| Current Chinese and American monetary policies | | | | expanded to any number of its trading partners, |
| are diametrically opposed. | | | | thereby creating a fairly large dollar-free economic |
| China has based its growth and rise to economic | | | | zone. |
| prominence on an export-led economic model, | | | | This would in the short term reduce the |
| with the United States as a primary destination | | | | importance of the dollar as the dominant world |
| for Chinese-made goods. The result of this policy | | | | currency. The ultimate effect would be much |
| is a two trillion dollar foreign exchange reserve, of | | | | more far-reaching. |
| which roughly 60percent is denominated in dollars. | | | | The global primacy of the dollar is to a great |
| The US, on the other hand, has chosen a policy | | | | extent based on the assumption that there is no |
| of monetary easing in to fight the current | | | | available substitute for it. |
| recession. It is running huge budget deficits, part | | | | The above strategy of dollar-free transactions, |
| of which is financed through money creation by | | | | which is quite workable, undermines this |
| the Federal Reserve. Such a vast increase in | | | | assumption by showing that in many cases such a |
| money supply can only lead to a devaluation of | | | | substitute is not needed. All that is required is |
| the dollar, which reduces the value of Chinese | | | | agreement on the relative value of two national |
| reserves. | | | | currencies. |
| The Chinese cannot allow thirty years worth of | | | | Furthermore, if demonstrated successfully |
| currency accumulation to evaporate as a result of | | | | between, for example, China and Brazil, such a |
| inflationary US policy. They have sent US | | | | bilateral commercial strategy could be applied to |
| authorities repeated messages to that effect, | | | | transactions between countries other than China. |
| including: top-level statements of concern; massive | | | | Russia and Germany, for example, could in the |
| purchases of strategic metals; announcing their | | | | same manner exchange energy products for |
| gold reserves are twice the size previously | | | | engineering goods and services. |
| thought; reducing purchases of longer-term | | | | Finally, this approach to trade would gradually |
| Treasury bonds. | | | | extinguish the key role of the dollar in pricing |
| The most recent Chinese move has been to | | | | commodities, such as oil, sugar, copper or grains. |
| start negotiations with Brazil to cut the dollar out | | | | These commodities would de facto come to be |
| of their mutual trade relations, which would rely | | | | priced in terms of a basket of currencies, based |
| on national currencies instead. | | | | on the actual volume of transactions in the |
| In response US Treasury Secretary Tim Geithner | | | | various national units of account. |
| traveled to Beijing in late May to reassure the | | | | The dollar would then be then reduced to being |
| Chinese concerning US policies. Perfunctory | | | | the national currency of the United States, with |
| statements of agreement were exchanged as he | | | | significant consequences for this country and for |
| left China. But on the day after Mr. Geithner | | | | the rest of the world. The US, no longer able to |
| departed, China announced negotiations with | | | | rely on the prominence of the dollar in global |
| Malaysia similar to those with Brazil: no more | | | | finance, would like any other country be fully |
| dollar-denominated trade there either. | | | | responsible for the value of its own currency. |
| In other words, the visit by Mr. Geithner solved | | | | The Chinese initiative is therefore no idle threat. |
| nothing. However, it goes way beyond that. The | | | | Whether the Chinese government will implement |
| announcement is not just another message to | | | | this new strategy across the board or even on a |
| the United States. It can well be the start of a | | | | large scale is unknown. Very possibly they have |
| new monetary strategy. | | | | no definite plan at this point. But a whole realm of |
| The type of economic transaction under | | | | possibilities has been opened. |
| negotiation with Brazil and Malaysia is essentially a | | | | What is certain is that the US government must |
| barter deal based on the relative values of the | | | | now face the fact that its policies, so far dictated |
| two national currencies involved. As China has a | | | | strictly by domestic concerns, may in the very |
| large economy involving many buyers and | | | | near future have a major and lasting impact on |
| suppliers, such a type of transaction can be | | | | the status of its currency. |