The tragedy of the dollar commons?
Brad Setser has the best blogging about the possibility of a drastic decline in the dollar’s value/the possibility of the dollar losing its reserve currency status. This Sunday stpry by James Brooke and Keith Bradsher in the New York Times contains a tidbit that worries me in particular: Mr. Asakawa, 46, is the top official ...
Brad Setser has the best blogging about the possibility of a drastic decline in the dollar's value/the possibility of the dollar losing its reserve currency status. This Sunday stpry by James Brooke and Keith Bradsher in the New York Times contains a tidbit that worries me in particular:
Brad Setser has the best blogging about the possibility of a drastic decline in the dollar’s value/the possibility of the dollar losing its reserve currency status. This Sunday stpry by James Brooke and Keith Bradsher in the New York Times contains a tidbit that worries me in particular:
Mr. Asakawa, 46, is the top official at the Finance Ministry here responsible for managing the largest portfolio of United States government securities in the world, worth a staggering $720 billion. As the dollar has slumped this fall, many investors have started to worry that Mr. Asakawa and his counterparts elsewhere in Asia will be tempted to pare their holdings, perhaps causing the currency to plunge much further and setting off a round of interest rate increases in the United States that could send the global economy into a tailspin. But Mr. Asakawa, at least for now, says that he intends to keep right on adding American holdings to Tokyo’s portfolio. “We’ve heard the rumors in the last few days that the Chinese guys, the Indian guys, the South African guys are diverting from dollars,” Mr. Asakawa said. “We have no plan at all to divert from our dollar-denominated assets.” Still, Mr. Asakawa admits that he has not been sleeping so well lately.
What bothers me is the concern by Japan that others might be tempted to dump their dollars while they still hold so many of them. The Japanese and Chinese central banks own an enormous part of these dollar reserves, and if they don’t move, a precipitous fall seems unlikely. However, both the Russians and the OPEC countries have started to diversify their holdings in favor of the Euro. If non-major Asian countries make the same move, the question for Japan and China is whether there is more to gain from moving first and getting a mediocre return on their dollar holdings or holding on and hoping the dollar slide won’t last longer. The temptation to unilaterally defect here is quite powerful. The beginning of the end of the Bretton Woods system was when the French announced in 1968 that they were going to convert their dollar holdings into gold. One wonders if OPEC and Russia represent a similar harbinger. Developing….
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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