Weaker Dollar, Stronger Yuan May Hurt The United States And Help China In The Long Run!

I’m no expert in economic matters, but I just want to use my own personal logic to make sense of a few things that are currently happening.  People are seeing that the Dollar is weakening as we speak, and the Yuan is growing stronger as we speak.  Some people say weaker Dollar is a good thing because export will become more profitable.  Furthermore, when export becomes profitable, it also drives up the manufacturing sector at home.  That’s the theory for some people, but I feel that it’s way more complicated than this.

Since the United States isn’t a world manufacture hub — China is holding this title — the United States’ exports won’t matter as much unless the United States becomes the world manufacture hub.  Sure, with weaker Dollar, the United States’ exports will become more competitive than before.  The question is, will a little gain in competitiveness in exports spur the manufacturing sector at home?  Meanwhile, weaker Dollar will make the United States’ imports a lot more expensive.

I think the United States currently imports a lot more than exports.  The United States’ import is at $2.25 trillion and the export is at $1.45 trillion for the year of 2016, according to Wikipedia.  If the United States’ exports continue to slack even with the weak Dollar and the imports continue to grow, the United States could face an even stronger trade deficit.  For an example, manufacturer companies in the United States may have to import more expensive materials from the outside to manufacture products at home for selling across the world and at home.  This may not make the products at home cheaper for homegrown consumers.  Furthermore, this will increase the trade deficit in manufacturing sector if not enough products within the United States get to export to balance out the import costs.

Weak Dollar will increase less buying power for the Americans who go abroad for vacation, business, and so forth.  Weak Dollar can make purchases of products from foreign companies through online websites or offline imports more expensive for the American consumers.  For an example, I could be buying a music plugin from an online website which belongs to a French company, and with a weak Dollar, I could be paying more for this software.

I guess good things and bad things do exist even when the Dollar is weak or strong.  Nonetheless, the most interesting question is can the United States fare better when the Dollar is weaker or stronger.  In my opinion, weaker Dollar can help spur export a bit, but if the United States’ exports don’t carry the whole United States’ overall, long-term economy, then the weaker Dollar will be a very bad thing!

What about China?  If the United States enters a trade war against China, China can increase import tariff costs for the products from the United States.  This could hurt the United States’ export market because weaker Dollar would be neutralized by this move from China.  Furthermore, China can also buy up weak Dollar on the cheap to make Yuan stronger if this would serve China’s agenda.  Of course, stronger Yuan for China could make China’s exports look expensive.  Still, from what I’ve heard, China is trying to spur demands at home to create a bigger home consumer market so China won’t be relying on too much from the export market.  If this is the case, then cheap Dollar would be beneficial for China in a big way!

Stronger Yuan would allow Chinese who are going abroad to get more bang for the buck.  Meanwhile, Chinese imports would become cheaper, and so China won’t have to spend so much money to import stuff.  As China’s export market isn’t doing so bad and the imports get cheaper, stronger Yuan allows China to continue to reform her consumption market.  Foreign companies would love to enter China’s bigger homegrown consumption market because China has 1.4 billion headcounts and growing.  As China becomes an ever more important factor for foreign companies due to the size of Chinese population and market, China can begin to dictate tastes, styles, fashions, and so forth worldwide.  Chinese culture will become ever more influential if Chinese market becomes the most important market in the world.

With a weaker Dollar and stronger Yuan, entering a trade war against China might be very bad for the United States!  China can sanction the United States’ companies, entities, and so much more to crash the United States economy.  Of course, a trade war would be bad for China too, because the United States’ imports from China do matter to China a lot.  Nonetheless, as China doesn’t rely on the export market so much, a trade war between the United States and China won’t deter Chinese economic reform plan.  After all, China wants to grow the homegrown consumption market!  While growing a homegrown consumption market to rely less on the export market, China relies on the cheaper import market to balance out the reduction of Chinese exports.  Weaker Dollar and stronger Yuan will allow China to transit from the export market to a service market, also to move to a higher value-added export market — all in all – making this transition in a smoother fashion.

