Friday, October 22, 2010

China's Dollar-Commodity Vise

Despite an outpouring of opinion about revaluing the Chinese yuan, very few (if any) commentators describe the vise China is in as a result of pegging the yuan to the dollar.

If there is any topic which generates more spin and less insight than China's currency, the renminbi (yuan), it has escaped my attention. It is remarkable how opinions magically gain credibility by being unskeptically repeated ad nauseum.

If we scrape away the spin, we find that China is not in charge (as many seem to think, or want to think) of the dynamics, but rather it is trapped between the jaws of an inescapable vise in pegging its currency to the U.S. dollar.

If the USD continues plummeting against other currencies, then China will be paying more for the commodities it needs to fuel its economy. Oil is priced in dollars. Even if it is priced in yuan, what difference does it make? None, because the yuan is pegged to the dollar. One dollar and 6.8 yuan buy the same quantity of oil because of the peg. The Chinese can "inoculate" their dollars by issuing yuan in trade for domestically held dollars, but they still can only buy as much oil as the dollar bought.

Trading their yuan for yen or euros still buys them the exact same quantity of oil (minus the exchange commission costs).

That's the downside of pegging to the dollar: the yuan is merely a proxy for the dollar.

The lower the dollar sinks, the more commodities will cost in China--not a good thing for an economy that is heavily dependent on inefficient production and a real estate bubble for its growth.

The only way to decouple the value of the dollar from commodities would be to have two different valuations for the yuan: one for physical-goods commodity trade and one for currency trades. Short of that dual-currency system, China will be forced to swallow massive inflation in commodity prices as the dollar weakens. That inflation threatens its citizens with declining purchasing power and its industries with much higher costs.

The other side of the vise is a much stronger dollar. Were the USD to strengthen against other currencies, then China's export goods would cost substantially more in Europe and Japan--in effect, making Chinese goods less competitive everywhere except the U.S.

If the dollar weakens, China will import inflation and much higher commodity prices, hurting its economy.

If the dollar strengthens, then Chinese goods become much more expensive when priced in Euros, yen, etc. Either way, China's economy suffers negative consequences.

Is being trapped in a vise controlled by another State really being in charge? Who would choose to give the power over commodity prices and one's export prices to another nation? That is not power, that is weakness. the U.S. can do whatever it wants with the USD, and the Chinese will take the consequences. "Inoculating" the surplus dollars piling up in China and adjusting the peg are merely tweaking the side bets in a game owned and controlled by the U.S.

Everything else is bluster for domestic and international consumption.

Special podcast: Steve over at Two Beers with Steve was kind enough to let me ramble semi-coherently for an hour; we had a great time and I think I should have interviewed him.... Check it out if you have an hour of sitting in traffic to invest: Two Beers with Steve podcast.

SPECIAL SEED OFFER, ONE WEEK ONLY: Our site sponsor, Everlasting Seeds, has graciously arranged a special 15% discount off all seeds for readers. Please go to this link to get the discount on all Everlasting Seeds offerings: 15% off, one week only.

SPECIAL "Ultimate Greens" PACK: One of the difficulties for most gardeners and folks concerned about their food is home-grown greens during the fall and winter months. Interestingly, it is during this very season that we need the micronutrients supplied by greens, and especially sprouts, ladened as they are with antioxidants and immune system enhancing agents. And nothing accents salads, sandwiches, and fresh greens of all types than sprouts.

We’ve put together what we consider the "Ultimate Greens" pack, for medium to long-term storage, that allows you to enjoy a variety of tasty greens that include alfalfa, broccoli, and {tangy}radish. Naturally, all our seed is Non-GMO, Open Pollinated, Heirloom *Organic*, so you can be assured the quality of your sprouts will be the very finest.

These seeds, when stored in our sealed and stabilized cans, will last between five and eight years, and will assure your family have these wonderful fresh greens ready to sprout whenever you need them. We suggest you store them in a *cool*, dark area and keep them sealed until you’re ready to use them; open containers *will* draw moisture, the killer of seed viability. Again, once opened, the sprouting seeds should be stored in a *dry* cool place.

Each EverGreen Can contains 908 grams {two pounds} of Organic Alfalfa, with an estimated seed count of approximately 522,000 seeds, 227 grams {one-half pound} of Organic Broccoli, with an estimated count of 73,550 seeds, and 227 grams {one-half pound} of Organic Radish (Spicy!), with an estimated count of 18,160. this variety has been designed to provide a good balance and mixture that will accent any meal.

We’re pleased to offer readers the *first* on our new product at a 10% discount to our usual price of $48.50, or $43.65; you must use the special link provided above to access the special, as it is not offered yet on our website to the general public.

Needless to say, don’t hesitate to contact us, should you have questions regarding this special offer or any aspect of our seed offerings; we’ll look forward to hearing from you, and hope our EverGreens provides you and your family another alternative to "big agribiz"....

If you would like to post a comment where others can read it, please go, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from or in ebook and Kindle formats.A 20% discount is available from the publisher.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, James J. ($5/mo), for your wondrously generous subscription to this site-- I am honored by your support and readership. Thank you, David K. ($50), for your awesomely generous donation to this site-- I am honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:
Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.

Our Commission Policy:
Though I earn a small commission on books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by 2008

Back to TOP