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starbucks4ever (97.62)

Strong currency is a good thing

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April 03, 2010 – Comments (11)

This whole currency manipulation debate leaves me scratching my head and wondering who is the greater fool here: the Chinese government or the American congressmen. Where did they get the idea that China ever benefits from cheap currency in the first place?

Let us consider any typical product that China exports to America. Let it be, say, the patriotic star-and-stripes China-made American flags on the shelves of Walmart. Suppose, for simplicity's sake, that these flags sell for $1 apiece. What is the cost structure of these flags?

Naturally, 50 cents out of this dollar will go to Walmart, Inc for its intangible "retail services". Then 20 cents will go to the wholesaler company that sold these flags to Walmart. Then another 20 cents will go to the producer company - a Seattle-based office that "produces" American flags by ordering them from a Chinese factory. The Chinese factory owner will then receive the remaining 10 cents. After paying 5 cents to the row materials supplier - A Korean textile company that made the cloth for the flags, and a Brazilian lumber company that supplied the wood for the sticks, the factory owner pays 2 cents in factory maintenance costs, 1 cent to the government, 1 cent to the workers, and takes 1 cent as his profit.

Suppose now that China has revalued its currency by a whopping 100%. Whatever Chinese land, labor and capital could be had for 1 cent before, will now cost a whopping 2 cents. In this brave new world, the factory owner can no longer afford to ship his American flags to Seattle for 10 cents apiece. His new cost structure requires that he must pay 4 cents in factory maintenance costs, 2 cents to the government, 2 cents to his workers, and finally, he now also wants a whopping 2 cents as a reward for his entrepreneurship talents. And of course, he must still pay 5 American cents to his Korean and Brazilian suppliers. So the American "manufacturer" company now receives a new invoice for 15 cents per flag. There has been a 5 cent price increase as far as the American company is concerned. As one could expect, the "manufacturer" refuses to swallow this expense and passes it to his wholesaler customer. But the wholesaler also refuses to swallow the 5 cent increase in costs and passes it to Walmart. But Walmart also refuses to swallow the increase and passes it to the customers. And now, as a result of this dramatic 100% currency move, the American patriots shopping for cheap flags see a new price tag of $1.05. There is no doubt among the economists that this intolerably high price is going to undermine the export of stars-and-stripes to America by forcing consumers to switch to a higher-quality German variant priced competitively at $5 a flag.

Nicht!

This is just not going to happen. At the current price point, the elasticity of demand for China-made American flags, drywall, and lead-painted toys is essentially zero. The volume of trade with China is simply not a function of yuan exchange rate vs. the greenback. It is entirely determined by the ability of Americans to pay for the hmm...well,...speculating...sorry, I was going to say, importation, logistics, merchandising, distribution, storage, tracking, promotion, market research, wholesale and retail services offered by the American "businesses" that do business with China.

Which means that China has nothing to fear from currency revaluation.

Except of course that when they look at their 2 trillion dollars invested in Treasuries, they will have to wonder why the hell they ever bought that junk that now won't even buy them much land, labor, and capital in China proper. Someone will have to lose face...  

11 Comments – Post Your Own

#1) On April 04, 2010 at 12:43 AM, whereaminow (22.35) wrote:

Dance of the crackposts.  Very nice post.

David in Qatar

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#2) On April 04, 2010 at 12:44 AM, whereaminow (22.35) wrote:

Arrrrrgh.  that's 'crackpots'.

Always weakens the insult when you misspell it :)

David in Qatar

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#3) On April 04, 2010 at 9:08 AM, devoish (98.37) wrote:

Naturally, 50 cents out of this dollar will go to Walmart, Inc for its intangible "retail services". Then 20 cents will go to the wholesaler company that sold these flags to Walmart. Then another 20 cents will go to the producer company - a Seattle-based office that "produces" American flags by ordering them from a Chinese factory. The Chinese factory owner will then receive the remaining 10 cents. After paying 5 cents to the row materials supplier - A Korean textile company that made the cloth for the flags, and a Brazilian lumber company that supplied the wood for the sticks, the factory owner pays 2 cents in factory maintenance costs, 1 cent to the government, 1 cent to the workers, and takes 1 cent as his profit.

Are these numbers accurate, from a verifiabe source? Or are they invented for illustrative purposes? It would make a very big difference to the results if the Chinese factory owner is getting $.50 of that dollar, shipping $.30 and the US retailer and importer splitting the rest.

