When you tally up all the pros and cons, on balance it is quite surprising that the US is officially championing the appreciation of the yuan against the USD. Even when you think about the supposedly increased attractiveness of all those US exports that would ensue, it still doesn’t make a lot of sense on balance.
Is the US posturing? Is this a political move rather than an economic one? What’s really going on with the Treasury pushing for a higher yuan (and at the same time, a lower USD)?
Higher Yuan Not Good For USD?
So let’s look at all the reasons that a higher yuan will not be good for the US.
A higher yuan will mean increased purchasing power for the Chinese all around the globe. This makes it easier for the Chinese to buy world resources, including domestic resources and industry in the US. You’d think that would be exactly not what the US would want geopolitically. “They’ve taken our jobs, now they’re taking our businesses and real estate!”
A higher yuan will mean less bargaining power for the US. Traditionally, strong countries have strong currencies and vice versa. What the heck is the US doing continually weakening its own? Is it trying to shoot itself in the foot? Recall Great Britain’s decreased bargaining power in the 60’s and 70’s.
Based on the two basic trends above, all kinds of implications fall out of the bag and none of them are in the US’ favor if you’re thinking in terms of traditional geopolitics.
The US will have to compete more for access to oil, against emerging economies, and the US will have to pay more for the same oil with more, debased dollars.
A weaker USD also weakens the case for the USD as a major reserve currency. The days of the reign of the USD as the ultimate world reserve currency are in decline. This is true even if there is no single strong replacement stepping up to take its place, but rather a basket of a handful of other, equally strong currencies.
A higher yuan helps China out in relation to its regional trading partners and will take away some of the regional antagonisms it has caused in relation to fair export policies with the US. Could the US be weakening its currency for such purely altruistic reasons? I doubt it.
All of this also points to the fact that the US is engaged in its own form of currency manipulation (it prints more USD on an as-needed basis), and it begs the question: all the US needs to do to have a higher yuan is to print even more USD. Perhaps this is the clue. Because it hints at the fact that even with all the USD weakening in the form of quantitative easing domestically, all that is still not weak enough for the USD against the renminbi.
The US wants China’s help to weaken the USD even further. If you ask me, this says something incredibly bad about the US government’s own expectations for its debt servicing scenarios going forward.
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