Living in Interesting Times: The Economics of a Chinese Currency Attack
Abstract
Several large near-peer competitors, such as Russia and China, have amassed large levels of dollar-denominated foreign exchange reserves. This raises concern that these states could deliberately sell off assets to harm the dollar's value. Currency attacks have historically been a part of warfare, and the recent advent of nation-states that have large reserves suggests it is possible that the United States could face this threat. Contemporary public discussion has often lacked depth and been at one of two extremes, either (1) China could destroy the United States if it chose to sell off its treasuries, or (2) the Chinese would lose so much they would never undertake a currency attack. This article takes a detailed look at China's economy to determine the plausibility of a currency attack against the United States. There are many conflating economic issues surrounding a currency attack, such as the perceived overvaluation of the dollar and its status as the world's primary reserve currency. The analysis herein suggests that large dollar reserves are sufficient to enable a currency attack, independent of the valuation of the dollar or its status as the world's reserve currency. The economic reasons for China to hold large foreign exchange reserves are central to our conclusions; these are found to be independent of any malicious intent towards the U.S. dollar. The probability of a currency attack on the dollar is low but plausible, and if not effectively countered, potentially devastating. However, an attack is extremely improbable due to the costs an attacker would face, and it could be effectively countered with adequate preparations. Given the speed of modern financial markets, these preparations must be made in advance; it is doubtful that an ad hoc response would be either a sufficient or an effective deterrent.
Document Details
- Document Type
- Technical Report
- Publication Date
- Jan 01, 2008
- Accession Number
- ADA509681
Entities
People
- Jeffrey E. Haymond