Sunday, December 14, 2008

Competitive Devaluation: More Support for the Dollar

Here is more evidence that concerns about immediate dollar devaluation are misplaced.

Mish's Global Economic Trend Analysis has a nice collection of news clips about the economic slowdown in China and the Chinese response to expand their money supply. His post China To Print Money To Combat Deep Slowdown also puts China's monetary policy in the context of the ongoing global game of "beggar thy neighbor", where all parties are pursuing policies of competitive devaluation and trade protection:

. . . the US seems hell bent on destroying the dollar to boost exports and/or to get consumers spending again, and Japan has threatened to get in on the act by selling Yen and buying dollars. Brown is certainly hellbent on destroying the British Pound.

In such a dynamic, our trading partners hardly want to see the dollar crater:

With everyone in on the act, or threatening to get there, the dollar is far more likely to enter a trading range than to crash.

Mish also mentions that this kind of deflationary environment is supportive of an asset that I like at this time, which is gold.