In conclusion, I think China can make the best out of either weaker or stronger Dollar, and the United States — as long as the country stays less competitive — won’t be able to have the upper hand if a trade war occurs between China and the United States.  Meanwhile, China can use stronger Yuan to buy cheap debts from United States’ weak Dollar to prop up China Yuan’s strength.  This, in turn, will actually help China transits from a manufacturing to a service economy.  As the low value-added market goes away in China, China has to accelerate the reform of the manufacturing sector at home so Chinese future export market will be more about high value-added products.  Anyhow, if the United States isn’t going to be able to use the opportunity of a weaker Dollar to reform her economy somehow to make the United States’ economy more competitive against rivals such as China, in the long run other rivals will use the weaker Dollar as the opportunity to make their own economies a lot stronger.

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China Amazing Growth Pushes American Companies To Go To China

Foreigners are trying to break into China’s market everyday, but not everything is easy with China.  Meanwhile Chinese most creative and big companies are trying to go global.  When modern China was young, she could not be so innovative since everything had gotten to be learned and copied.  Fortunately, China has been growing so fast that she could fast-track her learning and copying stage to innovation stage.  Right now as China tries to go global, she is also trying to become evermore innovative.  She invests in innovative talents in all sorts of fields such as industrial designs, brand building, and whatnot.  As China’s economy continues to grow bigger than ever, more foreign companies are vigorously trying to break into Chinese market to grab the ferocious growth of the world’s most populous country.  It seems American companies are also competing with other foreign companies in trying to capture the Chinese market.  Check out the video right after the break to see how American companies are trying to make their fortunes in China.

A Fiat Standard Hell May As Well Revive Gold And Silver As Unit Of Account

Not ever before that our world is so connected, because technology allows us all to trade and travel in seconds.  Just imagine this, before the Internet age, we were pretty fast, because we could travel the world in hours and very few days through flying on airplanes.  Nonetheless, age before the Internet is pretty slow comparing to now, because traveling around the world is no longer requiring us to be physically there.  Instead of just flying around the world, we can simply utilize the Internet to interact with various parts of the world in seconds.  Why traveling in the first place?  Sight seeings and trading and get to meet people and tasting different cultures and foods are probably on the todo list for many people, but the Internet allows us to do most of the stuffs I mentioned in seconds.  Of course, without physically traveling, we cannot use the Internet to have firsthand experience.  Nonetheless, with technology improves we might just as well be able to use virtual reality to somewhat attain the firsthand experience of physical traveling.  Trading is obviously done in seconds in the Internet age, and this has let the physical retail stores and what not to become almost obsoleted.  Fortunately, it’s that, nothing has yet to beat the firsthand experience of whatever, thus the physical retail stores might be able to retain the customers who prefer to have the physical feel and touch of things.  Too bad though, the trend is that many people rather go to physical stores for showroom experience, and then they go home to purchase the products they want on the Internet.

With being so connected as how we are now, it does seems that a small hiccup in the market would not be able to stir any storm and damage the wealths of many people.  Unfortunately, since we are so connected, a huge hiccup might churn out a firestorm that is huge enough to bring down the world market.  If this happens, the whole world will be in depression.  This almost happened in 2007-08, but China was holding up really good and stopped the whole world’s market from collapsing even more.  Nonetheless, I feel that, it is possible for a scenario such as a whole world’s market to really collapse and destroy all economies at once.  This is possible since we’re so connected and using only fiat currencies.  Never ever before in our human history that we have all countries using fiat currencies.  Some wise homo sapiens once said, the strongest link could also be the weakest link.  By being so connected, our economies could affect each other fast and furious, and so this would allow change to happen fast and furious.  When positive things are happening in the world market, this contributes as the strongest link.  The opposite could happen, and this would be the weakest link for the world market.  At the strongest link, positive effects would echo throughout the world at fast and furious speed.  At the weakest link, negative effects would also echo throughout the world at fast and furious speed.

