Are Dollars A Product Of The Past?

Chinese president Hu Jintao is visiting Washington this week.  He agreed to take some written questions from the Washington Post and Wall Street Journal.  Of course, he didn’t bother addressing uncomfortable questions about imprisoned Nobel laureate Liu Xiaobo, or the adventures of Chinese hackers in cyberspace.  One of the nice perks that comes with authoritarian rule is being able to pretend you didn’t hear inconvenient questions.

The answers Hu did provide contain few surprises.  He defended China’s monetary policy, while strongly criticizing Washington’s decision to follow similar policies.  He spoke of “mutual trust between China and other countries” in Asia, which has “deepened our common response to tough challenges,” which sounds nice if you can ignore the snarling North Korean attack dog pacing restlessly at China’s feet.

Most importantly, Hu affirmed China’s commitment to replacing the dollar as the world’s reserve currency, saying “the current international currency system is a product of the past.”  China holds a lot of dollars, and they’re not happy with Obama Administration attempts to devalue them, in an effort to stimulate foreign trade.

If the dollar is replaced as the world’s reserve currency, the effect on the debt-burdened U.S. economy would be catastrophic.  Even if we froze all government spending at current rates immediately, we’d have to sell a good $400 billion in new debt every year, just to pay the interest on the tab we’ve already run up.  Removing a powerful incentive to buy that debt would lead to bond auctions that resembled funeral services.

Also, breaking the link between U.S. dollars and the purchase of oil would dramatically reduce sales of our currency.  The wealth of the nation would be quickly melted away by soaring interest rates.  The process Hu is talking about will take years to complete, so maybe we’d be whipped into the proper fiscal shape to survive it by then… but if America is still a flabby mess sprawled on the couch of deficit spending, shoving billion-dollar bon-bons down its throat while it spends all day watching soap operas, the loss of reserve status for the dollar would induce cardiac arrest.

The overall tone of Hu’s remarks illustrates the confidence that comes from a forthright insistence on acting in China’s national interest.  American observers sometimes wax rhapsodic about the wonders of Chinese authoritarianism – if only we could be a dictatorship for a few years, long enough to address the important work of Big Government without interruption! – but their greatest asset is actually their polite refusal to feel guilty for doing what they want to do.  An awful lot of policy decisions in the West, and particularly America, are guided by a neurotic determination to gain the approval of people who profit when we do badly.

That’s not an endorsement for irresponsibly selfish international behavior… but we can safeguard against such impulses without self-loathing.  The United States has a record of service to the whole of mankind which requires neither embarrassment nor apology.  Hu Jintao’s China sees the endgame of Western democracy as a couch, a plate of bon-bons, and a TV remote.  We can prove him mistaken.  Let his synthetic reserve currency compete against a future dollar that nobody wants to give up.