If China devalues...

[Bigmack]

are we screwn?
- - - - -
1930s beggar-thy-neighbour fears as China devalues
China has begun to devalue the yuan for the first time in over a decade, raising fears that it will set off a 1930s-style race to the bottom and tip the global economy into an even deeper slump.

The central bank has shifted the central peg of its dollar band twice this week in a calculated move that suggests Beijing aims to offset the precipitous slide in Chinese manufacturing by trying to gain further export share abroad.

The futures markets are pricing in a 6pc devaluation over the next year. "This is clearly a big shift in policy and we are now on alert," said Simon Derrick, currency chief at the Bank of New York Mellon.

The move follows a Politburo speech by President Hu Jintao warning that China is "losing competitive edge in the world market".

China has allowed a crawling 20pc revaluation over the past three years. Any reversal risks setting off conflict with the incoming team of President-Elect Barack Obama in Washington. Mr Obama called China a "currency manipulator" during the campaign, a term that carries penalties under US trade law.

http://www.telegraph.co.uk/finance/economics/3546471/Chinese-economy-1930s-beggar-thy-neighbour-fears-as-China-devalues.html

[kristopher]

1. So let me get this straight

China has several trillion dollars of our debt.

We are printing money like crazy with no intention of slowing down in the foreseeable future.

More dollars chasing same number of goods equals devaluation of the dollars China is holding.

When china attempts to compensate they are labeled "currency manipulators"?

Isn't that what a country acting in its own interests SHOULD do - protect the value of its assets?

I don''t see a problem except for the weaselly plan to devalue our way out of legitimately acquired debt.

[truedelphi]

2. I think you're understanding the central issues

Some on DU don't.

Last week on DU, there were a group of people congratulating each other on the fact that their accounts are now 'safe', as the FDIC has raised the limits of its protection from $ 100K to $ 250K.

I have nothing against wealth, but any person with
$ 250 K in an account here in a bank in the USA that thinks it matters how mcuh FDIC says it will protect their money is seriously deluded.

Serious independet economists no longer know whether the Treasury is protecting the FDIC or the FDIC is protecting Treasury, things are that crazy. And it might as well be Scott Tissue Paper, from my reading of the situation.

[CoffeeCat]

3. I am very concerned about...

...our money in the banks--as it relates to the FDIC insuring those deposits.

When Washington Mutual failed, buried in several articles about the failure--were quotes about
the FDIC being stretched as a result of this one bank failure. Yes, WaMu is a very large bank,
but they were strapped after that ONE failure?

I really think people who are not at least asking questions about the FDIC's ability to insure
deposits---are living in a fool's paradise.

Is the FDIC really prepared to and able to insure deposits if there are untold numbers of bank
failures that happen all at once?

Most bank failures happen quietly, on a Friday--as a bigger bank gobbles up the smaller, failed
bank. What happens when a failed bank has no buyer? If deposits are FDIC insured, how long
before our money is returned?

Our government is so screwed up right now...I just have to question their ability to keep their
promises to the American people. Especially when it comes to our money.

I think these are important questions to ask and I hope this discussion continues--because I'm
taking nothing for granted in these challenging times.

[truedelphi]

8. One differernce between the M$M now and back in the 1980's

I sback in the 1980's the newspapers woul dhave sideabrs and graphs explaining things.

I remember when Illinois Continental failed in the early 1980's, the media clearly announced that only three or four more failures like that one and the FDIC provisions would mean nothing.

But these days, Treasury will print whatever the FDIC needs, and/or vice versa.

[westerebus]

7. Second look.

People in China are not paid in dollars. By pricing goods in under valued yuan compared to over valued dollars, they have a competitive edge. Their currency does not float in value like Euros or dollars. Euros go up, BMW's get too expensive. Sales slow down. Not good for the Euro zones leading economic force, Germany. Who by the way are not happy with the ECB's rate cuts.

For China where growth in the world market keeps the country stable and BMW sales up, there is not much choice when they are headed into recession. If China's economy stalls, Tienanmen Square will look like Woodstock. That's what the Communist Party will try to avoid even if it sinks the value of their currency.

