The argument that China is worried that it will lose money on its dollar holding because of a fall in the value of the dollar implies that the Chinese are morons. There can be no doubt that the dollar will fall and that the Chinese will lose money on their dollar holdings. The only thing that keeps the dollar from falling now is the decision by the Chinese government to buys hundreds of billions of dollars a year. Of course China can keep the dollar from ever falling as long as it is prepared to buy ever more dollars, just as it could have kept shares of Pets.com at $100 if it continually bought more shares. (By the way, the dollar will fall because of our trade deficit, not the budget deficit. If we had the same trade deficit and the budget was in surplus by $1 trillion a year, the dollar would still fall.)
The only plausible story for China's buying of vast amounts of dollars is to support its export market to the United States. It could do much better investing its surplus in euros, yen, or almost any other currency in the world or just about any commodity. China knows it will take a bath, arguing otherwise is saying that the Chinese leadership is stupid. That view may be taken seriously by David Brooks, but it need not trouble serious people.
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