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China is going to war! Not over islands in the South China Sea, but over the value of its money.
The People’s Bank of China launched an aggressive salvo overnight, devaluing the country’s yuan currency by 1.9%. That may not sound like much, but in the world of currencies, it’s huge. As a matter of fact, it’s the single-biggest devaluation since China adopted its current monetary system in 1994.
The devaluation comes as China’s economy and financial markets are increasingly on the rocks. Growth is slowing. Bad debts are rising. Exports just plunged by more than 8%, more than five times as much as economists expected. And the stock market has been tanking, suffering a series of huge swings the likes of which we haven’t seen in years.
Why is China taking this step? The PBOC claims it’s part of an effort to make the yuan’s pricing more market-based, and increase currency market flexibility. It said it would be a one-time move.
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| China is looking to give its exports a lift on international markets. |
But that’s hogwash. The real reason it’s devaluing is the same reason several other combatants in the ongoing global currency war are doing it: To give their exporters a competitive advantage.
Think about it this way. Cutting the value of your currency is like running a sale on your goods. You’re telling the world: Buy from us … everything we sell is now 1.9% cheaper.
The problem, though, is that it also makes goods from all your competitors relatively more expensive. So all your Asian neighbors panic, and are forced to launch their own competitive devaluations to avoid suffering a competitive disadvantage. That’s why a basket of Asian currencies tanked the most since 2008 after China’s news hit.
At the same time, think about what signal you’re sending to global investors by devaluing. You’re basically telling them your economy stinks. Not only that, but you just made every bond, stock, or other asset those investors own that’s denominated in your currency worth 1.9% less.
So what are those investors going to do? They’re going to sell, that’s what. One estimate in this Bloomberg story is that every 1% decline in the yuan against the dollar alone leads to roughly $40 billion in outflows.
China has a huge pile of foreign exchange reserves – around $3.7 trillion. So it can withstand the pressure for a while. But those reserves have already dropped for four straight quarters, by about $300 billion in total. Worries over accelerating capital flight could reverberate through global capital markets.
| “I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.” |
Moreover, I’ve been around the block for many, many years. I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.
A wave of competitive devaluations swept through Thailand, Indonesia, Malaysia and South Korea. Then the crisis spread to Russia, and ultimately to U.S. stocks. The Dow Industrials plunged almost 2,000 points, or more than 20%, in just a few months in 1998 alone. And that was when the U.S. economy was in fundamentally much stronger shape than it is now.
Finally, this move is sure to worsen U.S.-China relations. U.S. manufacturers have already been suffering from a rising dollar, and politicians have lambasted China in the past for manipulating its currency to give its companies a relative advantage. This is going to increase those tensions significantly, and raise the possibility of retaliatory “trade war” type actions.
Bottom line: The capital markets were already getting more volatile and risky, as I’ve been warning for a few months. Now China is launching its most aggressive currency war in decades – threatening to add even more uncertainty and risk to the mix. So if you haven’t taken protective action, now may be a very good time to do so.
So what do you think about this move by China? Is the global currency war going to get worse now? What does it mean for the U.S. dollar, U.S. stocks, and your investments? And how about the politics of the move? Will U.S. officials (and presidential candidates) threaten retaliatory action in response? What will that mean for the markets?
Please do head over to the website and share your thoughts as this is a big market story – and I’m sure your fellow investors will appreciate hearing from you. I know I will.
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There was a lot of discussion over at the website already even before we got this China news, and I can only imagine it’ll heat up now.
Reader William S. said the Federal Reserve won’t be in a position to raise interest rates, even if it wants to. His take: “The Fed cannot raise interest rates because there is so much un-payable debt out there, any hike would cause an avalanche of defaults and bankruptcies. Even if some could handle a couple of 0.25% rises, they would bail at the second something happened, noting the pendulum swing.”
Reader Jim looked at the political implications of the latest climate change regulations, saying: “I’ll refrain from partisan comments on the proposed EPA rules and simply ask a question. Doesn’t it seem to you that we are getting an awful lot of far-reaching rules and regulations that profoundly affect our lives without ‘We the People’ having anything to say about it? No debate, no peoples’ representatives. Here it is, take it and like it. What happened to the legislative process?”
As for crude oil and the American export ban, Reader Robert C. said: “It’s about time these so-called geneses in Washington woke up. Exporting oil to Japan, who has no natural resources, will bring down supply and may cause WTI to rise.
