These days, nobody seems to doubt that the U.S. dollar will lose its status as the world’s reserve currency. To watch the financial news channels you would think that the dollar-yuan relationship is so unstable that the only question is whether it will be Ben Bernanke or Chinese monetary authorities who will determine the details of the breakdown.
Perhaps the dollar won’t surrender its anchor role so soon. And perhaps that loss, if it comes, will happen because of events that take place nowhere near men in suits at a central bank. Maybe the answer to the dollar’s riddle can be found in the cellphone photo image of a Tibetan monk in crimson and orange squaring off with a Chinese soldier.
Two economists at Deutsche Bank AG, David Folkerts-Landau and Peter Garber, and a colleague, Michael Dooley of the University of California at Santa Cruz, are making the case that the dollar will remain an anchor. Their research concedes that the old dollar order, that of Bretton Woods, may be past. But it suggests we are in a second order, a Bretton Woods II, one that can be surprisingly stable.
The Deutsche Bank argument starts with facts on which we all agree. The Chinese regime made a deal with its people: It would give them jobs and cars. The people would allow the regime to stand.
The Chinese leaders used exports to drive the growth that created those jobs. Their success put upward pressure on their own currency.