China's Currency Consequences

http://www.forbes.com/2003/07/07/cz_rm_0707china.html

HONG KONG - Do Americans want Dell Computer's laptops or Nike's shoes to become more expensive? And what would happen to those companies' earnings if prices were forced up?

All the talk--most notably from Treasury Secretary John Snow--of the need for China to allow its currency to rise against the U.S. dollar could have unintended consequences. It could crimp earnings of U.S. companies making products in China or buying cheap components there. In a worst-case scenario, it could trigger a reverse Asia crisis, with currency speculators betting that China's renminbi and other Asian currencies would rise, not betting they would crash.

"We could face a mirror-image Asian Financial Crisis," says Ronald McKinnon, a professor of economics at Stanford University. The root of the problem is the massive U.S. current account deficit, which reached a record $480 billion at the end of last year and is expected to continue to rise. One-half of it is now financed through short-term "hot money," says UBS economist Jonathan Anderson. While the euro and British pound have risen recently against the dollar in response, Asian currencies are acting more like a dollar bloc, Anderson says.

...more...

understand why this administration is pushing the cheap dollar. The article only hints at some of the potential problems this strategy can cause. Another Depression is one scenario. Already, Argentina had to unlink its currency from the dollar to avoid going completely under.

It won't significantly increase our exports or reduce our imports, but it will likely spur other counties to peg their currencies to the Euro or yen. There is already a movement on to convert oil dollars to oil euros, and the dollar is increasingly seen as unstable, due to the current account deficit and the national debt.

The only rationale I can come up with is that maybe someone in DC sees the whole thing falling apart in a doomsday scenario and this is plugging the dike for a while.

More likely, though, they just don't know what the hell they're doing.

:hurts:

I can think of three reasons that some evil people might want to devalue our dollar.

1. Try to make inflation to make the deficit smaller on a relative scale.

2. Cheap dollar to promote U.S. exports

3. Try to push Europe further into recession by harming Europe's ability to export high-ticket items. Mercedes, BMW's, French wines etc. get more expensive with a cheap dollar/strong Euro.

The talking down of the dollar is is one of the things that really torques me!

:nuke: (I've never used that in a post before!)

Another, indirect, reason is to make some short term profits in the currency markets

A cheaper dollar means more expensive components for American systems manufacturers....so the net export sales advantage will be offset by these higher costs.

On the other hand, given the weakness of this economy and this administration's singular inability to do anything but deliver taxcut's to the wealthy, there is no apparent effort by the government to get pro-active in jump-starting it. At some point, China has to consider protecting its own currency...it does have the largest potential market with pretty awesome growth propsects in the 21st century.

You see, for quite a number of years, the U.S. has imported more than it has exported.

If the NeoCons want to shift the balance of trade, then one way of doing it is to cheapen the U.S. dollar so that the U.S. imports fewer goods from Japan and from Europe, while exporting more goods worldwide.

I am more concerned about the other two possible reasons that Treas. Sec. Snow is trying to devalue the dollar:

1) deficit 'devaluation'
2) pushing Europe into recession.

Here is how 1) deficit 'devaluation' might work: Let's say that the gov't (or bond bankers who are collaborating with the Repukes) has a certain amount invested in Euros at Time A. The deficit is a very large amount, as we know, all of it made under the current (mis*)administration. If the Euro increases in value, investments denominated in Euros will increase in value relative to the amount of the Federal deficit, which is in dollars. Pay off the deficit with the Euro accounts that have increased in value, and it's cheaper....

Here is how 2) 'pushing Europe into recession' works. If the Euro increases in value, things like Mercedes and BMW's become more expensive, and fewer Americans buy them. Also, fewer Latin Americans buy them, since Latin American currencies are usually dollar-linked. If Europe exports less, its auto mfg's, cheese makers, wineries etc. make less money, and this deepens the current recession in Europe.

How's that for analysis?

Not too bad for someone who lives so. of the Mason-Dixon, eh? (wink, wink...I see your avatar)

Pretty good analysis, too.

But would the Republicans play politics with our monetary policy? I'm shocked!

is a veritable straw man. What isn't being reported are increases in employment and small growth rates in the range of.1-.3%. European stock markets and currency markets are gaining on their post 11-9 losses. Hardly a recession, like the kind America is sinking under. Furthermore, analysis tends to discount the social value of a working "state-assistance" program to the unemployed which helps get a percentage of workers back into the market, maintaining trust in the system generally and inspiring workers to move off of benefits for the sake of higher income.

not you 'Corner, but them if they're trying this crap.

Cheapening the dollar can't do much for the current account balance. Too much of what we import is stuff like oil and gas, and we don't have one VCR, DVD, or camera factory here. We don't even make many memory chips domestically. I noted that my new Nikon camera was made in Malaysia, btw. Then there's the question of multinationals and worldwide investment, which isn't in the trade balance, but is in the current account balance. When a currency rises, money often tends to be invested there for reasons other than speculation.

I don't buy the deficit devaluation idea. Most US debt is in dollars already, and foreign buyers of treasuries can get a deal buying cheap dollar based treasuries in the short term, but get screwed when it goes back up again. They may be trying to make up for the interest differentials by cheapening the dollar so the yields to foreign investors will be higher here, but that's short term only and sounds scary as hell. At any rate, we need about $500 million in foreign investment here every DAY, and anything to get them to buy treasuries, golf courses, or whatever...

