OPEC, Bernanke, and China

The quantitative easing policies put in place by FRB chair Ben Bernanke are devaluing the dollar against other currencies and are intended to do so.  Oil exporting countries receive payment in dollars, so the FRB policy is damaging to the oil exporters.

One of the objectives of the dollar devaluation is to get China to drop its peg of the yuan to the dollar.  Thus far China has dismissed any possibility of eliminating its peg.

If OPEC countries felt that the dollar devaluation were becoming too damaging, there is a tactic they could implement which, while radical would likely be effective in persuading China to drop the peg.

The tactic would be to embargo oil exports to China, with a statement that the embargo would continue until the peg was eliminated.  This would instantly create serious problems for Chinese economy.  I believe that the Chinese government would yield rather quickly, as their primary goal is self preservation.  The turmoil created by the embargo of the US in the early 1970’s would seem minor relative to the repercussions within China of an embargo now.


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