I'm amused by a Financial Times item this morning: "China export surge
raises US anger"; and its byline: "Pressure grows to let renminbi rise".
"Let" renminbi rise? Doesn't the American administration realize by now
that the Chinese will revalue their renminbi (yuan) only when it's in their
interest to? The Chinese government is no different from Western
governments early in the last century when they decided to disassociate
their currencies from any sort of underlying value (gold) and printed just
as much as they conceived to be in their own interests.
Good sense partially prevailed by mid-century when Western governments
realized that currencies ought to start floating against one another so as
to impose some external discipline in how many bank-notes they printed and
how often they changed central bank interest rates. They still tinkered
about with these, however, but inflation eased back somewhat -- at least
for a few years. But, by then, European governments realized that those
investors who lent them money were favouring America because, alone of the
major currencies, the American dollar was still backed by gold and was seen
to have more solid value.
America, already prosperous by virtue of its domestic oilfields and its
abilities to recruit the best scientific minds of Europe since WWII thus
had a double benefit. The dollar was having a field day and US Treasury
bonds were the most sought after. American government debt was trusted and
European countries' debts less so. However, the denouement came when when
France played awkward and asked for its export profits to be paid in gold.
After all, the dollar was supposed to be backed up by gold! But America
didn't want anybody else to lay their hands on any part of its huge stock
of gold in Fort Knox -- the biggest in the world -- and, in 1971, President
Nixon decided to cut the dollar loose from any tie with gold.
From then onwards it was downhill all the way for the dollar even though
America still had tremendous industrial and military momentum -- which is
only beginning to fail palpably in recent years. The dollar gradually
became much like any other currency, increasingly subject to the whims and
fancies of international speculators. By now, America is much like any
other country. It can't afford to fight wars abroad except by going deeper
into government debt.
And China, since Deng Xiaoping's reforms of 1979, made America's plight
even more problematical. It, too, started to join the international trading
scene in consumer goods. But instead of free-floating its currency -- which
would have meant that it could never develop fast -- China decided to do
what all the European countries had done a century previously. It fixed its
currency according to its own internal circumstances. In fact, since
America was its largest export market and the dollar was still the
predominant trading currency in the world, China decided to fix its
renminbi against the dollar so that it could never become too expensive
however much the dollar varied.
Thus China has a fixed artificial currency while the other industrial
countries have free artificial currencies (the euro being one of them).
While we have nation-states and while their governments still have complete
control over how much artificial currency they print according to their own
interests, then China will stick to its present policy according to its own
interests.
America can't declare war on China -- much as many American politicians
would like to -- because it can't afford to. In fact, it cannot afford to
stay in Iraq or Afghanistan for much longer because its government debt is
rapidly approaching the point of no return -- much like Japan's or several
European countries'. China recognizes that America is getting desperate and
is trying to persuade America to resolve the artificial currency situation
at a more fundamental level by proposing a world currency. This would then
act as the ultimate discipline on profligate governments. So far America
has declined.
Well . . . we'll all have to wait until America appreciates that it's no
longer top dog. It will be a painful lesson, just as it was to the British
establishment from about the 1920s onwards when having to give up its
empire of a quarter of the globe's land surface. Sooner or later, America
will have to yield to reality and share its standard of living with
upstarts like China or India or Brazil.
Keith
Keith Hudson, Saltford, England
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