China and U.S. Must Take Their Dollar Medicine

by: FXedu

By Mike Conlon

Well it looks like the cars are speeding up. Like a scene from a James Dean movie, the global game of chicken that has been taking place between the United States and China and the rest of the world is starting to heat up. Just yesterday an article from the UK Independent by a credible author claimed that secret meetings have been taking place to effectively end the U.S. dollar as the currency of choice for crude oil trading, thereby weakening its position as the world’s reserve currency.

While nobody is happy about the decline in the value of the U.S. dollar, this is nothing new. I wrote about this back in June and since that time nothing has changed except that the dollar has declined further and the opposition has gotten louder.

Let’s have a look at what needs to happen to get us off this global collision course.

Global account balances need to move back towards parity. It is no secret that the U.S. has a massive deficit and that China has a massive surplus (most of it held in U.S. dollars). It is not likely that this account will ever be in balance, yet something has to be done to promote growth going forward.

There are many reasons why this account balance got so far out of whack, and now it is time for BOTH sides to right the wrongs of the past and move on.

Because there is no honor amongst thieves!

Let’s face it, would we be in this global mess if the United States didn’t print money at will and make bogus loans to consumers who had no business borrowing money in the first place? Or would this mess be as bad if China had allowed their currency to float like all of the other free economies around the world?

It takes two to tango and while I’m not absolving either side of wrong-doing or going to place guesstimates on who is more responsible, just fix it! The entire world economy is counting on it. What good is sitting on a mountain of dollars if it’s worth less and less each day?

Both sides need to budge and “take their medicine”. For the U.S. that means starting to raise interest rates and accepting a slower recovery, and for the Chinese that means allowing their currency to float.

While the Chinese stand to lose initially (by some accounts 30%) in their revaluation, once their currency is stable and floating they will be able to continue to grow but without the future risk of another country’s (U.S.) currency. They can start to use their reserves to consume more, become responsible stewards of the environment, and provide a better quality of life for their people.

For the U.S., this means living within one’s means. It means putting in an honest day’s work. It means making decisions based on sound fiscal policy and not populist pandering. This means saving money.

Unless we make these decisions now and consciously, economic forces will make them for us. The sooner we can get to a bottom, the quicker we can recover. All of the stall tactics are just delaying the inevitable.

Because if we continue down this current path, then we are ALL going over the cliff. That goes for you too, China.

Hey Bernanke, you’re no James Dean!

Original article