Posted on 11/27/2004, 3:36:56 PM by citadel84
Everybody just calm down, take a few deep breaths and relax about what is going on in the currency markets right now.
I have gotten tired of all the doom and gloomers out there so let me try to calm things down.
Yes the US government is trying to talk down the dollar, and yes the Eurocentric press is having kittens over this conversation. The question is why. The answer is not in Europe but in Asia.
First of all it is not widely reported but China has a very bad unemployment problem. The same old story a large supply of workers, from the countryside and relatively few jobs is the city. The situation is not unlike our own at the turn of the last century. To keep the lid on the situation the government, still nominally communist, has been trying to control the situation by essentially purchasing jobs.
How does a government buy a job?. Well you could do it our way through government largest, i.e. government spending. Or by artificially manipulating the economic law of Comparative Advantage.
In fact China is doing both, the Chinese have gone on a building boom over the last couple of years and are buying raw materials out the wazzoo, if you tried to buy concrete this summer you know what I mean. Buy the way that was our stuff they where buying and paying top dollar for it too. The idea is to keep the unskilled worker busy and happy, think WPA folks.
To the answer the question at hand, China is also manipulating the law of Comparative Advantage by artificially keeping the Yuan cheap against the Dollar. The basic idea here is to keep their goods so cheap that it actually forces the consumer to buy them. You might say nobody forces me to buy anything but in reality, another or we all in one way obey this law.
This law argues that a country should specialize and export the commodity, in China’s case raw labor costs, in which its absolute disadvantage is smaller and import the commodity in which it has a higher absolute disadvantage, again in China’s case just about every thing else.
In a perfect world things would be kept in balance because the Chinese consumer would get what they wanted at the best price and the US consumer would get what they wanted at the best price. But and this is a big but, China has a very small though expanding consumer market so the actual advantage is to the US.
What how is it our advantage? Well here is the idea. We don’t pay for anything in Yuan we pay in dollars so the Chinese need to convert our Dollars to Yuan on the Global market. The law of supply and demand holds so our many Dollars chases the fewer, due to the smaller Chinese import market, Yuan. In a truly free market the Yuan would get more expensive the Dollar would fall against the Yuan. Things would even out.
However in this truly free market the Chinese labor costs would rise and their Comparative Advantage, labor costs, would be reduced against the US. This would increase their unemployment problem and result in social instability, not what the Party wants.
So they, like any other Capitalist economy, note the irony, manipulate the currency by reducing the number of Dollars they hold by buying a US product directly, in this case US government securities, with those Dollars rather than converting them to Yuan.
Note China is not alone using this strategy just about every Asian country is doing the same thing most notably Japan.
So what does this all mean? Well the Bush administration is trying to reduce our trade deficit slowly, kind of like letting the air out of a balloon instead of letting it pop and the Asian markets are going to let him do it. It is in their best interest because they keep selling we keep buying and things get more into line with reality. You see the Asian’s are kind of like a bank after a point if the bank lends you so much money the bank doesn’t own you, you own the bank. Think Donald Trump.
Well this is all one big happy thing right? We keep buying both guns and butter, the Chinese keep the lid on and Japan muddles tough it’s impossible situation. Every body wins right? Well almost everyone, the Europeans are going to get screwed and badly.
The basic fact is they, like the Chinese, have high unemployment but are out of ammunition to solve it.
They cannot like the US government spend more they are limited by the EU charter and just about all the countries are at the EU specified limit. So the option is gone.
They cannot like the Chinese alter the law of Comparative Advantage in their favor without massively altering their Socialist government policies. The fixed costs that their welfare states burdens the EU economy with are simply too high.
So this is way the Europeans are screaming but remember, they did it to themselves.
At some point things will come back into balance, we can hope this transition is gradual and peaceful, that is the real risk. We will also need to balance our trade deficit. But when the world has a nearly unlimited supply of unskilled labor, what are the choices?
Well, it all sounds logical, but being a chemist and not an economist, I'll wait for the thread to develop to see further critiques.
FOR $10.00 !!!
For another ten, I got a complete set of bits. This aint real, and it will change, but for now I'm just whoopin it up.
Very interesting. New Zealand's socialists slashed their regulations and welfare state after they just about bankrupted them. Won't the Europeans do the same, or are they so mired in Marxist thinking that it's "out of the question"?
It really boils economics down to it's basic principles.
Great writeup!
And I thought this was a thread about Eurabia...
btt
Aye-aye caption. Anti-China/Walmart flame suit and shields deployed."
Good post. You even mentioned Supply and Demand, too, something those who really don't know much about economics but like to play experts on the internet seem to never mention much.
It's a question of will, They will get with the program, someday..... But it will Hurt.
The country of manufacture just transferred x amount of dollars of wealth to you in form of underpriced manufactured goods, aint it great?
Very good vanity!
I fear the latter..
It's a holiday weekend..You may be safe.
We visited China during our first daughter's adoption, one of the translators, in her 30's told stories of catching birds and cooking them wrapped in mud so they had something to eat. Now she has a decent life, at least a chance, there is no way it can be taken away from her.
Know a good chain saw for a lady who is not very strong but loves to clear brush and haul firewood? I'd be willing to pay for one that will start easily and not have so many tantrums. I have an electic one, but wish for a real one that I could manage all by myself .
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