■"Currency on a Collision Course: For how much longer will America have the luxury of running its own independent monetary policy?," op-ed by Christopher Wood, Wall Street Journal, 29 November 2004, p. A14.

Fascinating analysis from Christopher Wood. Very clarifying:

The comments emanating from Washington since the November presidential election,and the related action in the foreign exchange markets, make it clear that "go for growth" will be the preferred Bush strategy. This is an administration driven by ideological supply-siders, not fiscal conservatives. Sure, this suggests a still wider current-account deficit. And America's current-account deficit already accounts for about 77% of the world's total current-account deficits. But this is a game of chicken which Asia will be expected to continue to finance.

So the dollar falls and everyone is expected to adjust in order to make our goods more attractiveóeveryone but fixed-to-the-dollar China, that is. So naturally there is more pressure from the U.S. on Beijing to float the yuan.

Here's where the op-ed really gets interesting:

But on this occasion, this writer is no longer quite so sure as before that the old rules apply. China is now at the center, not the periphery, or discussions about developments in the world economy. This massively higher profile on the global stage makes it much harder for the Chinese to ignore external pressures. Their problem is, however, if they only revalue by a marginal amountóby which is meant 10% or lessóthis is only likely further to fuel speculative pressures as the animal spirits move in for the kill.

All this raises another question: Is it really in America's interests to pressure China for a renminbi revalution? The U.S. trade deficit is clearly one motivating factor. The U.S. merchandise trade deficit rose by 19% year-on-year in the first nine months of this year to $470 billion, with China accounting for 24% of the total. But this is, to a certain extent, offset by China's trade deficit with other countries, notably those in Asia. Excluding America, China posted a trade deficit of $50 billion with the rest of the world and $62 billion with Asia alone in the first nine months of this year. But U.S. pressure also seems to be driven by other considerations, notably the ideological view that floating currencies are a good thing and that mercantilism is fundamentally unfair as well as misconceived in that it suppresses the purchasing power of Asian consumers.

If this is all true, it also ignores the point that America needs to be careful what it wishes for. The Bush administration can only "go for growth" on the assumption that Asia will keep financing its current-account deficit because it has no choice if the region's exporters want to maintain access to America's domestic markets. This is all very well. But America can only run such a strategy because the dollar holds the privileged position of being the world's reserve currency. The dollar paper standard, which has been in place since Richard Nixon broke the last link with gold in 1971, has meant that America has the luxury of running its own independent monetary policy. That happy situation can continue only for so long as the dollar decline remains gradual and does not turn into a rout.

America's dollar being the de facto reserve currency for the world is how we're able to afford the military we now possess, meaning the rest of the Core subsidizes our Leviathan to a tremendous degree. When we overspend on our budget, we expect the world to pick up the tab, so anything that threatens that implicit transaction threatens our ability to continue exporting security around the planet. Without it, we'll soon enough have a military like everyone else's: good for guarding the homeland and nothing else.

And something very large will be lost with thatÖ

Tom Toles for The Washington Post, Universal Press Syndicate (the little cartoonist who chirps up in the corner says "Öwhich brings us to your saving rate . . . .)