Europe exports a lot of stuff here, but nothing that's critical to their existence, unlike China or the Middle East, or even Mexico. France's US exports have dropped by over third, but it's hurting only some sectors and not the economy as a whole. Europe has been making a lot of its serious export money in places like the Middle East. Add up the total European population and GDP and it's a lot more than ours-- and they are much more self reliant than we are without needing all that much in the way of imports if they don't want them.

Before looking at hard numbers, I'd guess that Canada would be hit the hardest by a strong dollar. They're our largest trading partner.

You're absolutely correct about the potential strength of China's economy.

It's easier to pay off the current debt with cheap dollars. If you mortgaged a home for 30 years in 1980, the inflation in currency would make it very easy to pay off today. Home values have skyrocketed...Take home pay is up 100% above where it was 20 years ago, not because real wages are higher, but because INFLATION has eroded the purchasing power of the dollar. Get in debt..and rather than cutting back and paying their way out of it...the government just inflates their way out of it...paying it off with worthless dollars. Looks good on paper...but hurts consumers in the form of inflation and higher prices on everything

As I recall, devaluation is a prescription to cure rampant inflation--or at least to correct for it. What on earth is the point of pushing it when the danger of deflation looms?

I agree with you. They don't know what the hell they are doing.

Think about it. They had more than a year to prepare for Iraq. They never even thought through the simple, elementary basics of handling the aftermath.

We have a group of extreme lightweights in way, way over their head. Bluster and bravado are the only thing they excell at.

No, devaluation is what happens when there is rampant inflation.

Revaluation is what countries like Mexico do in the case of rampant inflation or devaluation against another currency. Several years ago, Mexico had a bad spell of inflation, while the dollar remained relatively stable. In other words, the peso became devalued relative to the U.S. dollar.

In response, Mexico revalued its Peso. They declared that the new Peso was worth something like 10 of the old pesos.

Brazil and Argentina both experienced extreme devaluations of their currency a few years ago. The underlying reason for the fall in currency was extremely high governmental indebtedness, typically to the IMF.

(My Spanish sucks.)

I think you're confusing countries with fixed exchange rates vs. those who float their currencies, as Mexico decided to do after the Peso crisis.

The term "Devaluation" is still used (perhaps, as you say, technically incorrectly) to indicate the formal action a government takes to revalue its devalued (by inflation) currency.

For example, here are some articles about the Peso crisis:

"The project came to a sudden stop when Dosal's company was hit by one of the worst economic crises in Mexican history, which began with the Mexican peso's devaluation on Dec. 29, 1994.

The model of the plant he'd hoped to build reminds Dosal of the havoc a currency devaluation can bring.

Exporters are ultimately aided by a devaluation because it makes products cheaper for buyers in other countries."

http://www.mexico-info.com/leadstories/chron/devaluation.htm

Also:

"The Mexican peso began to stabilize yesterday, but investors were still reeling from huge losses resulting from the surprise devaluation of Mexico's currency earlier in the week."

http://www.washingtonpost.com/wp-srv/inatl/longterm/mexico/stories/941224.htm

And finally:

"...ever since President Nixon surprised the world -- as Mexico did December 20-21 -- with a devaluation of the U.S. dollar, only the second currency devaluation in American history. The first was the dollar devaluation of 1934 by President Roosevelt, when we defaulted on two-thirds of our national debt during the Great Depression by cutting the dollar's gold value by that amount..."

http://www.polyconomics.com/searchbase/g2-10-95.htm

yes i saw just a few days ago where he 'snapped' at journalists and with his best puffed up texas profile, acomplete with finger poking empty air..declaired ..'I suport a strong dollar and always have, i know the europeans have a differant stand on interest rates but we see things diferantly...' When they came out with the Globalasation',buz word for destroy the middle class and the nations tax base..BUT MAKE A LOT OF MONEY!!! i knew the end was near.. they made us totally dependant on unstable Fascist dictatorships, and other unstable institutions, read Sun Tzu's the Art of War..then buy chinese imports, our most favoured nation that has perpatrated genocide against the Tibetan people since 1959 with the resultant murder thru executions, forced labor death camps, deliberate starvation programs, destruction of housing in deadly winter.. my wife has worked in the garment industry for 25 and wa making $65,000 a year, i am disabled with no income at all. for years the industry called her every month and asked her is she wanted another job, in 4 months every job in her career line was gone to chima...there are no jobs to find...whats going on?

...maybe it will mean that Nike and Dell will bring their factories back to the good ol' US of A!

After all, if Chinese components become to expensive, then American industry will start looking for a cheaper source.
Of course, with our luck, it will be Russia or Argentina that will benefit, not us.

It is purely social and economical. It's the necessary result of the colonial idea of stealing the resources of another nation to make profit in your own. What is stolen here is the work force, the most expensive resource and thus the one that carries the highest potential profit. This is accomplished with the active participation of the Chinese ruling class, bureaucracy. As long as China is ruled the same way, nothing will change aside from a few adjustments.