Last week president Obama met with China’s president Hu Jintao in what ended being a huge propaganda piece for the media. Obama said that he’d like to see China’s currency, the yuan, appreciate at a much faster rate. In his eyes, this would increase the quality of living for Chinese citizens and help our trade imbalances with the country. At least Obama got one thing right. Allowing the yuan to appreciate would definitely help improve the lives of Chinese citizens, but it’s a complete joke if we think this will help our trade imbalances. As usual, Obama talked a lot of talk to make it sound like the US is giving China prudent economic advice, like we’re the ones calling the shots. Talk about biting the hand that feeds you (literally)! Behind the scenes I’d imagine that Obama is begging China to keep financing our debt and selling us cheap goods. If they stopped buying our government bonds, this hole charade we call government would default so fast it would make anyone’s head spin.
Another common complaint from economists and politicians in Washington is that the Chinese are currency manipulators. This is also a misconception that places that blame on the wrong people. The Chinese have pegged their currency to ours so that their product manufacturers and exporters can maintain some level of stability (we are the biggest buyers of Chinese products). Thus, it is really us who are the currency manipulators thanks to the loose and reckless monetary policies of the Fed. If you want to see an example of currency manipulation, check out the chart of our aggregate money supply! As Bernanke continues to pull the dollar down into a ditch, so does he pull down the yuan. An unfortunate side effect of our money printing is that we are exporting our inflation to China and they are seeing food prices at an all time high. This combined with the fact that the average Chinese citizen spends 50% of their income on food is causing lots of consumer frustration and even riots in some instances.
If the Chinese allow their currency to appreciate, their citizens will see a rise in their standard of living, but at the same time we will see a decrease in ours. The US economy desperately relies on cheap goods from the Chinese and if all of a sudden more products are being consumed by Chinese citizens instead of being shipped abroad, that’s going to cause lots of problems for us. We no longer have the manufacturing base that we once had, so it will be hard to find replacements for Chinese imports that are more expensive as the US consumers competes against the Chinese consumers on a more even playing field. Once our standard of living starts to decrease, we better realize the cold hard truth that we desperately need to rebuild our manufacturing base and start exporting stuff once again. However, as it currently stands, we are one of the most uncompetitive environments for creating new businesses, and if you consider manufacturing it’s even worse.
Therefore, Obama must be dreaming if he believes that having the Chinese yuan appreciate will solve our economic woes. When the Chinese consumers have more purchasing power, they’ll just buy more of the stuff they already produce and there will be less of a pie for us since we have no pie to offer them. The sooner the Chinese ditch their currency peg, the better off they’ll be. We’ve been dragging them down by our reckless monetary policy for too long, and I’m hoping we’ll soon come to terms with this and start figuring out how to get our economy back on track. An economy that no longer produces anything is one that’s not destined to last for too long, especially when the world rejects our inflated currency. The only culprit that Obama should blame for our economy woes is ourselves, and more specifically our out of control Federal Reserve combined with our stifling regulations on business. We need to once again make this nation the most free country in the world for not only civil liberties but also economic ones. Freedom is the only solution, not blaming others.