Andy Xie: "If China loses faith the dollar will collapse"

From Naked Capitalism
It's easy for Americans to pooh-pooh bearish talk about the dollar. Yet the sterling was once the reserve currency, and has fallen, what, by 80% since it lost its standing.

With increasingly dubious accounting and lax enforcement, the US capital markets no longer stand out by virtue of being better regulated. Yes, they still may be deeper and more liquid. But overseas buyers have to look hard at foreign exchange risk. The direction for the dollar in the long term is certain to be down. Overextended debtors trash their currencies (see the Great Depression, the Nordic and Swedish banking crises, and the Asian crisis for a few of many examples).

What is interesting about the Xie piece is that even the stalwart Chinese retail investor has become leery of the dollar. Despite th logic of "oh if you sell, you only hurt yourself", the flip side is if you become certain you are indeed holding a depreciating asset, it makes sense to exit. You want to be early, not late, out.

And that logic, if it starts to take hold, in classic run on the bank fashion, could lead to a disorderly fall in the dollar. It isn't clear what the trigger might be, but Bob Shiller contends that sudden flights from markets don't necessarily require an event to kick them off. And given that Willem Buiter, who though fond of colorful writing, is hardly an extremist, foresees a collapse in dollar assets if the US fails to contain its fiscal deficit, talk of a dollar plunge isn't a a radical view.