Friday, May 29, 2009

Why China is so worried about the Dollar?

In this short YouTube video, Milton Friedman explains why the US has been so attractive to investors worldwide in the past; and under what condition such appeal may disappear.

I also made a chart a couple of months ago summarizing China's recent effort starting to use its own currency, Renminbi, in international trade and signed numerous currency swap agreements with a bunch of countries. And China and Brazil are in a similar talk recently.

I don't think for these actions China aims to replace the dollar. What Chinese government really worries about is their huge dollar-denominated asset holdings (70% of nearly $2 trillion foreign reserves) may lose value big time if the dollar drops precipitously in the future.

(click to enlarge)

With economic recovery around the corner, the US should stop its money printing machine. "Ignore it at your own peril"---the US may well be on its path to destroy its economy and its reputation among countries. Watch this classic Friedman 1980 video on inflation, "Inflation is just like alcoholsim. In both cases, when you start drinking, or you start printing too much money, the good effect comes first, and the bad effects only come later. That's why in both cases, there is a strong temptation to overdo it: to drink too much and to print too much money..."