The China Situation

My dumplings, I have bad news for you. China is not going to change their currency peg to the dollar. There are many reasons for this.

First, and most overlooked, is the history of China in its dealings with the west. Wars and the social fallout from an opium-based economy are still remembered there with great bitterness, even though it was over a century ago. So the feeling is that the west has always run over China and caused great pain for its own economic advantages, like ensuring the supply of opium to Britain in the late 19th century. These feelings underlie the belief that China must do all it can for economic advantage, as they felt they were victimized long ago. So the sense of fair play that our politicians are implicitly relying on doesn't resonate with the Chinese.

Second, too many dollars are being held by the Chinese as wealth. If they allow their currency to rise against the dollar the value of what they already have will fall.

Third, the Chinese themselves are importing a lot, and the amount that US consumers buy from them keeps China from having a trade deficit of their own.

Fourth, cutting off the supply of cash from China will create a stoppage of Americans buying on credit. Essentially it is the Chinese and Japanese buying of US Treasuries that gives us the money to buy. Right now, US consumer demand is what is floating the global economy. Any deflation of demand would cause ruptures, especially in Asia.

Fifth, political fallout within China. Those old men that run the place don't want to lost control, under any circumstances.

Sixth, we can be reasonably assured that the US Congress is either posturing and doesn't mean what they say, or are ignorant of what they are really doing and are going to be educated into dropping their China legislation. Econo-Girl says that because of the US fallout of higher prices for most consumer goods. Inflation. And the implied counter-threat of China no longer lending us money to fund our lifestyles.

From the Chinese perspective:
  • Is the US going to declare war over this? No.
  • Is the US Congress going to take it on the chin with the voters with higher prices for daily living? No. Not from the displays of courage from that body recently.
So finally, what are we going to do, other than complain loudly enough so that the voters can believe something is being done? We can threaten and posture, but the US has an unhealthy dependence on foreign monies. And the foreign monies have an unhealthy dependence on us.

To reprise the British gloom, how long is it going to last?

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