>I have been saying for years to anybody who would
listen that
>the thig which props up the US economy is not our
military or
>our relative geographical advantages but the
superiority of the
>dollar-based financial system
...
>The challenge, I think, will come from the euro-based
system
>because it has fewer theoretical upper limits.
I always assumed a lot of the attraction of "dollar-based financial system" was a function of our military might and the sheer size of the market: the world bought into the giant market of Treasury instruments b/c we were conceived of as indispensible during the Cold War.
Our recent attempts at indispensibility fall far short. The Terror War is not a credible replacement for the twilight struggle against world communism. We're certainly seeing some diversification out of dollars precisely b/c we look like a bad bet now (though surely crap bond yields are a stronger motive). But I can't help but see the system preserved by virtue of its size. This time though its not its size relative to other attractive opportunities or its size as a guarantee against a menacing communism, but the fact that so much is invested here. I mean, even if Europe built a solid, frictionless system of unprecedented scale, how long would it take the rest of the world to unwind its treasury positions w/o suffering a massive haircut (is it possible that they could cause a run on the dollar?)?
Incidentally, I was struck by the readiness of the financial press to accuse China of the worst sorts of chicanery after the copper episode after their collective unwillingness to see the Chinese de-pegging as indicative as a vote against dollar reserves.
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