Going back to the closing of the gold window during Nixon administration, and even before that, the argument is that the West and Japan propped up the dollar as tribute to the emperor, in exchange for implied security guarantees. Foreigners were overpaying for "worthless paper", and Charles De Gaulle may have hated that (espcially when Americans used the paper thus propped to buy up French firms), but they were spending to save a status quo threatened by Soviet domination. They were purchasing American military and economic strength, because they depended on a strong America. The United States wasn't putting a gun to their heads to pay up. The Soviet Union was.
Now here's China, the newest of US dollar purchasers. I'd argue that among other things, what China is purchasing with its overpayment for US securities is American military and economic weakness. China's undervalued currency contributes to the "hollowing of smokestack America", and a postindustrial United States, with disruptable global supply chains and limited capacity for vertically integrated domestic military production, is a less formidable rival than Rosie the Riveter's America.
Please note that this is not an anti-China post. I don't think that China's currency policy is primarily driven by geopolitical rivalry, it is mostly about economics and development. I just think when the costs and benefits are summed, changes in the sectoral composition of America's economy enter into the benefits column. Nor do I think this is condemnable on China's part. In fact it is admirable. Managing geopolitical rivalries are part of what governments do. One ought not condemn the government that does its job well, but the one which for all its bluster manages its situation poorly.
This is cross-posted as a comment to a post of Brad Setser's.
|Steve Randy Waldman — Sunday March 12, 2006 at 12:30pm||permalink|