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Wake Up Washington! China Is Already Dumping the Dollar, Niall Ferguson Says
Posted Oct 20, 2009 11:52am EDT by Aaron Task in Newsmakers, CommoditiesWith about 1.7 trillion of dollar-denominated assets (mainly Treasuries) in its foreign currency reserves, conventional wisdom goes something like this: If China were to diversify away from the dollar or merely allow the renminbi to float, much less dump its greenbacks wholesale, they would be shooting themselves in the proverbial foot. That's both as investors and because further dollar weakness would put a damper on their biggest export market. (A weaker dollar makes foreign goods more expensive for Americans, meaning Chinese imports would become less "cheap.")
This view is "slightly naive," according to Ferguson, author of The Ascent of Money.
"The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.
China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."
Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.
"People in Washington rather assume because the U.S. consumer was so dominant there really isn't a substitute," Ferguson says. But China's trade surplus stood at $12.9 billion in September, down about 56% from a year earlier, according to MarketWatch.com.
From 1998-2007, China engaged in a form of vendor financing, lending money to the U.S. so the U.S. would buy Chinese goods, Ferguson explains. "I think that model has basically broken. They know it and have a new one in which we play a much less important role."
Editor's note: The accompanying video was taped last week at The Economist's Buttonwood Gathering. See below for additional coverage and stay tuned for further segments:
- Niall Ferguson: U.S. Empire in Decline, on Collision Course with China
- The Dollar Is Dying a Slow Death, says Niall 'Ascent of Money' Ferguson
- Current Market Boom "Can't Be Trusted," Robert Shiller Says
- Robert Shiller: We Could Have Another Housing Boom, But I Doubt It
- A 'Remarkable' Gathering: Soros and Roach and Geithner, Oh My!
- Exit Strategies: Worry More About Uncle Sam, Less About Uncle Ben
- "Astonishing" Big Banks Are Taking Taxpayer Money, Writing the Rules, Warren Says
- Elizabeth Warren: Housing Market Getting Worse, Not Better
- Wall St. Is Winning: Elizabeth Warren "Speechless" About Record Bonuses
71 Comments
Free Texas 2012 - Tuesday October 20, 2009 12:08PM EDT
It is interesting what is coming out of the Buttonwood Gathering. You can listen to the peons all day long and you can listen to the elites framing the discussion to their reference, but you can not deny that the U.S. is in a lot of trouble and a new day is coming. Fortunately, we have a few years to prepare. The prepared will survive, the unprepared will not. What is coming is a major shift in power, money and dominance.
Yahoo! Finance User - Tuesday October 20, 2009 12:08PM EDT
Key phrase is "Mr. and Mrs. Wong are buying CHINESE products". Americans buy CHINESE products. The unsustainability of the trade, financial and manufacturing system in the United States has made great wealth for the wealthy class but at the cost of gutting every aspect of the U.S. economy. The average American will be forced to eat scraps from the tables of the wealthy who made fortunes selling America.
franck s - Tuesday October 20, 2009 12:13PM EDT
Wow, Harvard prof with a Brit accent!!! Got to be truth in that. Truth is, nobody cares what China does. If US never bought another thing from the 'Peoples' Republic', they'd be better off.
Paul L - Tuesday October 20, 2009 12:14PM EDT
American people need to stop thinking that its the only big consumers of the world! China has over 2 billions people (not to mention India, 1.2 billions). Every empire falls!
Yahoo! Finance User - Tuesday October 20, 2009 12:15PM EDT
Ouch! This could leave a mark! WWIII coming soon!
yattaboy - Tuesday October 20, 2009 12:16PM EDT
It was indirect, but a friend of a friend who sits on a board in Hong Kong essentially said to my friend, "Look US, you know you're screwed. We know you're screwed. When are you going to do something about it??" 4 years ago, I didn't think either that China would fall on their own US-treasury buying sword, but faced with a choice of making one tough decision today vs. continued buying of US dollars in the future, I wouldn't bank on it anymore. Only 10% of China's population needs to reach middle class status to match the market of the US. That's actually easier said than done...I doubt it will be next year Ferguson says, but it's almost a moot point. It's going to happen in the medium term (within 5 years). And they don't like importing from other countries.
asdf - Tuesday October 20, 2009 12:22PM EDT
We are in deep do do with China;. All they have to do to ruin us is to stop reinvesting in our debt and then nationalize the US IC industry assets in their country. Almost all of the US IC industry production is done there.
james - Tuesday October 20, 2009 12:25PM EDT
Kudos Aaron...in my opinion, this series of interviews with Niall Ferguson may be Tech Ticker's best yet. Bravo.