“We should also bear in mind that Saudi Arabia will not cut production because they are out to put our frackers out of business. They feel betrayed due to our change in policy towards Iran.”
And Reader Mule was about as bearish as you could get on U.S. stocks, in light of the latest turmoil. The comments: “I’m the world’s second-worst gambler, but if I had to bet, I’d bet on a crash. This market is built on worthless paper and to worthless paper it shall return.”
Thanks for sharing everyone. It’s clear that topics such as interest rates, oil, and stocks are on the forefront of your minds. That’s why I urge you to stay tuned to Money and Markets for my latest updates in these volatile times. As I mentioned the other day, I’m more concerned about markets now than I’ve been in years – and that’s why safety and caution are watchwords to keep in mind.
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Google (GOOGL) is launching an ambitious corporate reorganization, one in which its core businesses will be reportedly separate from its more-ambitious, but costly non-core efforts.
Specifically, the company will form a new holding entity called “Alphabet.” It will own the existing businesses we think of as associated with Google, such as search, YouTube, maps, and so on. The company will also separate out its Google Ventures and incubator projects, as well as its smart home, high-speed Internet, and other businesses.
China may be going to pot, but Greece said it managed to reach a tentative bailout deal with its European creditors. The plan would give Greece up to 86 billion euros in aid, in exchange for the country adopting more comprehensive economic reforms. But it’s unclear if Germany will sign on, and whether Greece will get the first tranche of money soon enough to make a 3.2 billion euro payment to the European Central Bank on August 20.
Deal mania is alive and well on Wall Street, according to tracking firm Dealogic. Global M&A could hit $4.6 trillion if the current pace of activity holds through year end. That would make 2015 even bigger than 2007, when $4.3 trillion worth of deals got inked. Then again, 2007 marked the peak of the great global credit bubble – so maybe this isn’t exactly good news. We’ll see.
What do you think about Google’s new version of corporate alphabet soup? Or the big wave of M&A? Any other stories catch your eye that I didn’t mention here? Then let me hear about them at the website.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Looks like the U.S. influenced decision to keep China out of the IMF for another year is already having consequences.
Yes, it does. So, who’s on the war path here actually?
China built way too much of their economy on selling abroad but failed to build their own internal consumer base. That worked fine for the Chinese until everybody’s economy started slowing. Then China went on massive building programs with no customers. I have model trains, look at the price difference. Micro-Trains in Oregon can sell a model of a 50 foot boxcar for under $25.00, Kader (Bachman) has to get over $45.00 for the same model in 160th (N) scale. For the last several years there have been production delays out of China that run into years and several manufacturers have gone out of business literally overnight and a couple executed, really. Over there you don’t want to default on too large a government backed loan. The big question is will Obama sit on his hands as usual or will he counteract the Chinese move as every other Asian country is a sure bet to do?
Sorry, I agree with Rick (above).
China would not have devalued the Yuan if the US had not forced the IMF to keep China out for another year (at least)!
I expect further devaluation…a move not dissimilar to the Saudis keeping the price of oil low, in order to put U.S. and other high cost production on the ropes.
Mike: Off hand it would not seem that such a blatant and impulsive move by the Chinese government would not encourage the IMF to bring them into the circle of world reserve currencies. Please comment.
Greece can’t pay. Their economy must expand enormously to service their debt, and it’s tanking. Everyone knows the fundamentals. Loans and bailouts are political theater and maneuvering to have the bomb go off on someone else’s watch. It’s not even a secret anymore!
Hi Mike!
I recently sent you a commentary that explained the planetary influences on all global financial-economic markets. Today, August 11, is a global game-changer because Jupiter began its 13-month transit of cautious, serious Virgo, and this major influence induced the Dow sell-off and the Chinese currency devaluation. A flight to safety should ensue that should drive the prices/values of gold and silver to unprecedented heights!!! Moreover, I wouldn’t be in industrial stocks now—period!
I strongly sense the Moon’s effect on you, William. I urge you to consult with your family before investing any wealth you have.
Google has acted like a wealthy patron from the Middle Ages, funding “arts and sciences” out of a sense of duty to create a better world. This breakup will fundamentally change that equation, ultimately resulting in modern business decision-making. Out with the “social good” approach, in with the “profit / loss” model.
Risky “benevolent” projects will get canned quick. It depends upon your perspective if that’s a good thing or not!