There is a fallacy about China's trillions of dollars of reserves. A lot is already spent on investing and infrastructure both internally and around the globe. Buying friends and influencing governments. They are not a debtor nation like we are to be sure. They are warning the world don't expect a bailout.

China has huge problems all their own. They will look out for themselves. Our problem is what happens to the value of the dollar and where are we going to get credit to run this country?

[unlawflcombatnt]

10. Yes, China is a currency manipulator

"So let me get this straight
China has several trillion dollars of our debt.

We are printing money like crazy with no intention of slowing down in the foreseeable future.

More dollars chasing same number of goods equals devaluation of the dollars China is holding.

When china attempts to compensate they are labeled "currency manipulators"?"

Yes, that's exactly what currency manipulation is. But they're doing the opposite of "protecting their assets." They're devaluing their currency, which also devalues their own assets, and more importantly, their exports to the US. They're devaluing their currency to make their products cost less, so they can continue flooding the US market with cheap-labor produced imports.

They're not "protecting their assets," unless you consider devaluing their assets (and production) as protection.

If China didn't manipulate their currency to make their products excessively cheap in the US, American-located companies would be in a better position to sell goods to our own American consumer market.

China has no justification for devaluing their currency. They've got over $2 trillion in foreign currency reserves and a trade surplus with everyone on the planet. If they can't sell their imports overseas, then they can use some of their surplus to buy their own goods, and help their own workers in so doing.

Unlike China, the US doesn't have that luxury.

The solution to China's currency manipulation is not to just jabber about it. The solution is to put huge tariffs on everything China ships to the US. We buy over $300 billion in goods from China each year. That's $300 billion that Americans could be spending on American production, and creating jobs for American workers.

[Bigmack]

4. More China....

I think I know what this means for the US....
- - - -
Major Chinese Investor Loses Confidence in Paulson’s Bailout Plan

The man who heads up China’s new sovereign wealth fund, Lou Jiwei, startled a lot of people this week with his surprisingly undiplomatic comments about the prospects for his fund pumping more money into cash-starved Western banks. What does it mean?

Lou, speaking in Hong Kong at a conference organized by the Clinton Global Initiative, said managers at China Investment Corp. “don’t have the courage” to invest in Western banks because they don’t know how bad things will get. He also said he had “lost confidence” over the lack of any consistency to measures being taken to fix the banks’ problems. It’s pretty clear he was talking about the ever-changing Paulson-led rescue plan.

When a big investor like the $200 billion CIC chooses to publicly disparage the state of Western banks and the efforts to fix them, it’s bound to attract some attention. Perhaps it was posturing: if Lou complains loudly enough about the lack of protection for his investments in Morgan Stanley or Blackstone – both of which have lost billions on paper — maybe CIC can get those protections on the next big deal they sign.

Then again, Lou may have merely been speaking his mind. If so, he’s articulating what much of the rest of the world already thinks anyway. Does anyone plan to pump billions of dollars into a bank these days that doesn’t own the presses to print the money?

http://blogs.wsj.com/deals/2008/12/04/major-chinese-inv... /

[marketcrazy1]

5. if china devalues

they would ( again ) flood the market with cheap stuff! this would be very bad for us as it would increase deflationary pressure and push the U.S. AND most of the developed world closer to a deflationary collapse ( DEPRESSION ON A GLOBAL SCALE )

[marketcrazy1]

6. rumor has it

China and S Korea may move to devalue their currencies by 30 to 35 percent by year end!

[Doctor Cynic]

9. I don't believe it.

First, no one devalues by *that* much within an Iceland-style economic collapse. Second the Korean Won has crashed recently as the Carry Trades reversed. Neither of those are good for anyone.

It remains to be seen how much China's zillion-dollar stimulus package works.

[Deja Q]

11. "race to the bottom" has been said by many, long before now.

:shrug:

[Hawkowl]

12. Increases the dollar

People aren't considering the benefits that a Chinese devaluation will have by increasing the strength of our dollar. Yes, it hurts our exports, but our exports are a small part of our economy. Really small. The U.S. would be fine if we just manufactured and purchased our own goods in house. We don't need imports except for oil, and we should get the hell off oil.