Nowadays, we are using several main currencies that are known as reserve currencies.  The Dollar is the prominent of them all at this very point in time, but we never know how long can the Dollar hold this prominent reserve currency status.  If the world isn’t so connected, the multiple reserve currencies might be a panacea for world economic structural problems, because one economy can always spread foreign reserve wealth into multiple reserve currencies for diversifying.  Unfortunately, our world is so connected in a way that all reserve currencies’ hosts can be taken down, consequently rendering the reserve currencies themselves to be on the fringe of uselessness.  This has me thinking that perhaps gold and silver and other valuable metals are still very much the sort of wealth that us people may need to turn to if a perfect storm does hit the world market and bring down the world market in one fell swoop.

Just like fiat currency, gold and other valuable metals are backed by nothing.  Intrinsically though, gold is being used practically.  This means gold does have industrial applications.  Let me list a few gold’s industrial applications here.

  • Dentists can plant new gold teeth for patients.
  • Gold can be used to prevent rust and corrosion of important components within electronic devices.
  • In the medical field, gold can be used for various purposes such as treating patients with arthritis (gold salts reduce swelling, bone damage, joint pain, and stiffness).
  • Architects and builders can use gold to design beautiful structures.
  • Space devices can use gold to reflect radiation and cool temperature.

Besides gold’s few industrial applications, people like gold for its shininess and immune to rust qualities.  Before the well known use of gold in several modern industries, gold was being used as money since the early period of the entire human history.  Gold was minted into coins and so forth.  Since the dawn of human history, gold was used as money then was replaced by whatever and then it made a comeback, rinse and repeat kind of event really.  In our modern history, president Nixon of the United States abandoned the gold standard, thus he was effectively allowing the Dollar to not be redeemable by gold.  Since the Dollar was the most prominent (and still is at the moment) reserve currency in the world, Nixon’s gold standard abandonment was effectively put the world on fiat based standard, only.

With the knowledge of how humans tend to turn back to gold in hard time to hedge against paper currencies, it’s not too hard to see how people like us nowadays see gold might play the role of hedging against the possible collapsing of the fiat based standard.  Silver is considered to be a lesser quality metal than gold, but silver does have practical industrial applications too.  Nonetheless, I won’t elaborate on silver in this blog post.  With gold and silver and other valuable metals around, I think people and governments alike will use these metals in hard time as money.

To summarize everything up, what makes fiat currencies valuable is that people around the world see them as valuable.  Regardless fiat currencies are backed by anything, as long people of the world think fiat currencies are good enough as a unit of account, the fiat currencies can go on being the monies.  Unfortunately, people are usually illogical.  This is why if the so connected world market like ours stops functioning somehow, people aren’t going to wait around for the consensus that the fiat currencies will be OK.  Instead of waiting around, people may have a run on the fiat currencies and hoard golds and silvers.  This is when people will see golds and silvers as monies.  Perhaps, some people may argue that if the dollar collapses, the market will turn to IMF’s SDR (Special Drawing Right) or China’s Yuan as the reserve currency.  Since nobody knows the future, they maybe right, but I argue that none of those so called possible reserve currency replacements can hold water to gold and silver.  After all, gold and silver do have industrial application values and these metals have been used as unit of account over and over again in our past histories.  Moreover, I question the ability of IMF’s SDR or any other single fiat currency can be confident enough to rescue the fiat standard from hell.  By this I meant if the fiat standard does go to hell, by then it’s way too tough for any other fiat currency to be able to rescue the fiat standard system.  People may just as well turn to gold and silver as a change!

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Can The Euro Replace The Dollar As The Next Reserve Currency?

After finishing my reading of Chapter 5 for “Death of Money: The Coming Collapse of the International Monetary System,” it seemed at this point of the book the author viewed Euro as a potential challenger to the dollar as the reserve currency.  The author James Rickards surmised that the Eurozone could regain strength and vitality as long Germany and other Eurozone member countries could go ahead and reform several internal problems.

