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Dollar/Yuan Peg Means China Gains on All Fronts

I wonder if this is what Nixon had in mind when he opened China. Ever wonder how the Asian powerhouse can maintain 9% growth and lock in commodity purchases during a global recession? They don't play fair, wage arguments aside.

We need to pressure them harder to let their currency float and stop selling them our debt. A tariff on tire imports was intended, in my view, as a warning shot across the bow. It certainly isn't going to solve the problem.

Yes, I said it. We need to put an end to our huge trade deficits and stop selling more debt to a major debtor. Most of this is our fault, however. We loved exporting our inflation to China. We loved buying their goods, it saved Joe Sixpack some money. We just don't seem to care about being in debt to anyone and everyone, including command economy with a "free trade" interface.

China is developed enough to play with the big boys. So, let them.

Fix Euro / Dollar Exchange Rate? Fat Chance

When I said used against China, I meant against any trade imbalance...not China, specifically, for any other reason.

Fix Euro / Dollar Exchange Rate? Fat Chance

Sorry, my previous post was off topic.

As I understand them, I am beginning to come around to the idea of SDR. (please dont apply thumbs down based on emotion...LOL) Though, I do not think I would support the US dollar comprising only 4%, down from 44%, to make room for the yuan. The yuan could be on par with the sterling, but certainly does not deserve that much room.

If applied correctly, SDR could work against China in that SDRs can be a way of balancing trade. If (you) don't import enough, remit some SDR to (us) much like gold used to be remitted. An SDR would eliminate currency speculation, too, which I've argued is not natural to trade.

Currency trading is only a consequence of floating fiat currencies resulting from trade (and other factors) affecting the fiat value. It's a play on fiat value resulting from trade, not natural to trade, per se....especially unbalanced trade. (I recognize balanced trade can give fair value to a fiat currency relative to others.)

Fix Euro / Dollar Exchange Rate? Fat Chance

A while back when France and Germany showed a tiny bit of growth and more recently the ECB announced a slow recovery in the EU, the euro rallied. This propensity to buy euros at the drop of a hat is an indication the euro might be over bought (and conversely, the dollar over sold.)

Bull in a China Shop

Love the title of this article, by the way. :)

Bull in a China Shop

"The FOMC will leave the federal funds rate at zero to 0.25%, which to me questions the Fed’s confidence..." As it does mine. It can explain our rally, but is not a green shoot.

"It’s the nature of 'The Great Credit Crunch' continuing through 2011." Agreed. This is no ordinary, simple recession.

Economy and Equities Still Vulnerable: It's a Matter of Credit

I have to agree with the author, deflation will keep hyperinflation suppressed for the foreseeable future.

On credit, I am all for investment credit. As the author points out, this is good for business and employment. However, (excessive) consumer credit is a horrible thing. It is used for consumption and rarely provides any return. The end result of excessive consumer credit is to indenture consumers to banks. We feel wealthy because we can borrow that wealth from those who really own it. When you (we) cannot get a loan, now, how wealthy are you? Answer: as wealthy as you (we) really are. Joe six pack is flat broke, he just didn't know it...until now.

But, that's the banking system for you...it doesn't pay to save nor to borrow (for consumption.) Savings interest rates do not keep pace with inflation, even mild inflation, and borrowing your wealth simply robs you of money over the long haul. We need a new banking system, rather our old one would be fine...without a Federal Reserve...it is neither.

Okay, off my high horse. The economy should wind down a bit more. First, the hard lessons learned of easy credit will preclude those who have wealth from lending it to Joe Six Pack on the same scale. My guess is, the days of getting a plethora of credit card applications in the mail are over.

Second, the financial markets will be highly regulated. Derivative money will not be as plentiful as decades past. Third, the consumer has learned a hard lesson, too, about excessive debt...once bitten, you know. Coupled with the deflation that has already occurred, there is not nor will be anytime soon enough liquidity to drive the global economy we knew and loved during the 90's.

Anyone who thinks the recession is over and the market will soon reach it's highs needs to step back and look at the bigger picture. What is the face of the American economy? It's Joe Six Pack who flips burgers in the service sector and spends large portions of his income to pay off consumer loans. That money creates wealth for the few trough feeders.

We have a failing auto industry, but we build a few aircraft. Basically, we make little the world wants to buy, like hydrogen cell technology. The lawyers see to that, it's cheaper to buy it from France than to hire a fleet of scientists and engineers. We consume...we are gluttons...and we run huge deficits. That system has about reached it's limit. I see a possible major change in American consumer habits, whether by choice or otherwise, if the banking system will allow it.

