Many politicians are pointing fingers at China accusing them of keeping their currency under valued and therefore making their exports artificially cheap. Obama and Little Timmy Geithner have also made these claims. But are they true?
In a way, yes they are true. China doesn't allow their currency to float vs. other currencies and allow the free markets (which aren't free or markets) to set an exchange rate. Why doesn't China allow this? If China did allow their currency to float, the Federal Reserve and the US treasury would purchase massive amounts of the Chinese yuan and loan massive amounts of taxpayer dollars or printed US dollars to Wall St. IB's to buy more yuan. This would cause the value of the yuan to skyrocket. Thus increasing the costs of Chinese exports to US consumers. Many state this will create jobs in the US. It would create a few jobs but not many at all. US manufacturing has been hollowed out these last forty years. From textiles to electronics to automobiles. If the yuan would float, appreciate vs. the dollar, sock factories, T-shirt shops and other low value manufacturers would not sprout up in the US. Cambodia, Bangladesh and Vietnam would see jobs increase, not the US.
US taxpayers owe China over $1 trillion in treasury, bond and dollar holdings. By increasing the value of the yuan, US debt is decreased by that same amount. Good idea you say? Maybe, maybe not. What if China says enough of this and sells their US debt holdings causing interest rates to ramp up? If that would occur it would be an ominous sign due to the fact the US has such massive amounts of debt that any significant run up in interest rates would be devastating to the US. The money needed to service the debt would cause tax increases and cuts to all expenses even military.
The US has the privilege of possessing the world's sole reserve currency. This has been in place for over sixty years. This affords the US a constant, built in market for their debt. Dollars are always in demand. A nation buys oil from OPEC it pays in US dollars. Majority of finance trade deals are settled in US dollars. This privilege earns the US approx. $5-800 billion per year depending on how you look at it. Basically paying for the entire defense budget minus Iraq/Afghanistan wars. When, not if the US loses this privilege the US taxpayers will pay.
Quantitative or credit easing, QE 1 and soon to be QE 2 is nothing more than currency manipulation. The same thing the US accuses China of doing, it does in spades. As does Japan without a global uproar. It is money printing in the electronic age. Instead of physically printing the money, entries are made in a computer and Poof! mo money, mo money, mo money! The US money supply is increased, doubled or even tripled from a few years ago. Who gets this money? I assure you it's not me or you, it's Wall St, the IB's and the Primary dealers of US debt. The Treasury issues, sells debt to the markets. The Fed then comes behind these "auctions" and buys this debt back with freshly electronically printed greenbacks. This is done by the Fed to create jobs. I'm serious, that's what they claim. But we all know this isn't happening. This free money is being used to increase stock prices, commodity prices, asset prices as a whole. Been grocery shopping lately? Thank Ben Bernanke for increase in prices.
I'm just a layman with a layman's understanding of very complex issues. But, I also am an information junkie that has spent hundred's, thousand's of hours reading, researching these complex issues. My aim is to attempt to explain these issues in straight forward and simple terms. I very much encourage you, my reader to follow through with your own research. Click on the provided links for much more information. Google is your friend. TPTB, the elites, and the establishment democrat and republican parties are not your friend.
I'm going to go get something to eat. I'm hungry. Thank you loyal readers.
Fatboy
Fatboy sez: What. Me Worry?