"Rumblings" about possible political pressure for US$/Chinese Yuan devaluation....this has HUGE and I do mean HUGE investment ramifications. What is everyone here doing to protect themselves or to capitalize on this possible action??
Where is our beloved Slider????????
safehaven.com
(excerpt from the artilce follows below....)
There is only one thing which really gives me reason for concern that the US will not continue on a reasonable growth trajectory, with a few bumps here and there. That is the growing mood in Congress for passing trade protection legislation that could start a series of retaliatory actions around the world that could result in a trade war, a la Smoot Hawley in the 1930s.
Stephen Roach, Chief Economist at Morgan Stanley, writes a rather chilling description of his recent testimony before the Senate Finance committee. He noted that as he entered the room, he looked up and saw a picture of Senator Reed Smoot on the walls, as Smoot was a former chair of the committee and the co-sponsor of the Smoot-Hawley Tariff Act of 1930, largely responsible for the Great Depression.
At the hearing, it was clear that a bi-partisan effort is getting ready to pass legislation that would punish China for the large trade deficit we have with that nation.
Democratic Senators Schumer and Baucus and Republican Senators Graham and Schumer are looking for ways to try and force China to allow the dollar to fall against their currency. They think this would decrease the trade deficit and keep more jobs in the US. They are economic idiots of the first order. But they are smart politicians, which is dangerous.
They know that passing a tariff increase would not be compliant with World Trade Organization rules that the Senate agreed to, so they are working on a way to create a WTO compliant back door.
First, does anyone really think that by increasing dollar costs for labor in China that manufacturing would not go elsewhere? My socks were made in Turkey (which surprised me) and not in Asia. Are we going to pass legislation that would drop the dollar against all currencies? Does Congress really think they can control the price of a currency for any length of time?
The problem is not just in China. The US plays its part by not saving enough and running deficits. As long as the US does not save, we are going to run trade deficits. It is a basic law of economics. If it is not with China, then it will be with someone else.
You have to be careful what you wish for. If (and when) the US consumer saves more, it will naturally be at the cost of increased consumer spending. That would mean a slower US economy.
Roach also accurately notes:
"America's middle-class angst - which is driving the politics of China bashing - reflects a US economy that failed to prepare its workforce for the pressures of an IT-enabled globalization."
Yes, China does need to balance their economy, and float their currency, and they are working on it. The Chinese Yuan is moving from the upper right to the lower left at a very steady pace (see chart below.) This is not fast enough for the Senators, though. They want a much faster pace. Roach thinks that Congress will pass legislation this year that will try and force China to raise the value of the Yuan. Let's examine what might happen if they get their way.
First, let's assume the Yuan drops another 20% in less than a year. That means a 25% increase in the price of goods the American consumer pays on a considerable amount of goods. Can you say inflation, gentle reader?
And it will hit those who make the least the hardest, lower income workers.
"Income inequality grew significantly in 2005, with the top 1 percent of Americans -- those with incomes that year of more than $348,000 -- receiving their largest share of national income since 1928, analysis of newly released tax data shows.
"The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression. While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent..." (NY Times)
Second, what message does that send to the world? Protectionism is ok? Free trade does not work? Let's see if we can start a round of protectionist trade wars, with each country responding tit for tat. Let's kill the engine for global economic growth.
Do the Senators deliberately want to create problems in China by a precipitous change in our trade relations which will have a major affect on world commerce?
I am well aware that global free trade is not a one way ticket to prosperity for all. If it is your job that goes to another country, that affects you deeply. But the US as a whole has benefited tremendously from globalization, as has the world. And yes, some benefit more than others, but that is the nature of free market economics combined with technological change.
The one thing that worries me more than anything else, from an economic point of view, is the drive on the part of politicians to pander to those who want to be protected from change. We should help them, certainly. Education, reform and transitional help should be encouraged.
And then today, the Bush administration announces that it will pursue action against certain Chinese paper producers that the paper industry maintains is subsidized by the Chinese government, reversing a 20 year policy. I can see a case for this, in that it is unfair competition on one level. But it now means that every industry is going to come to Washington crying for protection from competition not just from Chinese companies, but any company that has a government connected with it. That is a potential trend that concerns me.
President Bush would probably veto a bash-China currency bill that would pass the House and Senate, but it is not clear that there would be enough votes to uphold his veto. Two-thirds of Senators voted for a tariff bill that they knew was viable. Maybe cooler heads will prevail. Let us hope so.
But the worrisome prospect is that the economy starts to slow and unemployment starts to rise just as the legislation gets to the floor and up for debate. It will give politicians the appearance of "doing" something, when in fact it will make things worse.
See full article below....
safehaven.com
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