The devaluation will help us tremendously by sucking up every other country of the world's currencies. Foreigners will buy T-bills as if they're going out of style. 6% devaluation means we can offer T-bills at -5% interest and still attract buyers. We should be able to refinance our entire debt. In order to survive without massive inflation the U.S. economy will need the world's currency to offset the massive, unprecedented money creation that the Fed is doing.

However of major concern, is a point point raised above: deflation. If the currency devaluation gets out of hand we will get into a massive deflationary cycle which leads to all sorts of problems which could last a decade.

So I'm not advocating for the U.S. Treasury to offer negative interest T-Bills. The government needs to offer low rates while slapping Tariffs on currency manipulators such as China, as long as we need to restore our manufacturing base. It is probably a lot cheaper to slap a few well deserved tariffs on countries that deserve them, rather than shoulder the costs of deflation and endless domestic manufacturer bankruptcies and the resultant job losses. Massive job flight to overseas manufacturers is, IMO, the key reason we are on the verge of depression and not a cyclical recession. No jobs equals no wages equals increased credit to maintain an inflated life style equals a bursting mother of all credit bubbles.

Again, the export sector of the U.S. economy, in terms of manufactured goods, is small relative to the size of our consumption sector which comprises 70-75% of the economy.

Tariffs. Make stuff our self. Buy our own stuff. We can use the justification that tariffs are necessary to save the world because we need to protect the new born "green economy". Without such protections these anti-pollution, green, sustainable industries would be crushed by evil polluting foreigners working at slave wages. A green revolution, similar to the 19th century revolution, could be our way out of this Bush Depression.

[westerebus]

13. The tariff already exists.

Look at the product label. If it reads "Made in China" don't buy it. Now that will not cover every thing, but it will cover a lot.

[Hawkowl]

14. Ha!

If only that worked! I stick to it religiously because Chinese shit sucks. It always breaks almost instantaneously. However, sometimes there isn't an alternative anymore. Besides it is my observation that most Americans simply don't act in their own best interest without a boot in the keister.

[westerebus]

17. Would you prefer formal Tariffs? n/t

[Hawkowl]

19. Yes.

For example, the American auto makers claim that healthcare costs add about $2,000 to a new cars price. All major foreign competitors have a national health care system. Why not slap a tariff on foreign cars that covers the difference in healthcare?

Currency manipulation is also a big factor. China, Japan, and S. Korea all work to keep their currencies artificially low against the dollar for THEIR NATIONAL INTEREST. In fact our "own" companies have been shipping jobs overseas to take advantage of this fact and selling us back our "own" products.

Airbus would never have gotten off the ground (pun intended) without subsidies, and commercial aircraft are probably the largest percentage of manufactured goods left that we export. Yet, Boeing has been allowed to export jobs to China, Japan and other countries to manufacture parts for their new plane, the 787. In fact, Boeing's worldwide supply chain has caused monumental headaches and delays with the new plane. Why did they do it? They did it because if they didn't, Boeing's access to foreign markets would be limited! Basically, China and Japan wanted jobs and airplane manufacturing technology as a bribe before committing to buying Boeing planes.

We Americans are simply wimps when it comes to corporations and foreign countries pushing us around on trade issues. The USA is probably the only country that doesn't use tariffs, subsidies, or other strategies to keep jobs in our own country. Why? Because our giant corporations make more money by outsourcing.

[westerebus]

22. Tariffs will not cure American Corporations greed.

Every tax corporations pay in this country comes out of our pockets. Tariffs will be no different. The bailout for the big 3 is the shift of the pension and health care costs to you and me. It's not going to make the big 3 competitive until they cut the workforce by a third. Tariffs are not going to stop that from happening.

Boeing SELLS the technology and permits to produce aircraft and parts. They set the world standard for quality aircraft. Without competition and open markets and the rule of law like trade agreements, there would be less jobs, less freedom, less democracy. Tariffs do not help.

