By Arnold Kling
Brad DeLong continues to predict a crash for the dollar.
Japan, China, and other export-oriented East Asian economies are indeed eager to keep the value of the dollar relatively high, and their central banks have piled up close to $2 trillion in dollar-denominated assets. China’s government regards the threat of capital losses on its dollar-denominated securities as less important than the need to maintain near-full employment in coastal manufacturing cities like Shanghai. After all, the ruling communist oligarchs have grown accustomed to a comfortable lifestyle. The last thing they want is mass unemployment and urban unrest to call their positions into question.
But if international currency speculators get the scent of near-inevitable profits from an ongoing dollar decline in their nostrils, all Asian central banks together will not be able to keep the dollar high.
I remember people attributing to Milton Friedman “Bet against the central bank,” meaning that speculators would do well to be skeptical that currency manipulation by central banks will be successful. Of course, he would say that printing more money could depreciate a currency, but he did not believe in so-called sterilized intervention. (Anyone have a source for the Friedman quote, or am I passing on an urban legend?)
For Discussion. Is foreign central bank intervention really an important factor in maintaining the high value of the dollar?