This is the Cato Daily Podcast for Thursday, April 9, 2009.

I'm Caleb Brown.

China is looking toward a new reserve currency, but what options exist that would be better than the good old US dollar

especially when politics don't tend to make for good monetary policy.

Jim Dorn, the Cato Institute's Vice President for Academic Affairs and editor of Cato Journal offers his thoughts.

Well they're worried about the future value of the dollar. They hold about $2 trillion worth of foreign exchange reserves and probably about $800 billion of that is in

U.S. Treasury debt.

And with the U.S. deficits and the debt probably growing by about another $10 trillion over the next decade, China's worried that the Federal

Reserve might be buying up some of this debt and resulting in higher inflation.

So China would take a huge capital loss on its dollar holdings.

Can't the Fed simply back so much of the new money it's printed back out of the economy?

Well it can, the problem is the Fed's balance sheet has more than doubled

over the last year and is expected to double again by next year. So that means

basically that the Fed is printing new high-powered or base money

to pay the US government bills in effect and also to buy these toxic assets.

And the Chinese are worried about the next decade or so in terms of rising prices in the United States,

higher interest rates and lower price of treasuries, which they hold a substantial amount of.

So I think that's China's main worry about the deficits and the position of the dollar in the next decade.

It's pretty clear that the U.S. is trying to avoid some pain by printing all this extra money

and giving it to banks, putting it out in the economy in the hopes of stabilizing the banking system.

What pain is China avoiding with its policies?

Well, China's got a very large stimulus package, about a half a trillion, which is a large percentage of China's GDP.

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