There is a bizarre theory circulating in high Washington circles, expressed today by Sebastian Mallaby in the Post, that China is concerned that the huge dollar reserves it holds will lose value. The reason this is bizarre is that the dollar already plunged in value over the years 2002-2008 and China just kept buying more dollars. The euro went from being worth just over 80 cents at the dollar peak in 2002 to over $1.60 at its trough early last year. Through this whole slide, China just kept buying up more dollars. Does anyone think that China's leaders did not notice the plunge in the value of the dollar? This is not exactly secret information. Obviously, China's central bank was fully aware that the dollar was losing value but was willing to buy dollars anyhow in order to preserve its export market in the United States. That is the reason that it continues to buy dollars even though its leaders know that they will lose money on the deal. The economy can easily afford the loss, contrary to the bizarre calculations Mallaby uses in his column. If it seems strange that elite Washington types can push economic views that are far removed from reality, remember, these people could not see an $8 trillion housing bubble.
--Dean Baker
