FreeMarkets (99.20)

China Has All the Answers

June 21, 2010 – Comments (3) | RELATED TICKERS: AA , X , DOW

The stock market jumped today on hopes that China would strengthen its currency.  The idea is simple, if stuff from China costs more, stuff we make is more competitive.  DJIA component Alcoa were up significantly.

Sadly this whole "blame China" story is completely wrong.  The idea that a country can artificially devalue its currency and screw up the largest economy in the world is complete and utter nonsense.

Let's say, just for sh!ts and giggles, that these China haters are right - that a weak currency is pulling manufacturing from the U.S. & Europe to China and the total benefit of this system is grossly benefiting China at the expense of Europe and the U.S.   If that is the truth, then we have a very easy solution.  Write one big check to China to pay off all our debt.  This would take care of two problems in one quick move 1) it eliminates 1/10th of our total debt and 2) it substantially devalues our currency.  In such a world the Chinese would have to remove their peg to the dollar or oil and other imports would skyrocket in price or they could refuse to remove the peg and go through extreme social unrest as the poorest manufacturing workers in the world find out they can't afford to put petrol into their scooter.  

Needless to say, this scenario would make Americans much poorer and the other $9 trillion we owe in debt would also been devalued making the owners of our debt very upset.

So, even IF we assume China's peg to the dollar is the problem, devaluing our currency won't work out well for us.  Of course the definition of a "peg" seems to be lost on most Americans.  If the dollar appreciates, so does the yuan - so the Chinese yuan is only cheap because the dollar is a trach currency.  

I'm trying to stay as serious as possible in this particular blog post, but if the argument from the China bashers is "They're kicking our collective asses because they have a cheap currency", then the answer is to just keep printing dollars until the cost of American labor is as cheap as China's.  Obama should come out and just say "We'll print so much money a daily revaluation of the yuan wouldn't come close to keeping up with our printing press".

But the above won't happen because everyone knows cheap currency's don't create prosperity.  Chinese jobs are not moving from America to China because of the yuan, they're moving because of cheap labor.  If the yuan appreciates by 50%, a Chinese worker can work for less money and STILL break even.  And if that worker INSISTS on making the same nominal wage, then we'll build more plants in Vietnam, Mexico, Ecuador and Peru.

SO WHY ARE WE TALKING ABOUT THE YUAN?

Simple - to distract the American taxpayer from the crappy job our politicians are doing to our economy.  Running up the debt, over regulating business (and creating business friendly regulations like a $92 million liability cap for a offshore oil blowout).  Basically the American people are waking up to the fact that both party's are in the pocket of corporations.  Big business say they hate regulations, but they actually love them.  The smaller competition can't spread out the costs of hiring dead weight workers required to fill out the paperwork, thus making their products/services more expensive than the bigger businesses.

The answer is to find a scape goat, like the Chinese.  Then the media gets on board and says "Hey, that factory that moved to China to make t-shirts would still be here if their currency was worth more."  Of course we know that the factory would be in Mexico or Vietnam - anywhere BUT here.  But we (as in financially astute FOOLS are in a very small minority).  Just mention currency at a social party and you'll be banished to the dark corners of the basement before the name Ben Bernanke leaves your lips.

Unfortunately China isn't the problem.  We have seen the enemy and he is ourselves.