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China’s Role in the Economic Crisis and the Rug They Have Yet to Pull

By: Steve Johnson

10/16/2009 - 35 Comments

The value of the dollar has been plunging in all major currencies for several weeks, except the Chinese renminbi.

China has maintained a peg against the U.S. dollar for the last decade, which has been the primary driver in their growth in exports.

Here is a quote from an article today,

“For its part, China has been critical of the United States for its fiscal and trade imbalances, without mentioning that those imbalances have been exacerbated by China’s own policies.

“To rant and rave about the unsustainability of our fiscal policy when they have their own unsustainable monetary policy is a classic case of the pot calling the kettle black,” said Robert Barbera, the chief economist of ITG.

“I still think,” he added, “that the single most destabilizing decision of the last 10 years was the Chinese peg.”
That peg forced China to take in huge quantities of dollars and then invest them in dollar-denominated securities, principally Treasuries. That in turn helped to hold down American interest rates and stimulate the housing boom that has since collapsed.”

China’s peg has been the enabler of our decade of credit expansion, which allowed our government to borrow trillions of dollars and our consumers to become 70% of our GDP.  Millions of jobs have been lost as the U.S. manufacturing industry has been virtually gutted.

The question is when are they going to remove the peg and what is going to happen when they do?

China is perhaps the only nation left that is not selling Treasury Bonds, hoping for a miracle that the U.S. economy will recover and they will not lose their investments. 

The reality is that they have already lost their investments because they have no way of getting them back without selling, and selling will cause the dollar to sink even faster – causing the majority of their investments in T-Bond to lose even more value.  And each time they sell more, the majority of their investments will lose even more value.

This is the same reason that they cannot remove their currency peg. They cannot risk the loss of their investments and perhaps their largest export customer. 

Eventually China will remove their peg and pull the rug out from under the dollar, take their losses and move on.  When they do, I don't want to have any of my investments in dollars.

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