Hi guys,Lets face it,its a jungle out there,dog eat dog,ying yang,call it what you want,You do me wrong,dont expect to come my birthday party.China is doing its thing,after all someone s..ts in my garden,expect a visit.Now what will the US do,wait and see.What can we do,try and make a $ out of it,thats my attitude.Try and see the bright side of life,People,after all you will find out some useless twat is tryng to >>ck it up
Huh…?
MEDIA BIAS AND PREDICTIONS
Ahhh, its no big deal. If it was not one reason ( for more sell-offs in the DOW or S&P) it surely would be another. So, the reason for market jitters is the least important matter to focus on, except for the pundits. Good stocks are now going to get even cheaper for those in for the long haul such as Alibaba and Apple. No reason to sell when others panic, in fact, according to Warren Buffet, its the Very time to buy. However, you have to be sensible about it.
All bear markets start like a earthquake, with a small tremor. The difference between a big earthquake and a tiny one is the follow-through after the first sensation of shaking. Same with bear markets. No one can know what the (immediate) future holds. A big sell-off might have just gotten started or it may just about be over. Best if you don’t try to predict it. Stick to your allocations and don’t be swayed by panics or bad news. The news is always bad anyway. There is your media bias.
Absolutely true that the media relies on bad news to sell itself! Also, the further removed from the reader, the worse it has to be to sell.
A neighborhood power outage. A car crash in the city. Murderers loose in the state. Riots in the nation. War and genocide on different continents.
I pretty much skip the commercial delivery of horror these days, and get the news I need from the Internet.
Only quibble with your article is the comment about American “manufacturers” being upset with the Yuan devaluation. There aren’t any American manufacturers, only corporations headquartered in the US but who do all of their manufacturing in countries like China. Their profits may be worth less according to their financial statements, but even that doesn’t fly because they keep the profits in the other countries because of the sadistic US tax code. I will shed no tears for them.
Reply to Joe: That is not true (that there is no manufacturing in America). I live in Connecticut which is one of the heaviest manufacturing states in the US, and there is plenty of it around, with the work being done right here. The US is an enormous manufacturing nation and is the largest exporter in the world (although a good amount of that export is agricultural rather than in manufacturing). We tend to forget that the US is the leading exporter in the world because we import so much more than we export. But the export story is true.
That said, it is also true that the rise of manufacturing capacity in other nations has reduced the percent of manufactured goods made in advanced nations like the US (Europeans have the same issue). That is because previously there was not real manufacturing muscle in emerging market nations. That is changing however so it’s not surprising that a greater degree of balance in sources of manufacturing has surfaced.
But advanced nations are in the cat birds seat to make advanced products. The US is a major producer of aircraft, nuclear power plants (ours are the best – which is why the Chinese buy them from us), industrial machinery (such as Caterpillar – whose largest customer is the nation of China) and more. We don’t want to make toasters here in the US – and American consumers don’t want to pay $190 for a toaster made in Connecticut which is what it would have to sell for if made here. We get the benefit of that lower cost overseas production by importing what is more efficiently made “over there” and exporting what is more efficient to make in the US. This is the key principle of the “Theory of Comparative Advantage” – (ref. economist David Riccardo) in which everyone wins by cooperating in trade.
And by the way, after the USA at no. 1, the worlds no. 2 exporter is China and the no. 3 exporter is Germany (with only 81 million people). So it is not true that you can’t sustain a solid manufacturing and exporting economy in a highly developed country that sports higher wages. You just have to be smart about it – which we in the US have not been. And Germany and Japan both have higher domestic costs than we have in the US – and that has not stopped them from enjoying a robust manufacturing sector. There is nothing they do that we can’t – we just aren’t as smart about the manufacturing business s they are. That should be fixed – but it’s no Americans to do it.
John
It’s not you Americans doing it,but international Jewish corporations doing it.I would prefer to buy reliable goods made in US,if it’s available rather than unreliable products made by cheaper labour that can not be trusted;that’s why German products are selling well because of the quality.As people grow older,we want things that will last longer than just cheaper.However,US products are notorious on spare-parts and repair facility worldwide;it took two years to replace my American made watch-strap.
China wants to sell by pricing its products aggressively. Their people aren’t demanding high living conditions (on average), so they can charge less than the West. That’s been obvious for decades, and has been the biggest complaint against free trade.