Yahoo! Finance User - Tuesday October 20, 2009 12:28PM EDT
The UK has been the one buying our debt this year. How does that make you feel? The bankrupt financing the bankrupter.
Ralph B - Tuesday October 20, 2009 12:35PM EDT
China have a billion plus other problems, people who haven't caught on to the 21st century yet. The only problems the dollar have are the penny,nickel, dime, and how Americans are the underdog to wop-sided world trade. One more thing about China, Americans will soon get tired of their defective workmanship.
holy smokes - Tuesday October 20, 2009 12:42PM EDT
My air compressor failed today, do you know how hard it was to find a new unit made in America? I did find one and it is so much better than the Home Depot unit that it replaced. Do your best to find American products!!
Terry - Tuesday October 20, 2009 12:43PM EDT
And we still have the same cronies in Congress that got us into this mess. Congress does what it does to first get re-elected then help their bosses on Wall ST. Both parties are the same. No Senator should be in office more than 2 terms (12 years) and no Congressmen/women should be in office more than 3 terms (6 years) otherwise they do too much harm to us all. VOTE OUT the INCUMBENTS in 2010.
KIPW - Tuesday October 20, 2009 12:43PM EDT
Just as China is protectionist, the US should follow suite and build new plant and equipment for our own domestic consumption rather than just export. The US has always sold export of about 10% of the excess production but then we made own washers, dryers, tv's, electronics, jewelry, clothes bathroom/kitchen fixtures , etc. Unilateral self destruction is stupid from Washington down and we are allowing it to happen!
James - Tuesday October 20, 2009 12:49PM EDT
62 cents on the dollar is what large dollar variables are trading for overseas., I had originally thought the complete dollar devaluation would be in 2013, yet I now see other countries are getting a good head start by fleeing early at extreme discounts. The American citizen needs to immediately withdraw their dollars from from the commercial banks and redirect toward silver which will go to 35. I have been preaching it since $8.00 an ounce. American citizens must redirect their 401k and other retirement assets at commodities only as the dollar is all but worthless already. Get smart and Get out!
Yahoo! Finance User - Tuesday October 20, 2009 12:50PM EDT
Hey Jimmie, If you don't stop advertising your BP / VRNM crap then I will report you to Yahoo! Go post your junk somewhere else - understand?
san - Tuesday October 20, 2009 12:51PM EDT
US will have to raise interest rates, if they want to save the dollar, even if it's only 0.25pc a qtr it would keep the market happy. It's not a deflation situation otherwise the Chinese wouldn't be selling cash and buying hard assets they are hedge again inflation/printing money. Jim Rogers and Peter Schiff called this a year ago was anyone listening? The "America is Collapsing" video from Dec 2008 is a classic http://www.youtube.com/watch?v=cH1SJhEbBKU&feature=related
Yahoo! Finance User - Tuesday October 20, 2009 12:59PM EDT
so easily solved to pay back the debt.. just raise taxes on the rich.. barack hussein obama is so smart mmm mmm mmm problem will be solved.. don't forget the DOW is booming... the market is BOOMING... V shaped babee mmm mmm mmm... that's all that matters, the MARKET is booming.. who cares about jobs.. just play the market, it's boom time... see how it works? get in line for some obama STASH money soon to be coming to your cardboard box home.. mmm mmm mmm
Yahoo! Finance User - Tuesday October 20, 2009 01:03PM EDT
Why do you American's love Goldmen-Sack so much?
Yahoo! Finance User - Tuesday October 20, 2009 01:06PM EDT
If the Chineze take us over, at least I will get Chineze food more often- tho old lady dont like it none.
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Yahoo! Finance User - Tuesday October 20, 2009 12:03PM EDT
Aaron - GREAT Job getting very interesting interviews at the conference - sorry - "gathering". Yahoo Finance continues to be the stealth winner in the financial press game. You guys make the hubris and arrogance of CNBC even more apparent, to your maximal credit. Keep up the good work!