Citibank is only one of many banks which could lend. I have no problem with Deutsche Bank or HSBC or UBS being involved in the US housing market – and losing billions. Let’s give the Chinese a shot. Let a thousand flowers bloom.

I see in the Financial Times today that Brazil and China are working to put in place the exclusion of the dollar in their bilateral trade. It seems BRIC isn’t waiting around to see what happens to the dollar. Evidently they want to be prepared for when it loses its international appeal. And by making such arrangements they are undermining its use and appeal. If this works for them, and we’ll know pretty soon (within months) then won’t that tend to open the floodgates as other trade partners follow suit?

If QE doesn’t work I don’t think the results are unpredictable at all. Neither do China’s leaders think it’s unpredictable. They’ve warned Treasuries and the dollar aren’t safe going forward. How much more clear can it be???

Evidently, the rest of the world doesn’t even come close to subscribing to the idea you put forth that the U.S. is so powerful that it can make things turn out right for itself even when things aren’t going well. The world’s major players are making preparations for when things don’t turn out so well for the dollar.

Twofish said, “But the US remains the political and economic center of the world, and if the US collapses, then everything else is going to fall apart.”

The U.S. does NOT remain the political and economic center of the world. It’s position is being greatly undermined by multiple developments, not the least of which come out of this crisis. Where is the wealth centered now? Asia. Who’s listening to and obeying the U.S. political/economic/financial agenda? Only a handful of lesser powers. The fact that the dollar is still the international reserve currency is cold comfort for the U.S. when you consider the moves afoot to marginalize it.

You keep talking about some rising powers like China “destroying the U.S.”. I don’t know where that statement comes from. They don’t have to, they’re not interested in doing so – but the U.S. is shooting itself in the foot in some important ways, leaving opportunity for rising powers to fill more and more of the global role that the U.S. has traditionally filled by itself.

WStrupe, the issue is not to devalue the dollar by shooting all of us in the head but to let the market forces do the requisite adjustment. A country with so many resources and idle work force cannot run a large trade deficit unless market forces have been suspended.

It’s not obvious at all. First of all, that’s assuming that QE doesn’t work, and second if it really doesn’t work, then then what happens next becomes rather unpredictable.

The problem with the “dollar collapse” scenario is that people been predicting the death of the dollar and the collapse of the US for decades, and if you want to do it again, you have to explain why you are right this time and everyone else got it wrong.

Looking at the past predictions of American doom, the mistake that people make is that they consistently underestimate how rapidly the US can change and how slowly any decline is likely to be. You can argue that if the US continues these obviously stupid policies the US is doomed, but that underestimates how quickly the US can stop doing stupid things, and how slowly it take a major power to decline.

One way of thinking about it is that the US has just had one of the most incompetent set of political and economic leaders running the country, and there isn’t blood in the streets. Maybe Obama will fix things. If he doesn’t, then he will get voted out and someone else with new and different policies will do something different.

WStroupe: I find it incredible that this view is still held, as if virtually all global trade is dependent upon the U.S. and the dollar.

Pretty much all financial flows involve the dollar directly or indirectly at some point. Even if the actual transaction doesn’t involve dollars, it likely goes through a bank that would be unable to operate if the dollar were to collapse.

WStroupe: By “decouple” I mean decouple from the traditional driver, the U.S., meaning that China and the world at large increase trade amongst themselves and thereby rely upon the U.S. market for a smaller and smaller percentage of their total trade.

Which still doesn’t allow you to get past the dollar. Even if the goods don’t even touch the United States, the odds are that the funds for those goods are going to pass through a major money center, at which point the dollar is going to be indirectly or directly involved.

China doesn’t do a particularly large amount of trade with the UK, but that doesn’t mean that it wouldn’t be in a heap of trouble if London disintegrated. Also, just because the United States isn’t involved in a transaction doesn’t mean that the dollar isn’t involved. The dollar is the standard unit for business just like English is the standard language. If you have two random countries they are likely to try to settle things in dollars for lack of any alternatives.

Yes, China is trying to set up currency swaps, but these are only in place for a few countries, and that leaves all of the other ones.

WStroupe: The fact is that since this crisis has hit the U.S., trade volumes have plummeted because the ‘conspicuous consumption’ of the U.S. consumer is being hit hard

They’ve gone down, but they’ve stabilized. Also I don’t think it has much with the US consumer getting hit hard, but rather that trade related credit dried up. Trade stopped dead right after the Lehman crisis but before unemployment numbers started shooting up. It’s hard to see how the US consumer running out of cash would reduce China-Saudi trade as quickly as it did.

WStroupe: Unless you think the U.S. economy is going to become vibrant again in a few months. I don’t think anyone really believes that their trade fortunes lie with the U.S. any longer.

But that is rather irrelevant for the use of the dollar as a standard currency. People used the Spanish dollar for centuries after Spain was no longer a world power, simply because there as so much of it floating around.

WStroupe: A new global trade order is emerging, one that isn’t any longer U.S.-centric. To deny this is to deny the reality that is already unfolding.

But the US remains the political and economic center of the world, and if the US collapses, then everything else is going to fall apart. Barring some massive global upheaval, it’s likely that China and India will “buy in” and “buy up” the United States rather than displace it.

London is a world financial center because of the British Empire and it remains and will remain a financial center long after the the British Empire fell. It so happens that the biggest banks in London are American.

Similarly, China, India and the Middle East are likely to assert their power on the global stage, not by destroying the US, but by “buying in.” If you talk a walk north from Grand Central in 2050, I wouldn’t be surprised if the big skyscrapers are the North American operations of Chinese, Indian, and Arab banks.

If a dollar collapse would bless the U.S. even though it has cursed every other nation it has happened to in history, then by all means, why don’t we just precipitate a dollar crisis and get on with the blessings?

Yup. I think we get BRIC-ABRACS. Or something like hat. BRIC plus ASEAN Plus 3, or however many. Money will be used to buy things. Reserves will be with trading partner currencies. Excess reserves will need to be diversified.

Unfortunately, the US will get to keep most of OPEC/Israel and the high maintenance cost.

Good question. But, first, the dollar would lose its value compared to what? Other currencies? Commodities? Let us say against the currencies of trading partners.

If something so unlikely as a 70% devaluation were to happen to the US dollar, then the US would run a trade surplus, unemployment would drop to 4%, and the US government budget would probably be balanced. Trip to San Tropez would be three times more expensive and clothes hangers would be manufactured domestically. Within months, the dollar would start appreciating.