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December 8, 2006
The China-Dollar Question: III

Don't Asian nations have nefarious motives for accumulating OUR currency? Not at all. It's simply an outgrowth of the extraordinarily widespread use of the U.S. dollar as the world's trade and reserve currency. Here's more on that phenomenon.

-Bret Swanson

posted to: Telecosm Lounge
poster: bswanson
date: 12/8/06 9:30:34 AM

Here's yet another way to think about the China dollar reserve situation. Asian nations accumulate lots of dollar reserves because, simply, the dollar is the most-used currency in Asia.

Most Asian trade is invoiced in U.S. dollars. For example, 80% of Korea's imports are invoiced in U.S. dollars. It invoices 87% of its own exports in U.S. dollars. Korea's use of the
Japanese yen is surprisingly low -- just 12% of imports and 5% of exports.

Even Japan, with its own major world currency, uses the dollar more than its own yen: 48% of its worldwide exports and 69% of its worldwide imports are invoiced in dollars. By comparison, just 38% of Japan's world exports and 25% of Japan's world imports are invoiced in yen. The
dollar is not just used in Japan's worldwide trade but also in its trade with close neighbors: 45% of exports to Asia and 77% of imports from Asia are denominated in dollars, with 53% and 28%, respectively, denominated in yen.

This pattern is similar for most of Asia.

The dollar has been the major trade currency of Asia. Asia has been an effective dollar area, an informal currency zone. This is yet another reason Asian central banks use the dollar as a reserve currency. We should be flattered that these dynamic and fast growing nations want to use the dollar and integrate themselves with us. Instead we seem to be pushing them away.

I believe Asia's intense use of the dollar was the key factor our Fed missed in the late 1990s and that led to the Fed's deflationary mistakes. Asia's thirst for dollars dramatically expanded the total worldwide demand for money, but our Fed concentrates on domestic data like our national PCE and CPI. Sometimes the Fed even targets our stock market or real estate market or unemployment rate. But in the late 90s, the Fed did not match the worldwide surge in dollar
demand with a commensurate supply of dollars. Thus the Asian crisis of 1997-1998, the Russian collapse of 1998, Argentina, Turkey, and then the U.S. crash.

It is probable that with the U.S. taking our dollars and going home, so to speak, Asia in the coming years will create its own currency area like the Eurozone, with China the top dog.

China is a historically fast moving train. For economic and military reasons, we should be on board for the ride.


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