Although I don’t remember all of the internal problems James Rickards described that needed to be reformed for Eurozone, I think he’d mentioned about labor mobility and several others.  Nonetheless, James Rickards imagined that if Eurozone could move the unemployed workforces from Eurozone member countries to employment resource scarce countries such as Germany, then the unemployment problem for the Eurozone could be alleviated.  In effect of this, the revitalized workforces that were moved could once again contribute growth in terms of consumption and investment and so on in general.

I have to wonder though, would Germany and other employment resource scarce countries, assuming jobs are abundant and requiring to be filled, want a flood of migrants from Eurozone member countries to disrupt the local employment flow?  Nonetheless, it seemed that China had successfully implemented something like this by allowing migrants from rural area to migrate into the cities, consequently expanding the cities’ size, reach, productivity, and so on. As Chinese migrants are readily earned city’s incomes, they can then export some of their earnings back to the rural areas for whatever.  Perhaps, some of the migrants will have enough money to go back home and open up businesses of whatever, and this in turn slowly urbanizes the rural areas.  As China’s urban cities got crowded, overused, overpopulated, and so the labor demand for such cities cannot grow more — wages for such cities might be higher as workers expect cities’ wages and not of rural areas’ wages — the flood of migrants will slow down.  Nonetheless, China’s coastal cities can relocate factories and other essential industrial capacities into the inner China where rural areas are common, and in this process China finds cheaper labor and urbanizes the inner rural cities.

James Rickards imagined Eurozone member countries could do something as China’s labor mobility but without the factor of urbanization.  After all, many Eurozone member countries may not need urbanization at all if I’m not wrong on this.  I think Eurozone member countries can definitely improve the labor mobility to improve the Eurozone as a whole, but internal political strifes among Eurozone member countries may prevent this to be done without danger.

Imagine Germany’s political force may not want to see the German workforce order to be disturbed too much, because once the workforce order got disturbed it could be a lot harder for such a workforce order to be reversed back to its normal flow.  To make my point, let’s assumes that Germany is experiencing growth in general and demanding bigger labor workforce, migrant workers from Greece and elsewhere within Eurozone can migrate to Germany to fill up the labor demand.  The problem is when Germany begins to experience economic downturn, the huge number of migrants will not be viewed favorable to the local population.  At this point the migrants will stop migrating to Germany, and the migrants that are already in Germany will go elsewhere within Eurozone to find jobs.  If everything works out the way the supply and demand force is meant to behave for the labor demand in Eurozone, things will not be so bad.  Nonetheless, will Germany in an economic downturn easily find it to be easy to accept migrant inflow when the economy picks up again?  The bigger question is what if the whole Eurozone experiences economic downturn, where the migrants who work in Germany migrate to within the Eurozone?  Perhaps, the migrants may have to go beyond the Eurozone for jobs, but it’s not easy for the migrants to migrate beyond the Eurozone for jobs for obvious reasons (i.e., documentation issues, immigration issues, etc…).

It’s hard for me to imagine Eurozone as a whole uses a single dominant language for facilitating economic conditions.  French will forever speak French, German will forever speak German and so forth for the whole Eurozone.  I assume this will be the same for writing too for the Eurozone member countries.  My point is that every time migrants from Eurozone relocate themselves elsewhere within Eurozone, they may have to learn new language (e.g., writing, speaking) in order for them to be effective at their new jobs.  This won’t be easy if the economies within the Eurozone change too frequently (e.g., economic downturn, economic upturn).

