The simple answer is HELL YES. But what does that mean, and how did it get that way? This rant comes out of the U.S. House just passing a Bill that would allow the U.S. to place tariffs on goods coming into the country that are imported from countries that have undervalued currencies. The Bill won’t be considered in the Senate until after the elections, something the Senate is very keen on doing right now (We need a budget for next year? Bah! We’ll just wait until after the elections! The Post Office is 7 billion dollars in debt? Bah! We’ll handle it after the elections!) Still the bill is aimed at trying to make China reconsider it’s policy on how it handle’s it’s currency.
So how does it handle it’s currency you ask? Well to answer that question I first need to tell you how we, and other members of the civilized world (Yes that was indeed a jab at the Chinese government), handle our currency. A simple answer is that we don’t. The government doesn’t have as much say in what our currency’s value is as compared to investors. Our currency is speculative, kind of like stocks and other commodities. It is bought and sold and traded on the open market and so it’s value changes from day to day, moment to moment. The largest direct effect the government can have on the value of the dollar is the printing of the actual money. The more money they print, the less the average dollar is worth and vice versa. That’s a really simplified view and it doesn’t exactly work like that all the time but it’s a good basic model to work from.
The Chinese government sets the value of their currency against the dollar via government edict. The value of the yuan (The Chinese name for their currency) doesn’t change unless the government changes it. This can be really good for business in China and really bad for business everywhere else. Why? Because the Chinese government controls the Dollar to Yuan exchange rate. Meaning that they can make it really easy to invest in China, and simultaneously really hard to invest anywhere else. The Chinese government has set the exchange rate so low that the Dollar goes a lot further in China than it does anywhere else in the world.
This results in two problems. Problem number 1, the U.S. becomes massively indebted in a single country, run by a communist dictatorship. Because the Dollar goes so far over there, American businesses spend a lot of money over there, but they also spend a lot of credit over there as well. Most large businesses these days don’t grow by saving up for a time and spending their savings to grow their business. No, most large businesses take out enormous loans to further their growth and then rely on their growth being successful to pay off the loans (The failure of that system was a fairly large player in the rash of bankruptcies that occurred at the beginning of the recession). So right now we have lots of businesses taking out huge loans with Chinese banks because the exchange rate is so good. That’s what our trade deficit with China is, we’re spending enormous amounts of money over there, while they’re spending almost no money over hear.
Add on top of this that every other developing country is getting shafted by this deal, because China is the cheapest place to do manufacturing, and you get a somewhat bad deal. Actually you get a terrible deal. It’s the same basic principle we’ve seen since the beginning of the cold war. The capitalist play by the rules, the communists smile while they try and club us over the head because we’re being stupid enough to play by the rules. Whether the Bill actually makes it into law is very doubtful. The Senate has a tough time getting international trade laws to the floor for a vote and the Obama administration has basically taken the “We don’t really care right now.” approach to the Bill. I’m hoping the Chinese take it seriously though, because well…you all know how I feel about the stability of the Chinese economy.
