Saturday, November 23, 2013

Chinese Monetary Propaganda

“The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings, adding to signs policy makers will rein in dollar purchases that limit the yuan’s appreciation. ‘It’s no longer in China’s favor to accumulate foreign-exchange reserves,’ a deputy governor at the central bank said in a speech yesterday. The monetary authority will end normal intervention in the currency market and broaden the yuan’s daily trading range, Governor Zhou Xiaochuan wrote in an article.
--Bloomberg, Nov. 20, 2013

Bloomberg quotes PBoC officials (above) saying that the PBoC will stop mopping up FX inflows, and will let the yuan appreciate. This already has the metallic community atwitter over the coming Fall of the Dollar and the Bursting of the Treasury Bubble.

This kind of thinking fits into the larger theory that the dollar and the Treasury bond are supported by a Ponzi scheme funded by witting and unwitting central bankers at home and abroad. China buys Treasuries so that she can “control” us, while the Fed buys Treasuries to “finance Obama’s deficits” with hyperinflation. Sooner or later, the music will stop and the Ponzi will collapse, enriching the metallic community and other doubters of America’s benighted currency.

Personally, I am very uncomfortable with China’s mercantilism, and I would like to see the yuan appreciate enough to bring our trade with China into better balance. I don’t like the idea of hollowing out our manufacturing base in exchange for cheap consumer goods. A stronger yuan would reduce unemployment among the young and unskilled, and help us to revive manufacturing.  I think that threatening China with punishment for “currency manipulation” is an excellent idea, especially if there is real policy follow-through, which has never occurred. Romney was pushing for that during the election, and was accused of “China bashing”. It's unsporting to bash one’s enemy!

The Ministry of Propaganda can say whatever it chooses about ending FX intervention, all of which is purely for foreign consumption, and meant to head off Congressional action such as the Schumer-Graham punitive tariff bill. But the hard fact is that China needs to add millions of new jobs every year as its peasants migrate eastward, and that requires a cheap yuan.

China needs to keep the yuan cheap enough that Americans will buy more flatscreens and laptops, not less. Pretty soon it will be cars and airplanes. There is no chance that the yuan will ever float. China cannot build enough dams, bridges and power plants to create adequate internal demand; she must export in exchange for our paper money. Hence her writhing around on the subject of the exchange rate, a topic about which she cannot afford to be frank. Instead she pretends that she is unpegging, which we are supposed to believe.

The metallic community is wrong, as usual. The dollar, bonds and stocks are safe. Gold and silver will continue their downward drift.

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