Accession Number:

ADA509681

Title:

Living in Interesting Times: The Economics of a Chinese Currency Attack

Descriptive Note:

Journal article

Corporate Author:

AIR FORCE SPACE DEVELOPMENT AND TEST WING KIRTLAND AFB NM

Personal Author(s):

Report Date:

2008-01-01

Pagination or Media Count:

23.0

Abstract:

Several large near-peer competitors, such as Russia and China, have amassed large levels of dollar-denominated foreign exchange reserves. This raises concern that these states could deliberately sell off assets to harm the dollars value. Currency attacks have historically been a part of warfare, and the recent advent of nation-states that have large reserves suggests it is possible that the United States could face this threat. Contemporary public discussion has often lacked depth and been at one of two extremes, either 1 China could destroy the United States if it chose to sell off its treasuries, or 2 the Chinese would lose so much they would never undertake a currency attack. This article takes a detailed look at Chinas economy to determine the plausibility of a currency attack against the United States. There are many conflating economic issues surrounding a currency attack, such as the perceived overvaluation of the dollar and its status as the worlds primary reserve currency. The analysis herein suggests that large dollar reserves are sufficient to enable a currency attack, independent of the valuation of the dollar or its status as the worlds reserve currency. The economic reasons for China to hold large foreign exchange reserves are central to our conclusions these are found to be independent of any malicious intent towards the U.S. dollar. The probability of a currency attack on the dollar is low but plausible, and if not effectively countered, potentially devastating. However, an attack is extremely improbable due to the costs an attacker would face, and it could be effectively countered with adequate preparations. Given the speed of modern financial markets, these preparations must be made in advance it is doubtful that an ad hoc response would be either a sufficient or an effective deterrent.

Subject Categories:

  • Economics and Cost Analysis
  • Government and Political Science

Distribution Statement:

APPROVED FOR PUBLIC RELEASE