[…] the only stuff that is trusted these days is cash. One of the more remarkable developments last week was a fall in the rate of interest rate on 3-month Treasury bills to below 0 per cent. In other words, people are prepared to pay the US government to look after their money, such is their anxiety about savings held in the private sector.
In this new dollar stampede, there are plenty of casualties. It won’t be long before US exporters are complaining about unfair competition from abroad. Flows of private capital to emerging markets will dry up, because the desire for dollars creates a “home bias” for US banks. Emerging market currencies, in turn, will come under pressure, reducing the nest egg of dollar foreign exchange reserves which had been built up in earlier years.
Funnily enough, then, the world as a whole has decided to behave as the Chinese have been doing for the last decade or so. The Chinese have been accumulating dollars. Suddenly, everyone else also wants dollars.
In hindsight, rather than demanding the Chinese should have allowed the renminbi to appreciate, perhaps the Americans should, instead, have encouraged the Chinese to diversify their foreign assets. Rather than holding Treasuries, the Chinese might have been encouraged to buy US companies in need of a bit of tender loving care. But the opportunity to sell General Motors at a reasonable price is no longer there.