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Richmans' Trade and Taxes Blog
Will Asia Pull Back from the Dollar?
An August 2nd Reuters article argues that Asian governments may be pulling out of dollar investments.
Some locations like Singapore and China are already taking steps to cut their exposure to the U.S. dollar, and Washington’s brush with default may hasten the shift.
Given the long track record of Asian governments using dollar investments as a way to manage their currency values, a wholesale pullout from dollar investments is unlikely. If it did happen, such a pullout could have long term benefits for the U.S. economy. These dollar investments are the linchpin of the mercantilist strategies that have contributed greatly to U.S. trade imbalances and economic decline ... but it would cause a lot of pain in the interim.
A major shift from the dollar by Asian countries would probably exacerbate its slide in global currency markets. Although this decline makes imports (like shoes, ipods, and gasoline) more expensive, it has the compensatory advantage of encouraging domestic production. Given the long-term costs of the trade deficit, and the unwillingness of policymakers to do anything more active to address the trade deficit, this is the way we will eventually 'solve' it. By becoming so spendthrift that the rest of the world decides not to lend to us. Unfortunately, this 'solution' likely implies harder economic times ahead.
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