If China Pulls Away From the Dollar, What Happens to the U.S. Economy?

BY busadmin  June 10, 2009 at 12:13 PM EDT

yuan; via Flickr

Question: There’s been speculation that China will lessen its ties to the U.S. dollar and U.S. debt. Some countries would also like oil to be priced in something other than dollars. If these events were to happen, what might be the effects on the U.S. economy and the U.S. stock market? (And what would U.S. investors buy to protect themselves?)

Paul Solman: China HAS been lessening its ties with the dollar. It just announced a trade deal with Brazil in which the two currencies to be used are Chinese yuan and Brazilian reals. No dollars at all.

China also has expressed interest in investing in SDRs – special drawing rights – which constitute, in effect, a world currency issued by the IMF. Russia has just said it will buy $10 billion worth of bonds, denominated in SDRs.

Hard to say what the effects of a decline in the dollar’s preeminence will be. (This is economics, after all, not Newtonian physics.) On the one hand, if the dollar becomes just another currency, the demand for it will presumably go down, which should (all else equal) hurt its value. On the other hand, as George Soros pointed out in an interview recently, maybe a humbled currency will lead to humbled Americans, who may finally have to live within their means.

As to where else to invest, sheesh. Last I looked, I myself had 17 percent of the family financial assets (almost all in retirement funds) in non-dollar-denominated stocks (a global stock fund) and 11 percent in non-dollar-denominated bonds (global bond fund). The idea was to hedge against the dollar. I’m not advising this, mind you. Just being honest about what decision I’ve come to for myself.