Through "unofficial" think tanks sponsored by the Chinese government, "intellectuals" have suggested China begin a massive campaign to dump dollars on the international market, which would cause the real value of a dollar to drop.
The reason they are doing this is because the U.S. has insisted that China un-peg the value of their currency, the Yuan, to the dollar. This artificially low value of the Yuan makes Chinese goods cheaper in America and makes American goods more expensive in China. This naturally causes the much ballyhooed trade deficit between us and China.
But what would the devaluation do to the U.S. Well, when a flood of dollars is released on the market, this causes interest rates to rise on Treasury Bonds. The reason is that the U.S. wants to control the amount of money in circulation, so they would raise rates, to encourage more people to buy bonds, which would absorb a lot of the cash. The article mentioned above predicts that this would kill the housing industry, as commercial loans are linked to the Treasury bond yield.
What the article doesn't mention, is that people invested in Bonds would be doing quite well. Banks who issue the bonds would be doing well, too. Moreover, China would be shooting themselves in the foot by eliminating the main customer for their goods (30% of goods exported from China are bought in America). It would also hurt other countries in Europe and Japan that keep a large portion of U.S. dollars in reserve. This would, in turn, decrease those market's demand for imported goods.
So, I say, call the bluff. Let them do whatever they want. Sure it will hurt us a little (housing and corporate borrowing), but it would hurt the fledging economy of China much more.
President Bush agrees and made a statement today calling the idea "foolhardy."
No comments:
Post a Comment