Shit Hits Fan: China To Give Up On Dollar, Invest In Yen, Euro

We've heard this was coming, but now the Washington Post reports that it's pretty much official:

China has resolved to shift some of its foreign exchange reserves -- now in excess of $800 billion -- away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday.

As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.

In sum: we're screwed.

China now boasts the world's second-largest cache of foreign exchange -- behind only Japan -- and is on pace to see its reserves climb past $1 trillion later this year. Even a slight diminishing of the dollar as a percentage of those holdings could exert significant pressure on the U.S. currency, many economists assert.

In recent years, the value of the dollar has been buoyed by major purchases of U.S. Treasury bills by Japan, China and oil-exporting countries -- a flow of capital that has kept interests rates relatively low in the United States and allowed Americans to keep spending even as debts mount. Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.

Remember in the 1980s when Japan used to lecture us on the need to reduce our deficit? Remember how they looked down on us for our profligate American ways? The word of the Japanese had an impact on our economy and foreign policy until their economic bubble burst around 1990. In many ways the Japanese have not recovered economically or internationally since that time. They were the ones who paid for most fo the first Gulf War. They have had hardly anything to do with the present war. While Japanese car companies are still beating the crap out of our car companies, Japan still has not reclaimed its previously vaunted position in the world. I can't help but feel that that is what will soon become of us now that all our debt will be devalued. Georgie may want to rattle his swords, but when we can't afford to build new swords, his new foreign policy-by-temper-tantrum will not have the same effectiveness.

 We've all read that manufacturing is leaving our country and along with it high paying jobs. But if that is the case, how in the world have we maintained a high standard of living? Cheap imports from China. But if the dollar is no longer as strong as it was, bye-bye cheap Chinese imports. The only bright lining in all this is Wal-Mart, with all their wall-to-wall Chinese made products, will be screwed. But since America is so dependent on the Wal-Marts of this country, we're all screwed.