Celebrating a new record
By: BJ Lawson
low for the U.S. dollar against the Chinese yuan:
China yuan central parity rate set at record 7.2566 to dollar vs 7.2672
I guess we’re celebrating… it’s the inevitable consequence of our twin deficits, the $9.2 trillion (yes, it’s now 9.2) national debt and over $800 billion current account deficit. When I was in China this summer, the rate was closer to 7.5 to 1.
So is this good news, or bad news? As with many things economic, you can’t really talk in terms of “good” and “bad”. It just is.
Imports from China are a bit more expensive. Chinese buyers will find our goods (and our companies, and commodities priced in dollars) a bit less expensive. Companies earning money in yuan will see their earnings grow based upon appreciation of the currency alone.
The self-correcting nature of trade and currency imbalances suggests that our currency will continue weakening as we try to reduce our deficits by repaying in “cheaper” dollars. At some point, we’ll be forced to again “work for a living” when a weaker currency makes goods and materials on the international market relatively more expensive.
But we’ll still be competing for our own raw materials and finished goods with consumers in a global market who have more valuable currency to spend. As a corollary, the U.S. consumer stands to lose its status as the privileged “consumption engine” of the global economy to the growing Asian (and especially Chinese) middle class. Watch your grocery bill, and your energy bill.
Wait, you mean we can’t thrive and prosper as a free country by issuing new government debt alone?
January 14th, 2008 at 1:53 pm
Meanwhile…
http://www.kansascity.com/105/story/441167.html
“The currency changer, brazenly plying his illegal trade in the Bank of China lobby, pulled out a thick wad of cash from around the world and carefully removed a bill. The 2003 series U.S. $100 bill was a fake, but not just any fake. It was a ’supernote,’ a counterfeit so perfect it’s an international whodunit.”
January 14th, 2008 at 2:17 pm
Very interesting article, Garland. I read another interesting article about a year ago that talked about the different market values being assigned to different vintage US currencies in foreign countries, where the “greenback” still circulates. For example, employees on cruise ships (often from Southeast Asia) are paid their salary in cash. The cruise ship companies have taken to rotating the order in which the salaries are doled out so that different folks get the “new” $100 bills, versus the “old” $100 bills which are often worth less in their marketplaces back home due to counterfeiting and quality of the note itself.
Amazing how the market adapts in the absence of legal tender laws…
January 17th, 2008 at 3:07 pm
Throughout the known history of humanity, the value of material objects has been at the forefront of human decision making. Being very hairless and needing tools to hunt with, so as to receive protein from game to grow our big brains, we needed stone tools and shaped wood to take down our food sources, as well as to use their skins to shield our bodies from the forces of nature. As civilizations dawned, certain elements became valuable, such as steel, and bronze, silver and gold. With things such as gold about, it may not be necessary to trade five chickens for a pig, when one may be able to trade a certain sum of gold for a pig. In fact, in a certain small society still in existence, particular named sea shells, passed down from generation to generation, hold more value than any some of currency being printed by the current government.
Gold became the most precious element as it could be shaped into many objects of use and, or beauty. The possession of gold by the governments of nations would lead to the creation of paper receipts for different amounts of the gold that could easily be traded throughout societies as monies. Eventually these paper receipts would become valuable in their own right, becoming a fiat currency, and the government would circulate a certain amount for people to use as bargaining chips for their affairs of receiving goods and services. With the invention of computer systems, these monies can now circulate as digits in a machine. All one needs is access to the system to carry out our modern business transactions.
One may ask, what word can I use in my mind, and on paper to manage this seemingly complex issue of revenues? The answer is the term; finance. In fact, in our modern world of scientific inquiry and methodology, finance has become a science.
Finance; “The science that describes the management of money, banking, credit, investments, and assets. Basically, finance looks at anything that has to do with money and the market”. Also, finance can be defined as; “The management of revenues; the conduct or transaction of money matters generally, esp. those affecting the public, as in the fields of banking and investment”.
A key word we see here is management. While we have begun to view finance as a science, we can view management as an art. Now we have the combination of arts and sciences, which brings our abilities as humans to full circle. As humanity has flourished into societies and civilizations, we have learned that we can produce more as a whole by specialization.
In a community, if people who are better at raising pigs, only raise pigs, and people who are better at raising chickens, only raise chickens, the individuals can raise a greater sum of the respective livestock, and then trade with each other. The result is that all individuals are better off than they would be if they tried to raise pigs and chickens. With a society operating in this manner, more is produced, and the standard of living for that society rises. As these individuals specialize, they can form their personal organizations into businesses, such as Bob’s pig farming business, and Larry’s chicken farming business. For their business to be effective, they must become skillful managers of their profession and revenues. As citizens of the public community, and perhaps other businesses or government agencies, come to Bob and give him money for pigs, Bob finds himself the recipient of several sources of revenue. He must manage his revenue and wisely reinvest it into his business. If Bob becomes very successful, he may hire someone who specializes in finances to manage his revenues and investments.
Through advanced transportation and communication, the finances of nations have become a global issue. The two corporate leviathans being rescued today are Merrill Lynch and Citigroup, receiving $19.1 billion of capital from nations such as Kuwait, Saudi Arabia, Singapore, Korea, and Japan. The reasoning for these two giants to be begging for money is major losses incurred from investments gone wrong in the US housing market. The loses of Citigroup and Merrill Lynch push Wall Street’s loses past $100 billion which is equal to 0.7% of the gross domestic product.
Without the boost from foreign investments, these two entities, and the other US corporations in the same boat, as well as some European giants, would be doomed to collapse. In fact, the buy out of the United States economy by other nations has become quite the trend, going as far as the national debt being financed by US Treasury Bonds being bought by Asian governments. Plus, there is an ongoing state of banks stakes being bought by rich oil nations. In the past, it has been the finances of the US that saved foreign businesses and nations. What can our corporate system do to survive this with its pride still intact? Probably nothing, which will probably be the best thing, so we can get back to being capitalists instead of tax serfs and work mules for the corporate elite.
Victor Pillow (17 Jan 08)