember, these people could not see an $8 trillion housing bubble.
--Dean Baker
COMMENTS (6)
The ever-execrable Niall Ferguson is at it again. Who can shut this man up?
http://www.guardian.co.uk/politics/2009/may/25/niall-ferguson-hay-festival
I thought his utter desperation to coin new words and phrases had sunk to its ludicrous nadir with his preposterous "Chimerican", but now he's defaecated out this risible rubbish: "Forget the axis of evil; welcome to the axis of upheaval."
Axis of upheaval... I literally don't know what to say - but there's more!
"[E]conomists are ill-qualified to analyse the current situation – since they lack the overview of historians such as himself."
God, the arrogance. Of course, why listen to know-nothing economists like Dean Baker when we can listen to revisionist apologists for British imperialism like Niall Ferguson?
But it's not all bad, he does make some predictions which no one else could have come up with: "There will be a rise of populist politics, he said, which would involve "a rejection of the culture of Westminster, was anti-finance, anti-immigration, anti-globalisation.""
No shit, Sherlock.
Posted by: Anonymousey | May 26, 2009 8:41 AM
Aren't there two other relevant numbers here? How much is China buying, and what is the size of its US export market in a year's time? You put out a good hypothesis but don't give us numbers to be convincing.
Posted by: NE1 | May 26, 2009 9:04 AM
Dean, thanks for once again pointing out the obvious which somehow is being missed by the media pundits. Its a wonder this country isn't worse off than it is given the economic ignorance of the media.
Posted by: AndyfromTucson | May 26, 2009 10:21 AM
Um, isn't it possible they are worried it will plunge *more*?
Is is not true that the financial crisis is causing the Chinese to mumble about moving away from the dollar as a reserve currency? Did they not call for an international currency before the G-20, as Weisbrot pointed out many times?
Also, the use of the Dollar/Euro rates from 2002 to 2008 is a bit silly, as the Euro was new in 2002, and that statistic, the only one you offer, would imply the dollar depreciated 50% in those 6 years...which it did not.
Posted by: Vincent | May 26, 2009 1:13 PM
Vincent,
While it was not yet a fully complete currency, the euro had already existed as a unit of account from the beginning of 1999, with all bank accounts in Euroland being in euros and only cash still in local currencies, now absolutely fixed to each other and the euro in value.
Indeed, the low of the euro was not in 2002 (where did you get that one, Dean?), but in September, 2000, the last time that the US Treasury engaged in any significant intervention in the forex markets, doing so to stop the slide of the euro in conjunction with the ECB and the Japanese central bank, who requested the action by the US Treasury. That was Larry Summers then in charge. Needless to say, the intervention "worked."\
My own theory on why the euro slid from 1/1/99 to Sept. 00 against most predictions was that there were an awful lot of Deutschemarks in circulation that had been used for black market transactions, especially in Eastern Europe. The holder of those needed to unload them while they could for dollars, and that process took some time.
Posted by: Barkley Rosser | May 26, 2009 3:39 PM
d only cash still in local currencies, now absolutely fixed to each other and the euro in value.
Posted by: kiralık | February 8, 2010 7:38 AM