| World Economic Question, relating to US economy?

World Economic Question, relating to US economy?

Jake J asked:


I am wondering if I have the facts correct, America is dependent on China to artificially inflate the US dollar? Without China buying Treasury Bonds the Yuan would overtake the dollar and hence Americans would stop buying Chinese goods? Americans rush out everyday to buy from Walmart and others who sell only Chinese goods, which is trickling back to Chinese nationals who are buying up American Soil, ie. shopping centers ET. Chinese people have a savings rate of 30% nationally, whereas most US citizens save less than 1% of income. Is it just me, or should I start learning Chinese, as my future boss is going to be Chinese?? I have worked for large Development Companies my whole life, for the first half of my life I worked for American Companies, who would always run over budget and also never complete a job ontime. I started working for a Chinese company that buys all its materials from China, employees cheap labor and completes all projects under budget. What does the future hold

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One Response to “World Economic Question, relating to US economy?”

  1. hackey24599 on May 29th, 2009 7:36 pm

    Our huge trade imbalance with China sends a lot of dollars overseas. In theory, China would have to sell those dollars to get Yuan which would force the exhange rate for the dollar down and make the dollar weaker. What they do instead is “peg” the exhange rate to the dollar and let it float with respect to other currencies. Because of this, the exchange rate of the Yuan to other foreign currencies depends on the exchange rate of the dollar to that currency. To do this, they manipulate the market by holding enough dollars in reserve or buying enough dollar denominated assets such as U.S. stocks, treasury bills, etc. to keep the exchange rate within a narrow range. Even the Chinese admit that this can’t continue forever. Eventually, they will have to get rid of some of those dollars in reserve and the Yuan will appreciate against the dollar. I think they are just delaying the inevitable long enough to allow their industries to get competitive enough to compete on a global scale.

    Actually, the dollar will get weaker against all currencies eventually, as foreign central banks start dumping their dollar reserves and foreigners lose their appetite for holding dollar denominated assets. This trend is already starting to take place. The huge deficits that we run can’t continue forever, although some think it can. Eventually, because of a much weaker dollar, the trade deficit will shift to a surplus, which means we will start to produce more than we consume and our standard of living will diminish. This may take thirty years or more to take place, but it is inevitable. Over the long run there is no free lunch.