I assert, the US consumer will place less global demand for goods and services. Who will pick up the slack? China's immature middle class? Europe's aging population? Mexico? (Why is Mexico even mentioned in the North American Union?) I don't see anyone feeding the global economic machine with the veracity of the employed American worker and his credit limit. And there are a lot less of them (us) around...who've also lost their homes. Well, maybe the middle east can spend some oil revenue. Maybe, but it's not likely to sustain growth of the past two decades.

It does have to do with credit, and "they" ain't handing out much "wealth" to broke and indentured Americans, Canadians, et al. I believe the recent rally was driven by green shoots (amidst the thorns), investors following government stimulus money, and many just being tired and too eager to get back on the business as usual band wagon.

We're still in big trouble, folks, and the author correctly asserts it's all about credit, as well as the liquidity damn burst and weaker global consumer demand in the coming decades. Some extreme views will say the entire crisis was engineered for whatever ends. (Who knows...) I wish the system could just fail and be replaced with our constitutional system, if it weren't for the millions of indentured Joe Six Packs who rely on our current system for basic survival.

Anyway, it ain't over.

China Wants to Ditch the Dollar

While it's true the Yuan has appreciated, it is still far from free a trade float.

I don't believe Chris meant a floating currency qualifies as a reserve currency. I believe he was saying if the yuan floated and fair trade was reciprocated, then dollar devaluation would not be much of an issue. (Oh, goodness, here comes some Fed bashing...)

The Chinese proposed the Yuan as the major world reserve currency? Now, that's interesting. What hubris. Again, it might be nice if it wasn't so heavily devalued. Stability is one thing, value is another.

So,let me get this straight, China is on fractional banking, correct? So, they will have the same problems as any western nation's currency in maintaining a stable money supply. Except, they will manage money from a command economy perspective as opposed to the more or less free market rules in the US. That is interesting.

Besides, the western bankers have too much power (money.) Having some of that power reside in foreign banks gives them additional leverage in world dealings. That is not gonna go away easily.

China has arrived, but they are still too heavily dependent on trade to be taken seriously as a host to the world's reserves.

And, can someone tell me what fiat currency would be stable enough to serve in this fashion? A gold peg would be nice.

China Wants to Ditch the Dollar

Jim, and a few others, right on. I might argue the self sufficiency part, but we'll do that over a beer. You are correct.

And why would anyone save? We've got SUVs and 60" LCD screens to buy. We've got to live beyond our means and make people, especially the ladies, believe we're better off than we really are. We've got equity to mortgage! Why save?

And it seems borrowing is the only way to do display our "wealth" (wealth effect, not effective wealth.) We worry about our credit scores, we should have them tattoo'd on our behinds and show them off at parties. We're part of the ponzi scheme and we've forgotten the age tested value of actually saving for a rainy day. I've relearned this...no debt and can pretty much buy what I wish even today. Trying to drive this point home to my kids. We need to learn this as a nation, too.

If China wants to cash in, maybe they can help buy AIG...hehe And I agree, China will diversify a bit. It's smart, and no one argues China isn't smart.

Greg, I am one of those few... :)

Marvin, a marvin-olous idea. Just don't see it happening, unless this crisis deepens and spurs some real fiscal changes.

FE812, yea, best I can gather, I think that's the plan...artificially prop up the market(s) until real appetite for such investments, especially toxic MBSs, can sustain it. What a gamble.

Then, well, back to business as usual...lending, borrowing, buying...consuming. We need more production, while we're reinventing our economy. Hopefully, regulation will prevent some log jams. Who knows. But, look for inflation once the financial markets recover from their coma...

And I think you've nailed it. Our economy will look nothing like it did. QE or no QE, we will settle into a period of lower growth in the coming decades. Many anti QE folks will say, "see, I told ya so." And argue incessantly we're just like Japan.

I am afraid this crisis mandated future, slower sustainable growth from the onset. Footloose financial markets will be hog tied for a good while to some...decades. Once bitten...Americans will learn excess debt is not sustainable...lest we forget.

But, this is good stuff. Now, if we can only get onto a commodity currency...were savings means hoarding and hoarding means protest against low bond rates. Don't like the bond rates? Hold onto your gold until they're favorable...keep and maintain your wealth. Now, that would be nice and worth a few thumbs ups...

China Wants to Ditch the Dollar

Krisandi, I am not blaming China for our financial woes. I am raising the bulls--t flag on their call for a global reserve currency. And I am explaining their unfair trade practices and how it's debased the dollar. Furthermore, I am saying that debasing is changing due to improving trade deficits. I am arguing against the dollars demise as both a fiat currency and the world's primary reserve.

