Friday, June 17, 2005

Another item from this month's Atlantic is one of their "future history" pieces -- this one by James Fallows on the economic collapse of 2006-2016. It has its interesting moments -- not least when it leaves current Washingtonian conventional wisdom... exposed. The key moment in Fallows's scenario is when China lets the value of the dollar drop, abandoning their currency peg, and triggering the nasty "hard landing" scenario that has many economists worried. Why? Because in 2008, President Hugo Chavez of Venezuela, bogeyman to all Georgetown (who has of course become an "outright military dictator", dont'cha know), struck a secret deal allowing the Chinese access to Venezuelan oil in return for this malicious slap at Washington.

What to say about this?

First off, it's not unreasonable to suppose that the Chinese would cut an oil deal with folks inimical to us. Their partners in current oil deals include Russia, Sudan -- and Iran. And, by the by, Venezuela -- already, and obviously without Fallows's quid pro quo, as the currency peg is still in place.

So the Chinese obviously do need oil. And if they're dealing with the genocidal regime in the Sudan, they're obviously not too fussy about where they get it. But that brings me to a second point -- it's one thing for the Chinese to offer money to an oil supplier. It's quite another to suppose that they'd be willing to allow an oil supplier (one among many --- they're cutting oil deals with Canada, fercryinnoutloud) to dictate their monetary policy. One of the reasons the Chinese deal with multiple suppliers, one can safely presume, is so that no one of them is ever in a position to make demands like this.

But not only that. Having supposed that Chavez somehow obtains this amazing influence, Fallows supposes next that he will use it to slap at our country, and not to benefit his own. As if he is as obsessed with Washington as some of Washington's chattering classes obviously are with him. Say what?

In the long term, the currency peg will go regardless. But the Chinese will do that when they think it benefits them -- and not one minute before. Much to the discomfort of Dubya's crew, which has been asking them for months, in increasingly strident tones, to drop the peg now...


Anonymous Anonymous said...

What do you suppose the effect would be on the yuan-dollar peg and on China's reserves policy if oil prices moved from dollars to euros or some sort of currency basket?

2:25 PM  
Blogger charles said...

I'd be a bit more comfortable with this question if it were being asked of, say, Brad Setser. That said, to maintain the currency peg, the Bank of China is currently acting to restrain market forces that would otherwise cause the value of the dollar to drop. So long as oil is priced in dollars, they're effectively propping up the price their companies pay for oil (in RMB) as well. (At least in the short term --- if the value of the dollar fell a great deal, oil producers might start to ask them to pay in some other currency. But you're postulating that the oil producers make that shift first, and asking what might happen to exchange rates as a result).

In sum, the currency peg probably isn't doing a whole lot to maintain favorable oil prices for Chinese business. The effect, if any, is more likely the reverse. So, I'd say that maintaining favorable energy prices is probably not the first thing they think about when they set their exchange rate policy...

3:40 PM  
Blogger The Haikuist said...

If Fallows thinks that Chavez, who is the president of a country with one of the most democratic constitutions anywhere in the world (can you imagine George Bush subjecting himself to a referendum?), will become a "military dictator", then that suggests that he is a victim of Bush' sown hysterical anti-Chavez propaganda.

1:33 PM  

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