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Payback from China continues

The head of China's central bank is now calling for the dollar to be dethroned as the world's reserve currency and replaced by a new IMF-controlled benchmark.

I doubt anything will come of this right away, and if I were the Chinese I might not even want immediate adoption of this proposal (which could devalue their vast dollar holdings), but this may well be the way we are headed. The U.S. has simply been over-exploiting the economic value of being the reserve currency, and at some point the golden calf perishes, so to speak.

My guess is that the Chinese are trying to scare us into taking more responsible measures so as to head off this kind of scenario. It's a tricky game, since until they've lowered their dollar holdings they don't really want to scare the world's investors more than they scare us - it has to be the other way around for them to benefit. But the fact that they are doing this shows how concerned they understandably are. And I don't know how responsive political constraints will permit U.S. policymakers to be, though I don't doubt that high-up Obama Administration officials have heard and understood the message.

Full post as published by Start Making Sense on March 24, 2009 (boomark / email).