November 6, 2010

Currency War on the Horizon

POLITICS - What the heck is a currency war you are probably asking?

Well, essentially its when countries like China deliberately deflate their currency in an effort to boost their exports. In China's case their currency is pegged to the US dollar at a rate so low it means Chinese products are the cheapest in the world, and not just because China is so good at mass production. ANY country can do mass production, but its the question of whether they can outbid the competition in low prices that effects whether all their products actually get sold.

In reality the Chinese Yuan is estimated to be worth 2 to 3 times what it is currently trading at. Thus products from China cost about 50% to 66% cheaper than products made in the USA based on their currency alone.

In the United States manufacturing is dying. Factories are being closed and moved overseas, to places like China where the workers are cheap. It is so ridiculously bad that it is the biggest fundamental reason for the recent Great Recession. Ignore the bankers, ignore all the failed mortgages... the real reason the US economy collapsed is because of loss of manufacturing jobs and people could no longer afford those huge mortgages.

In response to the failing economy George W. Bush bailed out the banks with $700 billion USD (which ironically he borrowed from China).

When Barack Obama got into power in January 2009 in tried to stimulate the economy and create jobs by ordering public works projects, new roads, etc.

But both of these measures have been nothing more than bandaid solutions. They haven't solved the problem of America's manufacturing crisis and the economic cost of the high American dollar Vs the cheap Chinese Yuan.

The United States needs to pressure China to revalue its Yuan to a much higher value, so that the two countries are on stable and equal footing. However whenever China is pressured to revalue the Yuan they only do so gradually. Very gradually, because they don't want to hurt their exports and their own economy.

Which means the ONLY SOLUTION left is to raise trade tariffs with China and similar countries. An end to free trade with Asia.

In theory the USA could also print more money (a concept Germany used after World War I to disastrous effect). The U.S. Federal Reserve earlier this week announced plans to expand the basic money supply by $600 billion over the next eight months. They won't want to keep doing that too much, the effects could be destroy the US economy even more and cause massive inflation.

Which only reinforces the concept that either China needs to start raising the value of the Yuan, or the USA needs to raise tariffs against Chinese products (and other countries which are undercutting prices by not allowing their currencies to float on the free market).

The question now is: Now Barack Obama have the balls to fight back against China's unfair currency policies? Or does China effectively own the USA and the war is already lost and over?

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