Empty threats by the Chinese this week in response to United States' demands for the Chinese to cease and desist from their practice of currency manipulation are just that- empty. The Chinese love to threaten that they may stop purchasing United States Treasuries should US policy be less accomodative to their desires. The problem is that Chinese purchases of US debt are not acts of compassion or alturism towards the US, such purchases are the sustaining force of their entire economy.
Without putting US dollars back into the hands of the United States citizens, the Chinese lose their biggest market for selling their goods. Currency manipulation and unfair trade has forced American workers out of work and into debt. Due wage disparities between US workers and their Chinese counterparts, the purchasing power of the United States has been severely reduced. Without taking into consideration unsafe working conditions, no environmental obstacles, a slave-like working class, the Chinese most effectively manage labor costs by not allowing their currency to float, or trade on the free market.
When US citizens purchase a Chinese good, the dollars used are confiscated by the Chinese government and internally exchanged for Yuan. Yuan are not allowed to be taken out of the Country and strictly forbidden from being sold except to the Chinese government. As a result, it is a worthless currency that only has value to the people of China. With this control China can set the Dollar to Yuan exchange at whatever level is most beneficial to China. In other words, the Chinese government gets to stock pile green backs and pay out in paper.
To compound their control, the Chinese government does not allow foreign corporations access to their Country's markets without giving their government an equity stake. This equity stake is mostly to ensure the regulation of Yuan to ensure their competitive advantage in labor costs. It is because of this manipulation that the Chinese love to state that their exchange rates are an "internal" matter.
The rub is that China must get the dollars back into their consumers hands, the United States citizens, because their own citizens are paid in worthless Yuan (very little Yuan at that). This equates to a Chinese popultion sustain adequate demand for goods to sustain their economy. Many sources have said that if the Chinese were to allow their currency to float, the market would prove it is undervalued by up to sixty percent (Peterson Institute of International Economics states the Yuan is undervalued by 30% to currencies in general and 40% against dollar).
Allowing the Yuan to float would solve the "real" domestic demand issue; however, the Chinese luxury of being a net exporter and hoarder of natural resources would be contested as their competitive advantage in undervalued labor would be significantly reduced. Other countries would be able to compete on the global markets and jobs would return to the United States, among other countries. The necessity for the US to float debt that the Chinese must buy would thus be reduced.
Let's get back to the empty part. If the United States really wanted to call China's bluff all that has to be done is to pay them back. That's right, have the Federal Reserve buy three trillion dollars in Treasuries from the US and then cut the Chinese a check. Maybe even a big check, like the type of check one sees at a charity event. One lump sum, paid in full, check! Now I know that the dollar would be devalued into oblivion on the international markets and mayhem would ensue for the exchanges and bankers, but the sun would rise tomorrow. I would bet you 50 percent of Americans wouldn't even notice, not "real" Americans anyway. After all, many Americans think the government just prints money in the first place, so why all this nonsense accounting. Com'mon China, Wake Up! If you don't want our debt but you still want to hoard dollars by devaluing labor, the end result is we can always just pay you back and start over. We have real infrastructure, real natural resources and a capable population- I like our odds.
After all, sometimes the bank owns you, and sometimes you own the bank!
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