Techzone, everything will come to a halt in China with an inflating dollar...making imports more expensive. Again, it's deflation that causes the domestic economy to come to a halt. This is why the Fed is aggressively trying to inflate the economy...pushing water uphill.

Euarte, the dollar will improve. Read the link in my post above. It is a good article on that subject.

Mr. Yu. Yes, it is unsustainable in the long term and even unadvisable in the short term. I wish we weren't in this situation. But, $600bn in bonds is a small percentage (single digit, like 5%, I believe) of the total bond market. China will not dump them for the euro anytime soon. When recovery begins, I believe the dollar will be on top of the debased currency heap and retain it's reserve status. China will need more bonds to keep cheap product exports alive. Inflation is a threat in the G20, and more so in China. As you're aware, we've exported our inflation to China for decades.

China Wants to Ditch the Dollar

Techzone, the converse is actually the general case. People save more during deflation and buy during inflation. Imagine, during inflation, buying a house at one price and selling it at a higher price. Nice, eh?

During deflation, imagine buying a house at a set price and trying to sell years later for less than what you owe on it. That's one evil of deflation.

China Wants to Ditch the Dollar

Paul, are you watching the testimony before the financial services committee? Man, yea, it's getting ugly. We're a long way from Ron Paul's economy... :/

The Fed was the only dog in this fight until the Bush stimulus plan. Bernie pushed congress to shore up the GSEs back in Oct 07. They did nothing. Then the Fed remained the only dog in this fight until Obama too office. Now, Obama is hitting this hard and some items are just ugly.

For example, floating FDIC loans on toxic assets no one wants sounds silly. And it probably is, but somehow those toxic MSBs gotta get sold to someone (some sukka) somewhere. It's laughable if it wasn't so serious.

Another example, seems AIG officials, including those in the Financial Products Division...ground zero, managed to save their retirement packages while main street lost nearly 50% of ours. I understand, ugly as it is, this was aggressive lawyering. And their bonuses were shielded from the performance of CDS and CDOs.

But, if Obama can halt the housing market decline, even by propping it up, and getting mortgage rates down...those assets might turn a profit in a few years. Maybe, maybe not...but this whole thing screams the trouble we're in and how our financial institutions simply raped our economy. The evils of a paper based GDP...and the ugly things that go on to fix it are absolutely stunning.

This is why the market volatility is not over. Dead cat's sometimes bounce, sometimes splat. The people are pissed and they should be. I am.

As for the Fed, reserve banking is a big mistake. I think many see this clearly. I get an (agreeable) ear full of gold standard almost daily. But, the Fed is what we have to work with for the time being. I don't think Obama is gonna push a return to a commodity currency.

Yes, drastic, inflationary actions are being taken and China is complaining about the value of their US assets. Well, let them buy European bonds and complain about them in a few months. Most assuredly, the EU will engage in it's own version of QE. Or maybe, since they're eliciting Russia's support, they can invest in the ruble.

China Wants to Ditch the Dollar

Morph, demographically and otherwise, I'd argue china is better positioned to host the world's reserve currency. Problem is, it's not worth anything. It's highly and purposefully manipulated. They don't want that, I suppose.

Husker, I am all for gold and a gold standard. I get an ear full of that almost daily. I just believe the powers that support our debt banking system are too entrenched for a gold standard to survive without another revolution.

And what's all this non sense about war with China. Jeeze...someone needs to stop subscribing to conspiracy websites. You're scaring yourself.

Mr Big, of course no one wants the yuan to float, besides a few of us in here. We use it to hide inflation. But, I have a feeling things might change. Maybe...maybe not.

Despite all the above, and even despite our coming lost decade through QE, we are gonna settle into a couple of decades with lower rates of sustainable debt accumulation...once the balance sheets are wiped clean...and lower, sustainable global growth. Regulation and fresh memories will see to that.

China is gonna have to accept this fact and at a bad time, too. Their middle class is not entirely formed to sustain domestic demand on par with their exports. I suspect this is one reason they are threatening a global reserve currency (implying it won't be the dollar.)

China Wants to Ditch the Dollar

And I might add, China dug it's own grave by accumulating such a large reserve of dollars rather than repatriating them in free trade. God help the EU if China get's it's hands on the euro...LOL...the 'next' reserve currency.

China Wants to Ditch the Dollar

Right on Chris, there have been repeated attempts to get China to let it float. They all failed. And the current crisis, remotely, has something to do with unsustainable trade deficits. These need to be settled, and might correct somewhat.

Salvador, oh you could not be more right. I have argued in other threads/forums that very issue. That's why I support Obama's push to build schools and develop a base of engineers and scientists so we can sell more than CDSs.