Nouriel Roubini of the Stern School of Business at NYU, and Brad Setser at University College, Oxford, have co-authored a paper on the possible unraveling of the Bretton Woods 2 system, and the consequent hard landing scenario for US currency.
A PDF copy of the report is online, and makes interesting reading, if you think currency issues are interesting.
Both Setser and Roubini have blogs, and they are both full of macroeconomic goodness.
Roubini has a great post from early March: a look at 10 reasons why it is in China’s long term interest to stop supporting US currency. I recommend reading the whole thing, but here’s the important bit fromt he end; what happens if the Chinese agree with Roubini about what’s in their interest?
Of course, the cause of the US external deficit is not China but rather its reckless fiscal policy: thus, a movement of the Chinese currency would not affect much the US current account deficit unless the US significantly cuts its fiscal deficit with increases in taxes (as spending controls are not sufficient given realistic scenarios for spending). But, at this point, it would be in the interest of China to move its currency regardless of the US policies. Economists and some economic authorities here in China are aware of it. Hopefully, the Chinese politicians will also come soon to the realization that it is in the interest of China to move its peg. Then, the US alone will have to face the consequences of its reckless policies: already in the last two weeks, two minor news such a sentence in a Korean government document about reserve diversification or a minor statement by the Japanese PM Koizumi have shaken the dollar, the US bond market and the US stock market. Wait until China decide to move its currency and see how the current hypocritical US policy makers’ statements about wanting China to flexibilize its exchange rate lead to a US hard landing (as Chinese and Asian intervention is propping the US bond market bubble).
When China starts to pull the plug – and pulling the plug does not meant to sell the existing stock of US dollar reserves but rather to accumulate from now on less dollar reserves than in the past – it will get ugly for the US, the needed reality check the US policy makers have avoided so far by living in their delusional bubble. As Bette Davis said in All About Eve: “Fasten your seat belts as it’s gonna be a bumpy ride!” Rather, a nasty hard landing for the US…
