The Empire Strikes Back: China Daily Warns About Currency War, Blames Dollar
You didn't think China was just going to do the rockaway and lean back, lean back, lean back. Nope - China Daily says: "A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days" and calmly confirms what everyone esle knows: "It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active." Check to you, Tim Geithner and your currency manipulation report. What is remarkable, is how simply and accurately CD writer Li Xiangyang captures absolutely everything that Bernanke is trying to achieve.
From China Daily:
A currency war is spreading as the
dollar's value against major world currencies has continued to decline
in recent days. Some developed countries have begun to intervene in
their exchange rates. The recovery of the global economy will suffer a
negative impact if this trend is not checked.
It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active.
U.S. Federal Reserve's statement that it might restart quantitative
easing — a policy central banks use to increase money supply — triggered
the depreciation of the dollar. The dollar's value against the basket
of currencies has decreased by 7 percent since the U.S. Federal Reserve
began talk of possible quantitative easing.
The move nominally
aims to further drive down the interest rate in America to prevent the
occurrence of a double dip. But it will affect the value of the dollar
too, prompting the dollar's devaluation. In light of the history low
short-term interest rates in the United States, a further decrease in
the interest rate will drive the flow of short-term capital toward
markets of emerging economies, quickening the appreciation of their
Second, the U.S. government's strategy to double its
exports within five years needs the considerable depression of the
dollar. For America, boosting exports is a must in the post crisis era,
because it cannot pin its hope for economic growth on the prosperity of
its real estate market and consumption based on borrowing money.
boosting exports relying on the competitiveness of U.S. companies is
not realistic in the short term. Nor is it possible to be realized by
the strong demand of its trade partners. None of America's trade
partners — except those emerging economies — are able to achieve growth
independently. Judging from the course of history after World War II,
considerable depreciation of the dollar is the sole possible option that
enables America to realize the goal. In this sense, driving down the
value of the dollar has become an important choice in policy for the
United States to recover the sluggish economy..
The last but the
most important point is that in the long run the considerable
depreciation of the dollar will help America to transfer its debts to
others. If we say the international financial crisis nationalized the
private debts, then in the post-crisis era, the United State sees an
urgent need to internationalize its debts.
A great amount of bad
debts of American financial institutions have been converted to
government debt through government aid measures. In 2009, America's
fiscal deficit stood at 1.42 trillion dollars, 3.1 times the 2008 level.
The deficit ratio surged from 3.2 percent in 2008 to 10 percent to a
new high since World War II. The debt of the federal government
increased to 6.7 trillion dollars, representing 47.2 percent of its GDP.
In 2010, the fiscal deficit is expected to be around 1.32 trillion
dollars. How America retains economic growth while reducing the deficit
is a big problem for the country.
Historic experiences show
debt-to-GDP ratio is not directly linked with economic growth and
inflation (even devaluation) in most countries. But the United States is
an exception because the dollar serves as the world currency. For
instance, the ratio decreased from 121.2 percent in 1946 to 31.7 percent
in 1974. Of that number, inflation accounted 52.6 percentage points,
economic growth contributed nearly 56 percentage points and federal
surplus contributed negative 21.51 percentage points. Even if the United
States denies its motives to transfer their debts, it will unavoidably
happen in reality.
Given a sluggish economy and huge amount of
debts, driving the value of the dollar down is in line with America’s
interests, both in short term and in long term. The international
community ought to stay vigilant about the strong motive for active
devaluation under the guise of a market-based move.
By Li Xiangyang, translated by People's Daily Online
Who would have guessed those Chineses know exactly what the Fed is doing...
h/t Geoffrey Batt