The USA plan is to employ people here doing work that doesn’t compete directly with emerging economies, countries whose people have low expectations. Services (healthcare, haircuts, food service) don’t compete because they have to be local. High-tech benefits from first-world infrastructure and workforce, but also has protection from competition due to international restrictions such as ITAR.
The rest of us here? If not for politicians pushing back politically, we can expect our personal economies to eventually resemble those with whom we’re competing. In the future, we’ll all live like Chinese (at least with respect to wealth).
Do you think the IMF’s recommendation to not allow the Yuan
into the SDR basket, August 5th, might have been a factor
in the devaluation?
If stocks, bonds, (real estate?) tank in the Sept/Oct window, will commodities
continue to tank? How about the Dollar?
Keep dollars and sell anything and everything…
I agree with you 100 per cent. Jim
What happens if someone like Soros pricks your dollar balloon like he did to Thailand almost 20 years ago.
Buy silver.
This is a classic deflationary battle that will force prices lower. And once it gets going in earnest, it will be hard to stop. China thinks that it can get a head up on the competition…..but as you said, other countries will just make downward adjustments to negate the Chinese advantage (the USA possibly excepted because we have leader(s) that are usually asleep at the wheel or, even worse…..are willing to let the USA suffer so that China and others can prosper – think CO2 emissions). China is so worried about their economy and their stock market…..but what they are doing will only make matters worse…….in the (not too) long run.
And their financial management team, yes the one that was so vaunted only a few years ago by Krugman and other liberals of the Western press and academia, has been showing over the last couple of months that it is nothing more than an uncoordinated gang of rank amateurs.
You mean uncoordinated gang of rank amateurs like the fed governors, the treasury secretary, and the presidents cabinet and the… Oh heck the whole bunch of corrupt bureaucrats and politicians in Washington and NY…?
Forget about the Fed raising rates this year. Raising rates is something central bankers do to combat inflation. China’s action of devaluing it’s currency will be deflationary, as imports from that country, and others that follow their lead will be cheaper. The Fed no longer has room to lower rates to fight deflation. No matter that food, housing and other costs have been rising in this country, basic costs of materials have been falling. That will soon be reflected in things that have risen in price. It already has in fuels. The lower cost of materials has given employers some freedom to raise wages a bit, but wages will also have to follow, giving people less money to spend on those things that have risen. Retail is going to be the first casualty, as people begin to economize. Those jurisdictions that have mandated high minimum wages will be hit hardest, if the trend keeps up for long.
This is where we begin to see what happens to the little guys who think they can outmaneuver the old market adage – “The market does whatever it needs to do to fool the most number of people”.
And again this looks like a case that Richard Russell would likely characterize by saying – “The winners here are the fellows that loose the least”.
Good luck to one and all.
Aloha Friends..I have put my two cents in at this website now and then.. Ok Here’s the God knows How many Trillion Dollar Question…How Much DEMAND can you Continuously create with DEBT…If you can Figure out that Answer..the Future is yours and you know what to Do…!! lolol Thanks for reading..aloha
Another way to put that would be – “How much Demand can you Continuously create based on promises of the insolvent?
Always chasing demands,don’t you all.How about retrogressing gently but quickly enough for the whole world of Nature and Man to be able to continue existence.
We will have one or two panics then the doomsday scare that will bring governments and the people to a point of acceptance of a lower standard of living for most, more taxes and a reset with a new multi-national electronic currency which will push the day of reckoning down the road indefinitely! Gold will be confiscated (at a fair exchange rate) by each member/nation to partially back the new currency and give it credibility. All people in the new union will HAVE to accept for there will be no good alternative!
So how does this latest move on the Chinese Yuan going to affect their invitation into the IMF this October as the latest “reserve currency?”
I think they already played their card today. They’re out and they know it.
BRICS conspiracy? Seems to me we have a Major Conspiracy for price manipulation.
The BRICS are establishing their own currency which they eventually plan to be sovereign from all other world currencies. I personally don’t believe the proclamation of gold held by the Chinese, a bluff, this belief fortified by evident alliance with Putin. This said, then why would they even care about IMF?
On China – there is no free trade with them because they cheat and have been cheating by devaluing their currency for decades. Simple solution: impose a 5% import tax on everything from China, all of it goes to the federal debt. PLUS, announce it will go to 10% if China cheats on their currency again. They would straighten up in a second. Then let them call us to go to the negotiating table, and let us take our time.
