PARIS (Reuters) - Accumulation of dollar reserves by some Asian countries could spark a systemic foreign exchange crisis, the chief economist of the World Bank said in an interview to be published on Thursday.
Francois Bourguignon told the Les Echos newspaper it was too early to talk of a speculative bubble but that the United States had to cut its deficits to head off a crisis. The paper released the text of the interview ahead of publication.
"For the moment I would not speak of a speculative bubble but of the danger of a systemic crisis linked to the accumulation of foreign exchange reserves," Bourguignon told the paper.
"Some countries, particularly Asian ones, have no interest in the parities of major currencies being modified. As a result, they are financing the enormous American current account deficit.
"Today, the danger is that some dealers are starting to think they must change the rules of the game, play dollar depreciation and move toward the yen and the euro. That would confront us with a real systemic risk.
(HT gwhayduke over at Kos)
This should be read synoptically with the gyrations with Congress, Treasury Secretary John Snow, and China.
Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., introduced an amendment Wednesday to a State Department appropriations bill that would slap a 27.5% tariff on Chinese imports if China doesn't revalue its currency within 180 days.
Lawmakers have expressed growing frustration over China's refusal to weaken the yuan's peg to the dollar. They contend that the tie has left the yuan significantly undervalued, putting U.S. manufacturers and workers at a disadvantage and contributing to the sharp rise in China's trade surplus with the United States.
"We think there is no more broad-based and serious violation of the spirit and rules of international trade than a purposefully undervalued currency," Schumer said in a statement. "When those conditions are violated, the system must respond or else the actions of one nation will upset the whole global balance."
On the House side, Reps. Duncan Hunter, R-Calif., and Tim Ryan, D-Ohio, are scheduled Thursday to unveil legislation that supporters said will use existing trade laws, in compliance with the World Trade Organization, to address China's currency peg. Critics of the Schumer proposal have argued that his approach would violate WTO rules.
This could make for some interesting consequences, to be sure, among them a) increased inflation in the US, b) your Chinese neighbors, friends and colleagues suddenly becoming a lot wealthier than you are (unless you happen to have Chinese folks in your family, as I do), and c) increased interest rates, because in yuan, we're in effect defaulting a bit on our debt obligations.
And now link 3
Treasury Secretary John Snow urged lawmakers Thursday to let financial diplomacy take its course in an effort to get China to ease the peg between its currency and the dollar...
In a move that caught the attention of the White House and top trade lawmakers, the Senate voted overwhelmingly Wednesday to defeat a procedural motion that would have set aside the Schumer-Graham amendment. A final vote on the language was delayed.
Snow, testifying at a Senate Banking Committee hearing on government-sponsored housing enterprises Freddie Mac and Fannie Mae, said the U.S. trade deficit with China is "far larger than we'd like to see it," but argued that financial diplomacy with Beijing, not measures like Schumer's and Graham's, will prove effective.
"We're all waiting, Mr. Secretary," Schumer responded.
Some lawmakers contend that the peg has left the yuan significantly undervalued, putting U.S. manufacturers and workers at a disadvantage and contributing to the sharp rise in China's trade surplus with the U.S.
These people may think they're bashing China to be popular, but they'll only be bashing themselves. China does subsidize its economy by keeping the yuan undervalued, this has to be looked at carefully, and remember, these are the same folks that did the Terri Schiavo fiasco. Or at least less than a quorum of 'em did, and the rest went on vacation.
Anyway, the international financial system's really brittle, and isn't very tolerant of grandstanding at the moment.