Financial columnist Bill Bonner, a frequent critic of the world fiat money system, whacks recent efforts by the US government to get China to allow its currency to float. As Bonner has frequently opined, the dollar standard allows Americans to consume without producing and to spend without saving, by living at the expense of the rest of the world. Americans can do this because we pay with dollars that are created out of thin air, and everyone else accepts them. The rest of the world saves and we spend.
The game is aided by mercantilist policies in many countries, China in particular. Mercantilism seeks to benefit producer-exporters of a country at the expense of consumers by subsidizing exporting industries. Market forces would soon put a stop to this because Chinese exporters would earn their profits in dollars that they would convert back to their local currency in order to pay their costs, which would be in Yuan. The demand for Yuan in relation to the supply of dollars being offered would push the dollar down in relation to the Yuan. So the Chinese government must continue to intervene in the currency markets in order to prevent their currency from rising. In so doing this, China has accumulated an enormous reserve of dollars.
The great wash of consumer credit — created by the Dollar Standard system — has made its way across the vast Pacific, sloshed over Japan, and now floods up the Yangtze and Pearl rivers.
And now, once again, we see the sordid spectacle of U.S. senators rising to defend American commercial interests by claiming that competition from China is 'unfair.'
"This legislation is a tough-love effort," explained Senator Charles Schumer of the great state of New York, sounding a bit like Richard Nixon, "to get the Chinese to stop playing games with their currency in order to level the playing field for American companies trying to compete with goods and services coming from China."
The specific injustice with which China stands accused is leaving its currency too low against the dollar. How Mr. Schumer knows what the exchange rate between the dollar and the yuan should be has not been revealed to us. But, while we have no laser transit, a brief gaze at the lay of the land suggests that the senator desires not so much to level the playing field as to tilt it further.
China fixed its yuan to the world's reserve currency — the dollar — nearly 10 years ago. It has kept its word ever since, faithfully exchanging 8.3 yuan for every dollar that came its way. No one complained about this arrangement; it seemed almost laudatory.
Now, China is accused of failing to adjust its currency upward against the devaluing dollar. Bernanke can print all the dollars he wants...but as long as the yuan is pegged to the dollar, when the later goes down, so does the former. Cheapening the dollar gave American companies a slight selling edge against other countries...but not against China. More than $125 billion of Chinese-made goods came into the U.S. last year, and the total continues to rise sharply.
Other foreigners, whose investments and credits were denominated in dollars, lost trillions as the dollar went down. But not the Chinese; in yuan terms their dollar assets remained unchanged. In the words of one eminent Senator, whose malignant pensées were reported by several newspapers, this is 'cheating' on the part of the Chinese; presumably, they should stand still and let themselves be robbed along with everyone else.
Oh, those crafty inscrutable Chinese. They work around the clock in unheated factories for $5 a day. And as the dollar goes down — against gold and other currencies — the $5 shrinks; they receive less and less real value for the goods they sell to America. Still, they don't complain; they continue stuffing containers for shipment to the U.S.. Is that slick, or what? What devious plot will they get up to next? Maybe they will just give away their TVs and geegaws?
Sooner or later the yuan will be revalued upward, we predict. When that happens, investments in China will go up in dollar terms, perhaps considerably so.