I’m a bit puzzled by the reaction to the Chinese move. The Euro, the Pound, the Rubble have all had market devaluations of way more than a couple of percent. China has always fixed its currency to the dollar. Why are we not seeing this as a way for China to compete in Europe? Isn’t that a more important market for China?
If the largest creditor and the nation with the largest trade surplus is forced to devalue its currency, imagine the fate of the largest debtor and the nation with the largest trade deficit for the last three decades when things don’t go their way. Right now world seems to trust the largest debtor and has pushed up its currency. How long this will go on? Expect the currency of the largest debtor to depreciate significantly ( 50% to 70%) from present levels. When there is world wide competitive devaluation, expect gold and precious metals to shine.
With all the market volatility could you recommend some inverse ETF’s or any good advice to hedge investments. We usually think of A rated investments, but now with this roller coaster environment everything is affected. Don’t know where to put the money safely.
Appreciate your advice – thank you!
The Chinese Yuan has never been freely convertible; and by China recently further maintaining a low fixed exchange rate to support exports I do not understand how anyone can give consideration to the Yuan becoming a reserve currency this year or to become a part of the basket of currencies called SDRs. Exports are what built China’s reserves, and a continued weak exchange rate is needed to maintain exports; especially as long as their local economy can not sustain itself. China is still too dependent on exports. It is these considerations from within China that prevents the Yuan from becoming a reserve currency at this time. I think China realized this, which is why China probably lied on the low side about its present gold reserves and is keeping the Yuan down. It is more important for China to prop up exports through a continued weak exchange rate, whilst also maintaining low gold prices to increase their stockpile. To think that the Yuan would become a reserve currency before it is made freely convertible is someone’s pipe dream; and I do not think that even China expects this to happen in year 2015. I am totally baffled how anyone could consider for the Yuan to become a reserve currency this year in light of the above.
Very good summation Will… Will you consider a Fed Governorship…?
My understanding as the consequences of the aggressive action of China in the disputed sea in South East Asian Sea their exports will go downward more faster than import (in the reversal action), which means become worse.
8/12/15
What the Chinese devaluation of the yuan means is that things are worse in China that you might think just from reading about it in the news media. And that they did it twice (another cut in the yuan on Wed followed the one Mike wrote about on Tues) is puzzling – since they seem to have stated on Tues that the cut was a “one time” thing. I guess after promising there would be no more they couldn’t hold off another cut in the yuan, even for 24 hours. Hmmmm.
The costs of doing business in China are rising – and the cost in currency – or money – are not the only ones going up. Chinese business are getting a lot more aggressive in recent years. I can’t say as I blame them for wanting to be more than the sweat shops for the world. Starting to produce and market under their own label is understandable – it’s been done for eternity in the history of business. But their desire for money has also caused some of them to overstep their bounds in relation to foreign business partners.
As subcontract manufacturer for foreign firms (I didn’t say American because they make goods for a host of companies from nations all over the world) the sub-contractor (sub) has a business deal to produce product, but does not own the product. Ownership of the product, it’s design, and everything having to do with the product (including its production schedule) belongs to the principle – or the company who has hired the sub-contract manufacturer. And generally accepted business practices apply in those situations including expectations (on both sides) about product quality, delivery timetable (set by the principle) and terms of payment. And if these are not satisfactory it’s understood that the principle can cancel the contract and take its business elsewhere.
But I’ve become aware of at least one Chinese sub’s didn’t want to accept the principle’s delivery timetable – they want to make more product and money. So this sub refused to accept the principle’s change of delivery schedule (it was slowed down) and demanded early payment on goods, with the product to be delivered held in hostage to punish the company they were making goods for. This is what I mean by “overstepping authority” – because the sub-contractor does not set delivery schedule and does not have the right the change terms of payment previously agreed upon. The principle (or company for whom the goods are being made) is the decision maker and the one who will both take delivery and pay for the work. It’s their call, not the sub’s.
The reason for this move on the part of the Chinese sub is clear – greed. They want the work and the money that comes with it. That part is clear – but they seem to have lost sight of the fact that the principle company runs the show. Using inventory and schedule to hold the principle over a barrel (and in this case the American company complied and made that payment – even though it was a hardship) is not the way to treat a “business partner”. And this company will learn that when the company they are sub contracting for pulls it’s business and moves it elsewhere in the future. (And that is the resulting plan in this case) This move on the part of the Chinese sub reflects a lack of both business smarts and common sense. It is never a good idea to alienate those you work with in business.
