Wednesday, May 18, 2005

The Chinese Yuan (Talk is Cheap)

Let it Be

Politicians (bad ones anyway) talk up and down the US Dollar like its their own stock portfolio. It is common knowledge that a "strong" dollar against other currencies means that foreign goods are cheaper for US consumers (eg everyone in America) whereas a "weak" dollar means that US goods are cheaper overseas, which is good for US exporters.

Let's be honest: the real reason the US Government is asking the People's Republic of China to consider de-linking the Yuan from the dollar is so that a stronger Yuan can buy more dollars. With US government spending - both war efforts and domestic spending - increasing under the George W. Bush administration at a higher rate than under any other administration since the second World War (albiet happily this increase for domestic spending has now slowed for budget year 2006), the government needs those stronger Yuans to cover its profligacy.

Asking another country to devalue (or revalue) their currency is just like telling them what kind of government to have....its a form of fatal conceit, only brings resentment, and its really nobody's business except the government of that country (and the people of a country get the deserved government in the long-run). And in fact, nobody likes to be bullied or told what to do so will no doubt be counter-productive anyway!

A currency revaluation within a country has winners and losers just like any government-mandated policy change. By keeping its currency undervalued the Chinese are just prioritizing their exporters over their consumers, eg keeping the poor poor! The longer the Chinese government holds off freeing the Yuan the greater the shock and economic disruption once it is freed. And it will be freed, as a fixed currency is unsustainable and costly.

It is kind of like free trade, unilateral free trade, eg, allowing goods into your country without quotas or duties or constraints (eg the least costly alternatives) is ultimately the best value for the people. Trade barriers, like fixed-currencies, are just political shenanigans benefitting the well-organized and politically powerful (the State-Capitalist manufactoring sector) over the unorganized, politically-weak masses (everyone else).

The solution is:
1) Cutback US Government spending, and
2) Let the Chinese government do the right thing on its own.