China's watching: Stop talking about default

Watch out, President Obama! China waiting for U.S. default. Photo: China / Associated Press

WASHINGTONOctober 8, 2013 – All this talk about default is very dangerous, even if it doesn’t happen.

What most people, including elected officials, do not understand is that the dollar is still the world’s reserve currency. This means that all the countries and international corporations in the world hold huge piles of American dollars in order to carry on international trade. 

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If the dollar were suddenly to lose reserve status, the United States of America would face catastrophic inflation. All the dollars that the Federal Reserve has been creating, at about $85 billion each month, would begin to be dumped right on our heads, and the dollar would become virtually worthless. A loaf of bread could cost $50, a basket of groceries could cost $500. Hyperinflation has happened to many nations, including post WWI Germany, France and Russia, and modern day Greece and Spain. 

This threat is not just wild speculation. China has openly criticized America for not being a trustworthy steward of the dollar.

More importantly, China has moved aggressively to replace the dollar with its yuan in all its many, many international trades, including those in Saudi Arabia, Russia, South Korea, Australia, and many other traditional U.S. trading partners. China, with vigorous support from Russia and reluctant support from the other mega-economies in Asia, especially India and Japan, is using treaties which require acceptance of payments in their currency, the yuan. In these transactions, China is making the yuan a viable alternative to the dollar. China has enormous leverage as the world’s largest customer, second only perhaps to the United States. What we have seen as currency manipulation, they view as conserving a sound currency against extraordinary competition from the dollar and the euro.   

The Chinese have increasingly widespread support. For example, the International Monetary Fund, though located in Washington D.C., has openly studied replacing the dollar with its Special Drawing Rights (SDR) as a currency, and has been pushing for SDR bonds as an alternative safe haven for investors. Currently, only the U.S. dollar, the Japanese yen, British pound, and the euro can be used to redeem SDRs, but this could change in view of the rise of China and the resurgence of Russia. In summary, there is much criticism of the dollar’s reserve status.  

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The basic argument against the United States is that we have abused our privileged status. No other country in the world can print money to finance its deficits. Opponents point out that the U.S. has been living beyond its means for two generations by running up deficits that are paid for with inflated dollars. The only reason the U.S. has been able to do this is because the international community has had to accept the American dollars in order to do business; they had no choice. With the decline of the British pound sterling, which was completed in the mid-1970s, no other currency existed which was acceptable as the reserve standard.

These complaints against America are made all the more credible when the world hears the U.S. President warning Congress of the dire consequences of U.S. default on its bond obligations. This behavior sends chills down the spines of the world trade players. Americans can argue about who is responsible for the current stalemate, but the world hears only the President. For the most part, they don’t even know who Harry Reid and John Boehner are. 

It is inexplicable why a sitting President would engage in such dangerous scare tactics. It has never been done before. The American people expect the president to be the peacemaker, not the troublemaker.  Is he simply ignorant of the possible consequences of his rhetoric? If so, it constitutes culpable ignorance. Is he cynically prolonging and exacerbating the current struggle for partisan political reasons? None of us wants to believe that.

Whatever the reasons, the damage to the fragile dollar is serious and growing as the rhetoric escalates.  If our opponents prevail in replacing the dollar as the world’s reserve currency, the consequences to the country would be grave indeed. 

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Lawrence J. Fedewa

Lawrence J. Fedewa is author, publisher, and speaker, he has addressed international audiences on both technical issues and events of the day. He is also a Contributing Editor for “A Line of Sight" magazine.

Lawrence J. Fedewa has worked with railroads, less-developed countries, and labor unions as a management consultant, and with professors, managers, politicians, and teachers. 

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