Saturday, November 13, 2010

A summit high on rhetoric, low on achievement - World Politics, World - The Independent

A summit high on rhetoric, low on achievement - World Politics, World - The Independent

Less prosaically, it was a US declaration of economic war; if China will not voluntarily allow her currency to reach what the G20 terms a more "market-oriented" level, as she has consistently failed to, then the Americans will do it for them by printing dollars.

For America, using the currency as a weapon works because the supply of ammunition – more dollars – is virtually inexhaustible. The Chinese may try to buy more dollars to drive the exchange rate back up again, but that has limits. Even if the Chinese added, say, another trillion dollars to the $2trn-worth of US Treasury paper they presently own, that could all be devalued by the Fed. Hence the occasional talk from Chinese officials about replacing the dollar as a reserve currency with some cocktail of the euro, yen, yuan and gold (at least before the near-disintegration of the European single currency earlier this year). The more realistic danger is that the Chinese opt to retaliate with more protectionist measures and the Americans follow suit. Both sides in this "G2" have already begun to indulge in such behaviour – American fiscal packages have a "Buy American" rule – and it remains to be seen how the new Congress will behave when it assembles next year and US unemployment stays stubbornly high. Congress won't be much influenced by what the G20 thinks, even when the more assertive French take over the chair next year.

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