China recently stated that they had too many dollars, and were looking to diversify. China has over half a trillion dollars, and if they start selling them, the dollar will drop. The announcement alone caused the dollar to drop in value.

If the dollar drops in value, China will get less from selling them. It doesn't make sense for China to announce something that will make the dollar drop. They should instead quietly sell dollars.

So why did they announce it? My theory is that they want the dollar to drop but are not intending to sell dollars for a few months, during which the dollar will recover.

If the dollar drops in value, it will take more dollars to buy things from China. Normally, that would mean that fewer goods would be bought. However, it's Christmas shopping season right now, and parents are going to buy toys for their kids no matter what. Furthermore, they're shopping around. That means retail stores (and online stores) have to keep prices low—they can't raise them to reflect the lower value of the dollar (and thus increased cost of goods). With prices staying low and Christmas coming up in a few weeks, demand will remain high.

Since the amount of goods bought will stay the same, the cost paid by retailers has gone up, and the price paid by consumers has stayed the same, the big winner in all of this is China, and the losers are the retailers. A portion of their profits will go to currency exchange. If I were playing the stock market, I'd short the retailers that sell lots of goods from China.

If I were in charge of the Chinese currency, I'd make some announcement right after Thanksgiving about my wanting to get rid of dollars, but I wouldn't actually sell any dollars. That way I can get even more dollars from all the Christmas shoppers than I normally would have. A few months later I'd quietly sell dollars. I certainly wouldn't announce that I'm going to sell dollars right before I sell them. That'd be dumb.

If you're in Second Life, you should check out Svarga [SLUrl]. It's an exotic jungle island with pathways, towers, musical instruments, isolation room, fountains, temple compound, secret underground chamber, lookout posts, a second island, and even its own ecosystem (birds, bees, flowers, plants, trees, weather). There are lots of details that are easily missed the first time through. When you get there, be sure to take the guided tour by sitting on the hovering tour chair.

Svarga is my favorite place in Second Life. Unfortunately it may not be around for much longer.

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