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The looming fake currency war

the fake currency war

Bank of England governor Mervyn King has warned that tensions between countries over their respective exchange rates could degenerate into trade protectionism amid talk of a potential ‘currency war’.

So basically, economists and finance ministers who brought up the fear of a currency war are now saying it’s nothing to be afraid of and everything is China’s fault. Indeed, according to John Ross, the supposed currency war term being used by deindustrialized nations like the US is being used as a smokescreen. The core of the “currency wars” – in which China has been accused, primarily by the US, of undervaluing the renminbi to boost its exports – is a simple piece of arithmetic. The US has only a quarter of China or India’s population.

America can remain the world’s largest economy only if average Chinese or Indian living standards never exceed 25% of its own. As – rightly – China and India will never accept this, a peaceful global outcome therefore requires the US to abandon its undesirable and impossible goal of a readjustment of the dollar-to-renminbi valuation.

Western debt the issue, not China: Academics, Xinhua

China Daily Xinhua concurs with these findings in one of its recent publications: The world’s largest debtor is using dollar dominance and debts to suck the wealth from emerging economies.

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In a drummed-up currency war, in which China is viewed as the main target, the United States once again revealed its desire to promote the redistribution of global wealth to its own advantage.

A currency war is in essence a financial war, or a war for more wealth possession, one in which the country that has the dominant say in world’s currency issuance will gain an absolutely advantageous position in global wealth distribution.

us trade deficit 2010

The US has long skillfully exercised financial policies characterized as “economic egoism”. The world’s sole superpower has been depending on the inundating issuance of the dollar and its national debts to be the two major engines that sustain its economic growth. As a result, the Dollar Standard System has evolved into a kind of “debt standard system” to the US’ advantage.

A typical example is Washington’s attitude toward its bulging fiscal debts. To defuse its astronomical government financial debt, which increased to $12 trillion in 2009, or 82.5 percent of its gross domestic product the same year, the US Federal Reserve adopted a Quantitative Easing Monetary Policy in the hope of expanding the country’s balance sheet and monetizing its fiscal deficits, so as to reduce its debt-holding costs.

Basic arithmetic explains problem

The problem is a simple mathematical fact. Let us consider what “trade” actually is: You grow oranges, I grow apples, we each want what the other produces so we trade each other an equal value (not number) of our goods to each other. This is free, fair, and balanced trade.

So how to trade deficits occur? Let us assume one orange is of equal value to an apple. Unbalanced trade would be trading one apple for two oranges, but because both fruits are of equal value the individual with oranges would never agree to such a trade. So once again I ask how do trade deficits occur? The person who wants two oranges, but can only produce one apple (either due to lack of productivity or laziness) must come up with the equivalent value of the extra orange from one of two ways, either they trade an asset, such as stock in a company they own, or with the promise to provide the second apple at a later date (ie, taking on debt, usually with interest).

Generally, the second option is the most prevalent, and in the real economy individuals obtain this debt through consumption loans in the form of credit cards, mortgages, and consumer financing (no payments for 24 months!)

Now that the private American consumers can take on no more debt, the US government must run a deficit (take on debt) in order to fund the trade deficit; no increase in combined private and public debt, and there can be no trade deficit.

But why do the Americans have to operate with a trade deficit? Everything they want is now made in China. But why is it made in China? China is extremely protectionist, and to sell in China, Western companies must 1) make it in China 2) give up part ownership to the Chinese and 3) release all intellectual property to China.

China is essentially lending the money to the US so that the US can buy their stuff. This isn’t sustainable. Eventually both the Yuan and the greenback are going to have to be massively devalued, and the entire thing will fall apart bringing down both economies in the process, via hyperinflation.

The current arrangement creates an illusion of growth in both countries, but it is only illusion, because there is no increase in standard of living or “real” personal income. The US growth illusion comes from the increase in spending on lower and lower grade products which have a shorter and shorter lifespan, but via hedonic manipulation of the numbers the government can make it look like growth. The growth in China is a capital growth only. The national reserves increase, thus making the country look more prosperous, but what real good does holding the chit of a bankrupt nation really do? China will never be able to convert it’s US money holdings into assets other than paper, unless their domestic economy magnifies at unrealizable rates so that their own citizens can unburden their own government of this worthless paper debt.

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