Why China is Afraid of the U.S. Dollar

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CBNNews.com - A call by China this week for the world to consider dumping the dollar as its reserve currency is still sparking controversy.

The dollar has been so strong because America has been such a strong, dependable economic superpower.

Click the player to watch the report from CBN News Senior Washington Correspondent Paul Strand.

But as the U.S. begins to print hundreds of billions of extra dollars to get out of this recession, it does worry countries like China that have invested heavily in the dollar. They invested when the dollar was way up here, and if the dollar's value erodes, so does the value of China's investments.

As a gigantic exporter of cheap goods to America, China is worried Americans with devalued dollars will no longer be able to afford all that Chinese-made stuff.

Heather Boushey of the Center for American Progress explained China's concerns.

"As the dollar falls, our exports, the cars that we make, the steel we produce, all the things that we make, become cheaper. But that means that the things that we import from China become more expensive for U.S. consumers. And so China is very concerned about the relationship between the dollar and the yuan because they of course want the dollar to remain high so that their goods remain cheap here in the United States," she said.

But Dan Mitchell of the Cato Institute points out while China may be worrying about a cheap dollar, it's Americans who should be panicking.

"Well, I think the Chinese plan to create an international currency out of nothing is a bit fanciful. I don't think that's realistic. But I do think the mere fact that they're talking about it is in effect a referendum on the weakness of the American dollar," he said.

Mitchell also explained why the dollar is weak.

"Why is the American dollar weak? Because we've had easy money policy. In effect, we are stumbling our way back to the inflationary policies of the 1960s and 1970s. I thought we had learned the lesson that you don't try to create prosperity by printing money. And yet that's what happened under Bush, and now Obama's doing it even more," he said.

It was those policies of the 1960s and 70s that caused massive double-digit inflation and arguably the worst economic misery America suffered in at least the last 50 years.

*Originally aired March 27, 2009

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