Wednesday, November 07, 2007

China Roars, America Reels, the Loonie Soars

The upshot is that the loonie has surpassed a buck ten US. The trigger was declining confidence in the US dollar.

China has demonstrated the underlying vulnerability of America's insatiable addiction to debt. This arrived in the form of remarks made yesterday by Cheng Siwei, vice-chairman of the standing committee of the National People's Congress, China's parliament:

“In terms of the structure of our foreign exchange reserves, we should take advantage of the appreciation of strong currencies to offset the depreciation of weak currencies,” Cheng told a financial forum.

“For example, in the current foreign reserves structure, I mean the bonds we bought, the euro is appreciating against the yuan while the U.S. dollar is depreciating against the yuan. So we should make a balance between the two,” Mr. Cheng said.
The United States has long depended on other nations, Asian and European, to buy its debt and, in essence, make good its deficits. The trick has been to have that debt bought and sold in US dollars which then ties the lender to the borrower's fortunes. A shift from greenbacks to the euro as the commodity of American debt financing changes all that. Instead of being able to service debt with depreciating US dollars, America faces the nightmare of having to use its depreciating dollars to buy appreciating euros to support its debt habit.
The United States has been playing with other nations' money so long that this has become seen as a permanent state of reality. America would simply defy gravity and levitate comfortably above its rising international obligations.
Cheng's remarks are the mildest of rebukes and don't reflect any concrete policy changes. It is, however, an example of the strength China now enjoys and that nation's power to fundamentally impact the American economy.

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