rocnob

Could China Crash the US Dollar on a Whim?

There is an error in your thinking. You state that "As the Dollar has depreciated over the last five years, many Central Banks have begun “diversifying” their forex reserves, switching from Dollar assets to assets denominated in other currencies."

In fact, the above statement is illogical. Central Banks as a whole cannot ALL get out of US dollars ... who would they sell them to. Sure, the Chinese central bank, for example, could exit the US dollar, but it would have to sell to the French or English, or Japanese. If it tried to sell to the US it would get US dollars back.

There are only three ways for for Foreign countries to exit US dollars. Number 1, by "ripping up" US dollars. Not going to happen. Second, by sending the US dollars back to the US as Foreign Aid. Also, not likely. The third, and only plausible option, is for those dollars to come back to the US in exchange for goods and services.

When this happens, and it must, the demand for US goods and services will exceed the ability the ability to produce, even at full capacity, and this will send Inflation skyrocketing. Remember, this will happen simultaneously as Foreigners stop buy US treasuries which will send yields higher.

Bottom line is that at some point in the future the trade imbalance MUST reverse, and that will mean sky high inflation in US which will create a real conundrum. The Federal Reserve will need to contract the monetary supply and depress expansion at the very time that the claims for US goods are increasing. Damn if you do and damned if you dont.