follies of fiddling with the yuan

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    Interesting article

    I wonder when they're going to tire of supporting the worthless greenback as Asia is the only entity propping it up at the moment

    PART 1: Follies of fiddling with the yuan
    By Henry C K Liu -- Asia Times, China, October 23, 2004

    Dollar hegemony emerged after 1971 from the peculiar phenomenon of a fiat dollar not backed by gold or any other species of value, continuing to assume the status of the world's main reserve currency because of the US's geopolitical supremacy. Such currency hegemony has become a key dysfunctionality in the international finance architecture driving the unregulated global financial markets in the past two decades.

    The US Bureau of Labor Statistics (BLS) expanded the use of hedonic regressions to compare quality differences in prices. As this measuring technique is being extended to a growing number of goods, it has become a most important factor in reducing the US inflation rate, and intrinsically raises nominal GDP growth while the real GDP may actually decline. Its overall effect on monitoring the economy is kept secret from the public. The hedonic price adjustments for computer hardware and software alone went a long way to explain US growth and productivity miracles of the past decade.

    The US current account deficit reached a record 5.7% of GDP in second quarter of 2004 and a net national saving rate that fell to 0.4% in early 2003. It has since rebounded to 1.9% in mid-2004. The US now absorbs 80% of the world's savings not to finance economic growth, but to finance debt-fueled over-consumption collateralized by an asset bubble. In 2003, US net capital investment was 60% below 2000 levels.

    Thus, recent calls from US officials for China to simultaneously raise both the yuan exchange rate to the dollar, and yuan interest rates further above dollar interest rates are ill advised. Such moves will cause an upward spiral of interest rates and inflation in the US, China, Asia and the rest of the world. Yuan interest rates are already substantially above dollar rates, an upward valuation of the yuan against the dollar with a rise in yuan interest rates will exacerbate the destabilizing flow of hot money into China. To understand China's dilemma on interest rate policy as a key tool in its macro approach to cooling its overheated economy, one needs to understand the interlocking relationships of interest rates, inflation, exchange rates and credit allocation.

    The dollar economy is in fact devouring not just non-dollar economies, but also the US economy. The dollar is like the rebellious computer HAL 9000 in Stanley Kubrick's 1968 film 2001: A Space Odyssey. Hal 9000 was programmed to believe that "this mission is too important for me to allow you to jeopardize it", and proceeded to kill everyone who tried to disconnect it. Dollar hegemony kills all, pushing down wages everywhere with no exceptions made for nationality. As Pogo used to say: "The enemy, it is us."

    The issue is not whether Asian central banks will continue to have confidence in the dollar, but why Asian central banks should see their mandate as supporting the continuous expansion of the dollar economy at the expense of their own non-dollar economies. Why should Asian economies send real wealth in the form of goods to the US for foreign paper instead of selling their goods in their own economy? Without dollar hegemony, Asian economies can finance their own economic development with sovereign credit in their own currencies and not be addicted to export for fiat dollars. As for Americans, is it a good deal to exchange your job for lower prices at Wal-Mart?
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