Costs can mean a lot of things. The Chinese have bent over backwards to accommodate the manufacturing needs of foreign companies. That has “earned” them a lot of business, but if that stops the costs of doing business in China will rise for those companies who want to have work made there, with predictable results.
At the time of writing I read online that Ford is relocating a vehicle manufacturing plant from Mexico to Ohio. And in the ultra-competitive automotive industry, you can be sure that costs were carefully taken in to account before that happened.
John
The hundreds of thousands of vacant apartments built to meet the need of the natives moving into the Chinese cities for work, who never arrived. This seems to be the tipping point for the collapse of the Chinese economy. Look how long the US economy has been is a slump after the collapse of the stepped-up in three years mortgage interest derivatives market. Seven years and counting! Once an economy steps into quick sand, getting out is a huge and lengthy problem. The economy has to recover first and that takes years with the debt burden of a government created problem funded with political contributions,
Does anybody still think that Republican Nixon did the right thing by going to China (when it was a third world nation) and opening it up to trade with the world? Billions of American jobs are now in China and they now have the fastest growing Military budget in the world…..Didn’t Republican Preston Bush have a little something to to with supplying the Nazis?
Mike, I fail to see there has been any real difference between the progressive liberal Republicans and the liberal progressive Democrats for the last 63 years… Oh wait… It’s that big “R” and that big “D” behind the politicians names…!
STOP BUYING ANYTHING MADE IN CHINA GOD Bless America
Yuan has been pegged to US dollar. Dollar rises, so yuan rises, China suffers (eg exports just as US exports suffer). So China wants to devalue yuan. Where is the surprise?
I’ve sent an email request about this before: I want to print out “Convergence” – Larry’s 44-page white paper about the upcoming “global implosion.” But the result I get is illegible (solid colored pages). I prefer to read important documents in PRINT. Can we get access to that file in a printable format please?
Perhaps this sounds infantile but maybe it’s time for America to stand tall and become more protective. And most importantly start looking out for its own. Bush II strongly cautioned about becoming a “More Protective Nation” and perhaps that should have been a clue. This is not about Politics or a party view but rather survival.
We’ve always made the best products. If you don’t believe me go somewhere that sells second hand goods or antiques and find something mechanical made 40 plus yrs ago in the USA, guess what it still works. Myself I’m tired of spending good money on inferior products made in China. Their (China) coffers are full because we filled them. And contrary to what you may believe most Chinese goods are not cheaper in reality. What you don’t see in the reflection of prices is Uncle Sam and the American taxpayer subsidizing the imports. Of course labor is less but oil is not and either is the cost to ship.
There’s an old saying “You can pay me now or you can pay me later”. What’s the savings if you have to replace it two or three times? To those of you that haven’t experienced this good for you. Ever buy something, take it home, plug it in only to find out it doesn’t work, well maybe once or twice. And what’s the question of the day at the register? Would you like an extended warranty?
Straight up investors and speculators won’t like this but when no good or service or product is produced ultimately none will exist. Money creates nothing. Don’t believe me?
Take some currency out of your pocket and put it on the table or floor and watch it reproduce. People produce the goods and services and that’s where we need to be putting our energy.
And the rest of the world, screw them… They really have nothing that America needs, do they.
Here’s a novel idea, the next time your toilet or lights don’t work import someone to fix them.
This view represents regressive economics. Isolationism and tariffs will obstruct trade, and increase the prices of goods in the US and lower the standard of living of American people. There are tradeoffs involved and if we cut off lower cost producers from outside the US, American companies will go back to settling for inefficient production and happily charging higher prices for everything knowing consumers are stuck without options.
And you have to remember that one of the drivers of low quality goods is pressure from retailers in the US to get what they want as cheap as possible. Price point is not just a decision made by foreign makers of goods.
Now I do not believe we should give up on American productivity and competitiveness. These are qualities American companies can and should work towards excelling at. But throwing the monkey wrench into the consumers purchasing choices does not foster American ingenuity in either competitiveness or quality. The points is that to “be good” at making things Americans should be able make goods that are competitive – as the Germans and Japanese do (and they are not low cost nations either).
