The other day, I had a facebook chat with Derrick Bemis, a buddy from Oklahoma State. We got on the topic of China, debating how China would react or be effected by certain US actions. It was a great back and forth, and Derrick suggested a joint blog post, which I thought was a great idea. We then transferred the conversation to email and cleaned it up just a bit...
Before we jump into the post, I'd like to give a few definitions....
ASEAN - The Association of Southeastern Asian Nations. They've taken steps to organize in a more European Union fashion, with China/Russia playing big roles.
Dollar peg - A peg is a fixed exchange rate. In essence, China tries to keeps its currency value fixed to the value of the US dollar.
Yuan - the Chinese currency
QE - Quantitative Easing. The US policy by which we print more dollars, cheapening our currency. The goal is to encourage spending and in turn trigger growth. In reality, we've frustrated other countries and hurt the world economy.
And with no further delay, our conversation, with some editorial comments after the chat.
- I know ... I was saying I am looking at the China contrarian issue
- What if we decide that the "big bad wolf" isn't so big and so bad.
- I have been guilty of arguing against a trade war. What if we called their bluff.
- I think they need us as much, if not more, than we need them. Specially with the peg and now with ASEAN developing
- How would the ASEAN mean they need us more? I would think it'd mean the opposite
- They are the superpower in ASEAN for no other reason than the US Dollar peg
we take away that peg, the countries start thinking... why are we using the YUAN?
China's problem is now they are trying to become us, economically
- Would they still not be super important in the ASEAN?
- NOOOO
- If they didn't have the peg, Russia would be the power.
- Russia has a HELL OF LOT more pure assets their country can develop
it's the reason China has been buying resources so frantically
- I gotcha
But it looks like no matter what China is gonna suffer
With or without the US
- Do we suffer with them, or do we take the quick hit and leave them laying again
- Yeah. But if China leaves us would that not be the first domino?
- No.
- I guess it's the dont get dumped, do the dumping theory?
- As long as we go to a better theory away from them (gold and silver and natural gas
- reestablishment of our currnecy.
- It will hurt the banks, but benefit the savers and the fixed income people
- That'll never happen. We'll never base our currency off of something real
- China is going to use us till they can't
- everybody they tie to will use us till they can't (through China)
- You will be surprised. Even Newt is "talking about it" (though I don't believe he would)
- All the candidates on the Republican side are pushing for it except for Romney
- But it is a start
- if Romney wins and is terrible... more and more will come to the strong currency side
- It'd be great. I just think there are more powers otherwise. Too much money
- Idk that it matters. China and us are both screwed either way... Haha
- China... if they continue to buy commodities at the peg .... they are making out like bandits
- Actually if you're right that people are coming on the currency train... Maybe we have a chance.
- As long as they're tied to us tho...
- Right
Kurtis Hanni
- The Chinese can repress their people in a crisis.
- Americans could never organize enough to "revolt"
- The Chinese are getting poorer
That middle class you mentioned is becoming poor again.
- They repress their people.... but now that more and more are becoming middle class the people have more power.
- Well they WERE middle class.
- They are getting richer asset wise and inturn real power wise.
Only cause they slowed down because of the Europe issue and they are affraid of contagion
- Hmm. Valid point.
- In the end we might be saying the same thing. I think they'll cut the dollar to avoid a rising of the new poor. And then their new assets keep them afloat
- So WHAT IF... we preemptive strike with cutting the peg.
- It would take that away and take away their power card in ASEAN
they would still be powerful in ASEAN, but the would no longer have the ace in the hole
- Hmm... I see your point now
- It would hurt us momentarily
- I think it'd almost have to certainly be paired with a backing for the dollar to not kill us
That or massively paid off debt
- EXACTLY
if we do that COINCIDING with a strong dollar policy...
- That'd be gold. Strong dollar itself would be enough to turn us away from disaster.
- I think we figured out the theory to get away from China
Yeah I think you're right
Now our editorial comments
Derrick
My initial believe is that a trade war with China would greatly hurt the United States. However, I have recently taken a self-contrarian belief. Knowing countries, like people, have a self interest in mind. It seems theirs is not mutually beneficial. What if the best course of action IS to take on the Chinese issue head on and right now? What if it would be beneficial to take policies that would conflict with China?
Kurtis
Initially I balked at Derrick's idea. But after some vetting it makes sense. With another QE on the horizon, and China currently shedding the dollar, the US is in a precarious position. You can see the storm coming... eventually China is going to get tired of our cheapened dollar and decide they want to go another way. At that point the US will be left with its pants down. Instead of playing defensive, the US needs to leave China out to dry. This action by itself would hurt the US long term. So how do you combat that? A strong dollar policy. You'd see immediate increased confidence from the US citizens and world governments. We'd be avoiding disasters on two fronts: our toxic relationship with the Chinese, and correcting our currently precarious dollar position.
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