I think we can pretend that many economic models and facts and equations can point out the problems and provide solutions for an economy, but we fail to realize that what matters most is the irrational behavior of humans.  We humans don’t behave rational all the time, because we are not the robots.  Robots follow the rules of the algorithms without theirs own rationalization.  Us humans tend to do things on our own as if we know best, thus when we become irrational we don’t think that we are irrational.  As a collective whole humans can be very irrational, and this shows why our history is full of wars and tragedies.  Our economies behave the way we are, and so when we are not so rational, our economies become irrational.  With this notion, I don’t think few simple suggestions such as labor mobility and so forth can be implemented with certainty.  Even with labor mobility and so forth could be realized, the global economy as a whole has too many moving parts, and these moving parts can be counter productive to the positive trends that occur within the Eurozone.  For an example, United States will not want to see the Euro rises for obvious reason (i.e., dollar’s reserve currency status must be upheld).  China too wants its currency to become a reserve currency in the near future.  With the two biggest economies in the world, United States and China, with very powerful military mights to back their agendas, it’s easy to imagine there are so many more moving parts within the global economy as a whole.

I think the author is too optimistic about the whole Eurozone as a whole.  I do think the author does have many good points on why the Euro won’t collapse and Eurozone won’t be breaking apart, because he explained well why United States and China do not want to see the collapse of Euro and Eurozone.  James Rickards mentioned that the United States had been wanting to keep inflation high in the United States and interest rate low for revitalizing exports and easy debt payments.  By printing more dollars, the United States can push inflation up.  By printing more dollars, the United States also keeps the Euro strong.  Besides United States exports deflation to Eurozone member countries, China too wants the Euro to stay strong for many reasons.  One noticeable reason which James Rickards mentioned is that China wants to diversify its foreign investments.  Instead of only investing in United States treasury bonds (i.e., dollar holding), China wants to convert some of its Dollar holding to Euro holding and other Eurozone investments.  This way, China does not have to put all of its eggs in one basket.  After all, how can one be sure that the dollar will be alright for indefinitely?

Entering Russia and so the picture of global economy becomes even more complex.  Russia does not want the dollar to be the only reserve currency, and Russia isn’t having a good relation with the United States since forever.  Especially since Syria, Libya, and Ukraine crises/conflicts, United States-Russia relationship has gotten worse than ever before.  In fact, many people think this relation is making a full circle (i.e., getting worse to the freezing point of the cold war).  Russia is an energy export country, and so Russia’s energy geopolitical maneuver has great impact on the world.  As United States boosts its own energy export sector, it’s in conflict with Russia in the energy export market.  Meanwhile Eurozone member countries are depending on Russia for energy supplies such as natural gas.  This is a big security issue for Eurozone member countries, because Russia can blackmail Eurozone member countries into submission by raising prices or producing less energy resources.  Can the United States help Eurozone member countries to rely less on Russia’s energy resources?

Anyhow, Russia with its own geopolitical agenda can make the whole global economy a lot more complex.  It’s already happened as Russia and China signed the $400 billion natural gas deal.  With this deal Russia will not have to worry about too relying on Eurozone member countries for natural gas export.  As Ukraine conflict continues, United States and Eurozone member countries continue to sanction Russia.  Returning the favor, Russia cuts more ties with the United States and Eurozone member countries.  With these economic sanctions between them (e.g., Russia vs United States and Eurozone member countries), the outlook for the global economy might be dampened by a lot.  Meanwhile Japan, Philippines, and Viet Nam are in territorial disputes against China.  China might play hardball and sanction these countries.  If the tension between these countries against China are not dying down, the global economy as a whole might get even worse.  Simply put, there are way too many uncertainties and moving parts for the author, James Rickards, to be certain that Eurozone will be able to reform without issues.  Without reforming appropriately, the Eurozone will not be able to perform.  If things got really bad, the Eurozone might even see the collapse of the Euro.  This is why China isn’t exactly put all of its eggs into the Eurozone.  Although China is cutting back on the buying of the United States’ treasury bonds, China isn’t exactly cashing out all of United States’ treasury bonds.  It means that China is still hedging between the United States’ dollar and the Eurozone’s Euro.

