Paulson's Real Job

According to today’s Financial Times online, my recent blog about Hank Paulson contributed to the dollar’s recent rout. Much as I’d like to believe my modest blog can move markets, I doubt it. The reality is this. Paulson was brought in to accomplish one big thing. That’s to oversee an orderly decline in the value of the dollar. By “orderly” I mean gradual. The Chinese and Japanese central banks don’t want a run on the dollar because they have too many of them right now, and would lose their shirts. But they understand, as does the Bush administration, that the huge global imbalances represented by their giant export surpluses and our giant debts are already causing global investors to diversify their currency holdings out of dollars and into euros and other denominations.

It’s only a matter of time before the dollar ceases to be the only “reserve” currency in which global transactions are undertaken, and before investors move substantially out of dollars. So the Chinese and the Japanese would like the dollar decline to be gradual, so they can move out as well without suffering major losses. Paulson understands the Chinese economy and has good contacts with top-ranking Chinese policy makers. He’s the ideal man for the job. But will global investors give him time? Or will they turn into speculators, and rush to the door too quickly for the Chinese, Japanese, and the U.S. to keep the dollar relatively strong in the interim? That’s the big question.