Tariffs are a bad idea for another reason – they never go unnoticed by other nations, who will then put up tariffs against US goods. And the USA is the largest exporter of goods in the world – so that will hurt the US economy in a big way. Free trade is the better choice. Inefficient American jobs have to be changed over to efficient ones to put our people back to work. But subsidizing unnecessarily high costs of US manufacture through gov’t intervention is always lousy and wasteful idea.
As for the toilet example – that (and many other jobs) do not lend themselves to being “exported”. I highly recommend that people planning a career look to jobs that do not export well, and to not lend themselves to automation well. That’s where better employment will be. In the meantime if you are the homeowners you will continue to pay through the nose to get that toilet fixed.
John
As i understand it, the US demanded that China peg its Currency to the US dollar, as one of the conditions to join the IMF, when the deal fell apart, then China had nothing to lose via devaluing its currency.
China’s exports were falling due to its currency rising, thus it was caught between a rock and a hard place, thus by not joining the IMF it could devalue. The current drop in its stock market left it no choice.
Consequences, now if the IMF starts to print SDR,s, it could be a MAJOR Black Swan Event.
Reply to PeterW – I’m not sure where you got this view of China and its currency – but it is not correct. The US does not advocate rigging (or pegging) of currencies at all. The US advocates that currencies should be valued by the markets – not by gov’t degree. That is how the US dollar( USD) is valued, as is the currency of most major and developed nations.
Furthermore the Chinese policy of pegging the yuan (aka – renminbi) to the USD is has a very negative impact on the US’s domestic production (and hence employment), as it does on most other nations economic picture. The US gov’t has been crying for China to remove the peg and let its currency float on the market, as the USD does and as most other major currencies of major nations do.
But, as the Chinese know, if they do that the yuan will surely rise in reflection of economic success in China, which will have two major effects. First, it will increase the buying power of Chinese citizens, especially when it comes to affording imported goods (coming into China). Second it will increase the effective price of Chinese exports and it will slow down purchases from them by other nations. Exports have been the engine of China’s economic surge and is the primary source of revenue for the gov’t who owns most of the nation’s major corporations. But China’s is clear – they want to stop that appreciation of the yuan to keep the export engine flying (and PeterW – you are right about this – lower valuation gives a boost to exports) which also keeps money rolling in to the and gov’ts bank accounts. This of course takes place at the expense of the standard of living of Chinese citizens. Recalling that China’s gov’t is not a democracy and they are not accountable to their citizens helps you picture why this decision was made.
The fact is that everyone is trying to pressure China into letting it’s currency float on the markets and China as steadfastly resisted. But since this is a domestic policy decision there really isn’t anything other national gov’ts can do about it – China will do as they please. But the Chinese know other’s don’t approve of this policy (of pegging to the USD) so in the recent devaluations they have made a point of stating that the devaluation moves are leaning in the direction of a market driven valuation of the yuan. Nothing could be further from the truth, of course – but it sounds good and so they say it.
Sorry, but China is not going to war. It was the US, with all its bluster, that browbeat China into raising the value of the yuan in the first place. They never wanted to do it, we bullied them into it. Now they have had enough of our big talk and are just moving the yuan back to where it was.We need a scapegoat for our governmental incompetence over many many years and China is our new whipping boy. The government there is fighting for its life, with riots and demonstrations, etc. all hushed up. I lived in China for 5 years, by the way. As for war, it is us, this time, that wants World War III, flying over what they consider to be their territory with the head of the Pacific fleet in the plane. That is pretty close to war. I suggest buying all the Chinese yuan you can, as it may soon be backed by gold and you can buy ETFs or even have a Chinese currency account at a Swiss bank. How sweet is that. Might as well make money on it. China is on sale. I am buying what I can afford at this time. The main reason for currency wars is that governments all want inflation because they are all dumb. We did fine with deflation in the late 1800s. Deflation benefits savers. Anyway, my thing is stopping World War III, even though I know it is “Mission Impossible.” I hope everyone here makes money on this crisis. I am @BRZEE_BRZEE on Twitter. China is one of the two countries on earth that doesn’t mind telling us to f*^# off. France tried it by advising us not to go into Iraq and we threw a hissy fit. Right now the devaluation is China’s way of saying, “This is for bombing our embassy in Belgrade. We have long memories.” I would love to subscribe to Larry’s premium service. Maybe I can hold up a liquor store for the money! Just kidding.
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