Bretton Woods Revisited

  • So one view of the financial system is that buying dollars is a bet on China. On the margin, China converts rich-world demand for consumer goods into emerging market demand for raw materials. China’s exports to the US are priced in dollars, and their imports tend to be, too, so China drove higher dollar demand even independent of their accumulation of reserves from 2000-2014.

“There are three scenarios that count for China:

Dominance: as China grows, it convinces more countries to settle trade in RMB instead of USD, and chips away at the dollar.

A steady state: China remains a large economic player, but doesn’t try to reach global hegemony.


“But interestingly enough, every one of these scenarios has a mostly dollar-positive outcome: generally, countries with an invest-and-export model are very reluctant to let other countries get involved in their currency, since they give up control over important policy levers. In the steady state, China keeps doing what it already does: buying dollar-denominated materials, selling dollar-denominated products, and further dollarizing global trade. And a collapse would be a macro shock—of the sort that makes every borrower panic and scramble for dollars.”