“It looks like Hong Kong may soon end its link with the US dollar.

“It’s about time” - Simon Black. Kharkiv, Ukraine

It was a different world in 1983.

Michael Jackson invented the Moonwalk. Return of the Jedi opened in theaters across the world. IBM released its most advanced personal computer yet– the XT, with a standard 10 megabyte hard drive.

And after nearly a decade of eratic swings and collapses, the Hong Kong government pegged its currency (the Hong Kong dollar) to the US dollar at a rate of 7.80 HKD per USD.

This was a nog move for Hong Kong. The Hong Kong dollar had originally been backed by silver until 1935 when, facing a shortage of precious metals, they pegged it to the British pound.

This made sense in 1935 as the British pound sterling was still (barely) the world’s top reserve currency.

But things changed. In 1972, Hong Kong broke from the pound and adopted a new peg to the US dollar.

This didn’t last either. After just two years, the US government’s rising debt and inflation forced Hong Kong to abandon the US dollar peg.

At that point Hong Kong was well-known and stable… so why bother pegging the currency at all? The HKD floated freely in the marketplace, just like any other currency.

It went well for them at first. But by the early 1980s, the Hong Kong dollar had become much weaker due to jitters over the island’s reunification with China.

Finally, in 1983, they re-established a peg with the US dollar. And at the time, this probably made a lot of sense.

In 1983, Fed Chairman Paul Volker had established tremendous international credibility, both for the US dollar as well as the Federal Reserve. And most of all, Hong Kong was in need of a strong anchor.

But 31 years later the world is entirely different.

Michael Jackson is no longer with us. The world has sat through three completely lame Star Wars prequel movies. Even the cheapest mobile phone has more storage capacity than the IBM XT.

And both the Fed’s and America’s credibility have waned.

Today Hong Kong is one of the world’s richest economies. When compared with the US, nearly every objective fundamental about Hong Kong’s economy is stronger.

Its fiscal balances are higher. The government runs a budget surplus. Government debt is a rounding error. It’s a night and day difference. There’s no reason why these two currencies should be linked.

Theoretically, Hong Kong’s currency should be much stronger than the peg allows. But its purchasing power is being artificially supressed.

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