Same question for the $5.00 German flag. Is that an accurate representation of the cost comparison between the German made Americn flag and the Chinese one?

And isn't it also likely that these numbers/percentages would vary greatly depending upon the actual product being imported? Airbags as opposed to Flags, as opposed to silicon wafers, as opposed to fruit as opposed to electric guitars?

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#4) On April 04, 2010 at 1:08 PM, SockMarket (42.34) wrote:

crackposts was much better :)

 

I too would be interested to know the answer to devoish's Q

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#5) On April 04, 2010 at 1:35 PM, portefeuille (99.60) wrote:

China overtakes Germany as world's top exporter

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China's commerce minister: U.S. has the most to lose in a trade war

...

But if the United States does decide to impose tariffs on China, Chen said, American companies operating in China, which account for more than 60 percent of China's exports to the United States, would surely be hurt the most.

"In the end," Chen said, "America is the one that needs to adjust."

While some analysts have predicted that China would soon start to let the yuan appreciate, Chen's interview illustrated the fact that there is a strong lobby in China opposing revaluation. One reason why a revaluation would be dangerous for China, Chen said, is that profit margins for Chinese exporters are tiny -- ranging from 1.7 to two percentage points.

...

----------------

 

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#6) On April 04, 2010 at 3:25 PM, memoandstitch (< 20) wrote:

Before the German flags, there will be Vietnamese, Philippine, Guatemala, Indonesian and etc flags flooding the U.S. market.

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#7) On April 04, 2010 at 7:37 PM, alkusari (69.08) wrote:

its mind boggling....Why must someone pen a blog defending the idea of having strong purchasing power?

 This reminds me of time I overheard doctors at a hospital arguing amongst themselves on the benefits of having a strong immune system vs a weakend one.

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#8) On April 04, 2010 at 7:48 PM, starbucks4ever (97.62) wrote:

#5,

Profit margins just reflect competition between Chinese factories, not a lack of competitiveness vs. Germany, Philippines, or even Vietnam. Every biologist knows that intra-species competition is more intense than inter-species.

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#9) On April 04, 2010 at 11:13 PM, jgknot (31.11) wrote:

the truth is that chinese buying the us treasuries is like an insurance to them. you want to have it when you are young and poor . and you work to become rich, as you become rich you know the insurance isn't worth much, who cares but you are rich now thats what matters.

if all hell break loose intially or in the middle you have your insurance to protect you. infact thats what happenned during the recent crisis, that had  their currecy pegged to the one they most own and spend a lot as they had a lot in reserves.

chinese are not making a dollar product for 10 cents, they are making a 60 cents product for 30 cents, with 20 going to their own economy.

because no way in hell walmart is paying 50 cents for a 10 cent product, they are WALMART only because they are able to cut all the middle men..so i would say atleast the product is worth 30 cents. and also no way they sell a 50 cents product for a dollar, did you look at their margin, i would say 60 cents max.

so when there currency appreciates, the other little guys(countries )will benefit by coming and selling for 23 or 25 or 27 cents, this way the money go to the litle guys..

its like our bailout fund gone to the big banks and not the little banks, here it was ok as the big banks were part of our national infrastructure. but when it comes to countries, iam (may be congressmen too )  worried because its a diff country, which is on its path to take over us,

its all relative to what. we know we still be in deficit but not with china , so money won't flow there and hence slow growth, hence less worry..

instead of creating one giant monster, create small ones more so you can handle them.

but china knows they need to grow fast to get their billion plus all up together , so as a communist nation their focus is on the average guy whose job is more important than the value of money. so money flow there as the average guy wants the job for not so great money. average guy grows to be a better than average guy hence better nation.

meanwhile they keep  buying insurance, just in case.

with all the money coming , buying insurance/puts is a sensible thing don't you think.

why from US.. you buy insurance from someone who is stronger and stabler than you..hence US

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#10) On April 04, 2010 at 11:59 PM, starbucks4ever (97.62) wrote:

#9,

This is dead wrong. If you know what you're doing, you buy insurance from someone who is weaker than you, so there is at least a decent chance they will honor their promises when you need them. 

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#11) On April 05, 2010 at 4:28 AM, jgknot (31.11) wrote:

well the beauty is they will be stronger , and the insurance guy end up weaker later.  but not today.say the insurance end up too weak, still don't care because i will be so dawn worthfull at that time.

who cares for the million insurance i took when was young, now that iam old and iam a billionaire

 

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