In summary, I think the author is too bullish on the Euro even though the Eurozone isn’t exactly doing too well at the moment.  If the Eurozone fails to reform as how James Rickards had advised in “Death of Money: The Coming Collapse of the International Monetary System” book, the Euro may suffer great setback.  Furthermore, Ukraine conflict might add more energy, economic, and political issues for Eurozone to be dealt with.  If the United States sees the Euro as the potential rival for the dollar’s currency reserve status, the United States might not want to see the Euro rise.  China might not want to see the Euro rise also, because this might dampen the potential for the Yuan to become the sole reserve currency.  Nonetheless, what if the Euro rise will happen anyway and China will insist the Yuan to become another reserve currency?  This will be very problematic for the United States for obvious reasons.  One noticeable reason would be the world will use the dollar even less as the reserve currency, and this will make it harder for the United States to print more dollar to pay off debts.  In a nutshell, the global economy is a mess and a battlefield, and James Rickards might be very wrong for being too bullish on the Euro.

Energy Needs Drive World Big Chess Game

Energy need for the world is an ever changing chess game.  Countries in different regions are trying to outmaneuver one another for scarce resources, and energy resources are always part of the big chess game.  For an example, Russia wants to stay dominated in supplying energy to the regions that she has the most stakes in.  Nonetheless, world conflicts cannot be avoided, thus Russia needs to make sure she has the means and ways to not too depend on any single region for bringing in her energy resources’ revenues.

Ukraine conflict is still going on, and Russia knows that Europe is evermore an opposing force since European countries are supporting the oppositional force within Ukraine conflict.  Moreover European countries are eagerly to wean off the dependency of Russia’s energy resources since conflicts such as Ukraine might put European countries at the mercy of Russia’s energy sanctions.  Meanwhile China is an ever growing economy with a modern military that needs more energy resources than ever before to continually power her mightily growing machine.

With Ukraine conflict is still going on, Russia is eager to wean off her dependency on European countries for exporting her energy resources, and so she is looking East toward China.  Meanwhile China is not too eager to depend on Russia for energy resources since putting all eggs into one basket is a very bad idea, because everybody can use one’s dependency as a mean to sanction in a bargain or world conflict.  With this in mind, China is also looking elsewhere in the Middle East for alternative channels of piping more energy resources into China.

United States is now wanting to export more energy resources as her industry is shrinking, thus she has less needs in hoarding these energy resources.  Europe is looking toward other regions for energy resources so she can wean off her dependency from Russia.  The whole big chess game is being played out as we speak, and nobody knows who will be the victor at the end of this very big chess game.  Right after the break, check out a video I found on YouTube which is very descriptive in explaining this sort of big chess game, and the global players are Europe, Russia, United States, Middle Eastern countries, and China.

Something Suspicious Within The Circle Of High Frequency Traders Prompted Authorities To Seek Secret Computer Codes And Algorithms

Years up to 1929 and short while afterward, pools of wealthy investors joined up secretly to drive up prices of stocks so they could reap the most money from the market.  The reverse could be done so certain stocks could be horde to sell at higher prices later.  Rules and regulations came into play when the authorities figured out the game, and that were enough to effectively stop such practices.

Nowadays, stock market seems to be even more volatile even though we still inherit the rules and regulations of the pasts.  Everything electronic has drove stock market to lose points sharply as if the game is rigged, therefore not every investor is confident that the market isn’t rigged.  Story such as “U.S. Regulators Seek High-Frequency Traders’ Secret Computer Codes” isn’t boosting confidence of many investors, but the truth has to be sought out nonetheless.

Hopefully, the link which points to the story above won’t be a smoke of a fire to come that will destroy the confidence of investors, especially now since the economy isn’t stable at all.  If there is a fire though, the truth has to be told so people can avoid being burned by a rigged market.  Scary isn’t it?

Basically, Huffingtonpost reports that Financial Industry Regulatory Authority requested secret computer codes and algorithms from high-frequency traders for an investigation that is underway.  Securities and Exchange Commission is also on the case.  The authorities don’t want investors to be alarmed since nothing suspicious has yet been found, but the investigators want to make sure the market isn’t rigged, I guess.

Source:  http://www.huffingtonpost.com/2011/09/01/us-regulators-traders-computers-secrets_n_945897.html