Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
to put in my twopenn'orth on the reserve's issue of China and the EU/US. I think you have it seriously wrong.
  • if EU/US seriously crash, $/EURO is worth nothing any more, so China couldn't buy oil from it
  • reserves doesn't say anything about the state's fiscal health. China is not communist any more. The current account surplus (which by the way is in the same order as Germany's) is not state income. The enterprises change their earned Dollars to RMB, which means, the state has the Dollar, but the enterprise has the RMB. To prevent inflation from too much RMB, the Chinese state sterilises a part of it by selling RMB debt, that means the Chinese state has lots of Dollars and lots of RMB debt. As recently the Chinese reserves increased much much faster than the current account surplus mostly due to speculators betting on RMB appreciation, quite a lot of these RMB are owned by foreigners. Of course the Chinese state could disown foreigners owning enterprises and RMB in China, but that would give other countries the perfect opportunity to do the same with the bonds hold by the Chinese state. Currency depression is an export subsidy, and not a cheap one.
  • the currency depression in China has led to negative interest rates. This has led to massive malinvestment, certainly much bigger than e.g. currently in the US. As you can see there, if suddenly the hot stuff, e.g. low interest rates or a depressed currency, vanishes, the malinvestment will not be profitable any more. China is in a serious trap and won't come out of it without real trouble. You may google 'Michael Pettis' to find a blog, where he speaks about such stuff. So using the currency reserve will not only devalue the currency reserve, but as well impose serious trouble in the Chinese economy, even without peak-oil.

  • countries who suppose to be reserve currency countries don't build up reserves. It doesn't make sense. Therefore it is not useful to put in the US and probably not the Eurozone into your picture
  • everybody can want to be the reserve currency, but in the end you are dependent on the trust of others, that you will deliver some decent goods for the paper you sell them for goods. I can't give a formula, how to build trust, but certainly the $ and the Euro are the currencies in which reasonable agents would invest more than any others (or currently mostly the Euro, as the $ currently is mostly bought for political reasons, but when there is peak oil, maybe some countries will still be happy to be a friend of the guy with the biggest cannon)

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Thu May 29th, 2008 at 08:26:27 PM EST
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