A Fantasy Conversation Between Greenspan and Zhou

I dreamed that Greenspan and Zhou Xiaochuan, China's central bank governor, had a conversation -- must have been a couple of years ago. In my dream, Zhou called Greenspan and said something like, "Alan, as you know, we've been pegging to your dollar for a while now because we like the way you do business. But don't you think you've loosened up the money machine enough by now? I know credit has succeeded in keeping your economy from tanking after the dot-com bubble and 9/11, and thanks to you we've been able to give a great boost to Chinese expansion. And neither of us will forget that this has helped you keep your U.S. CPI so low that your money expansion can proceed virtually unnoticed.



"But now your dollar is quite weak, and we think we need to unpeg our currency. We've got to stop accumulating dollars and your low-interest Treasuries. This pegging is causing some speculative havoc in our real estate and other capital markets. What do you think?"

Greenspan replied, "Well, if you wouldn't mind, Xiaochuan, as you can see we've begun our rate hikes now that the economy is coming out of the doldrums, and we believe that things should be up and running nicely within a year or so. Perhaps you could hold off a few more months. You'll see, the dollar will start its comeback soon and you can start unpegging nice and easy."

"Okay. Sounds like a plan."

And you know what? In my dream they succeed. If it were true... Hey, you know, so far reality doesn't seem too far off? This unpegging is going quite smoothly. I wonder if this is the first time in history a strong currency has been pegged to a weaker one. Usually, it's the other way around, and it all comes crashing down when the weaker nation gets caught in a credit squeeze.

Hmm. Maybe I can just keep on dreaming that the U.S. doesn't fall into one of those.