The Farm Bill, the Energy Bill, the National Defense Bill and on and on are subsides for American industry. Our tax dollars at work. Boeing develops new technology through defense appropriations and sells a version of this technology to the world market. We need to get our act together and put national health care as a right for all Americans. Blaming China or Japan for what we have allowed is not going to change what we need to do here.

[Hawkowl]

23. We disagree

Competition? You can't have competition with only two corporations. Nobody every cut their way to being competitive or profitable--that is supply side, simple minded bullshit.

It appears that you equate free markets with democracy and innovation. Not true at all. One man one vote is essential for democracy, which is absent in corporations. Monopolies and oligopolies stifle innovation not sponsor it. ALL of our corporations are oligopolies now. Giant bureaucratic, innovation stifling nightmares. Small businesses and individuals are the best innovators. These cartels, trusts, and holding companies need to be shattered into pieces if you want true competition. (Economic theory dictates that to have perfect competition many, many, companies need to be competing). Our country was founded on tariffs and democracy. Would you say that the founding fathers, were anti-democratic? They were to a man anti-corporation (almost became the 11 amendment) and fair traders.

Boeing sets the standard now like GM did for cars in the 50's. Toyota does now and we will see Mitsubishi for airplanes in the future. Being an airline pilot I can say that almost 0% of "defense" R&D makes it into the commercial side. If we are going to subsidize it would be moe efficient and profitable to subsidize commercial apps only.

Tariffs level the playing field but yes, we need universal single payer healthcare. If you ignore currency manipulation and other protectionist measures by China and Japan we simply will lose the world competition. When we go to the Olympics, nobody makes the Americans start 10 meters back in all the events? That is what our government in effect does now.

We do agree that tariffs won't cure corporations greed. Nothing will. But their profit can be taxed, their practices regulated, and their corporate personhood removed and their officers held responsible. Whole new kettles of fish. As it stands now corporations are "an ingenious device to obtain profit without personal responsibility"--Ambrose Bierce.

[westerebus]

24. We sure do.

Corporations love tariffs. Monopolies love tariffs. Oligarchs love tariffs. Just as long as they are the ones setting them up to insure their own viability and profitability. The less competition they have the better it is for their balance sheets.

Free markets bring innovation and competition and that's healthy for democracies. I do not equate corporations with democracy. They are in competition with democratic principals. They do enjoy the benefits provided by democracy and in particular the freedom and rule of law that democracy provide.

As to the 0% of military R&D going to the commercial side, one example, GPS.

The founding fathers looked after their own self interests and that of the freemen of the new republic. Democracy as practiced today has taken two hundred plus years to get to where it is today. Despite eight years of the last king george. Go figure.

[Joanne98]

16. We can't afford to hurt our exports anymore.

[Hawkowl]

18. Not hurting exports

Tariffs are on the imports. Seriously, there are provisions in trade agreements to impose tariffs when the country is using unfair trade practices such as subsidies (healthcare would be a good argument), and violating environmental and labor laws. The U.S. is by far the worlds largest consumer market and other countries are not going to over react to the U.S. leveling the playing field with FAIR trade, not FREE trade.

Free trade has been an unmitigated disaster. I say this with a classical education in Economics and mathematics. Free trade is a theory that has just not panned out.

[Joanne98]

21. Oh. I agree with you completely!

[Joanne98]

15. How can they devalue the yuan? If they let it float, it will go up against the dollar!

This would be the ultimate currency scam!

[Hawkowl]

20. The yuan doesn't float

It is pegged to the dollar, as many foreign currencies are. This is one of the reasons why I'm advocating for tariffs. China, among others, keeps it's currency artificially low to build up its industrial base, make its exports cheaper,provide jobs for its citizens and enrich their treasuries.

Do you think the Chinese are complaining about how expensive American imports are? I think they're happy to have the jobs they wouldn't have if China didn't use PROTECTIONISM to create jobs?

[notesdev]

25. If they devalue, THEY are screwed

China's economy is dependent on exports. If you throw higher prices for those goods on top of the already catastrophically-falling demand, another revolution would not be far behind.