Commentary on Obama's Push For China To Revalue Its Currency

For the record, after Obama's first day in office, I must commend him on key actions he took to reverse a number of Bush policies. I have argued that the Bush Legacy will be best viewed via the lens of how many policies Obama reverses or alters and how quickly he does so. I am hoping the latter's machinations will demonstrate the secretive, opaque, unjust nature of the previous administration's views on International Law and many other topics. Specifically, I am very pleased that our new president specifically took a more balanced view of the Middle East when he said:

“Just as the terror of rocket fire aimed at innocent Israelis is intolerable, so, too, is a future without hope for the Palestinians. Lasting peace requires more than a long cease-fire, and that’s why I will sustain an active commitment to seek two states living side by side in peace and security.”

Furthermore, he put in transparent rules on staff compensation and distanced the White House from the efforts of lobbyists. These are all strong first steps that I applaud.

I must comment, however, that Obama must be very careful with his administration's rhetoric regarding China, on many levels. Specifically today, I am focusing on comments he and his staff are making that has the effect of soft-spoken saber-rattling about China's perceived manipulation of its currency.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5EaHQZG_KJA&refer=home

It is generally held that the Yuan, or Renminbi, is held roughly 40% undervalued by the Chinese Government. The argument goes that this creates an unfair trade imbalance because it makes goods made in China artificially cheaper and thus hurts American exporters' competitiveness.

The dirty little secret is that none of us actually want to see the Yuan appreciate because it will make ALL of the Chinese-made goods more expensive at precisely the moment when the American consumer, who buys those goods, is cash-strapped. Simply put, it would then take more dollars in our pockets to buy the same Chinese product at Walmart or wherever.

This phenomenon is what is called Inflation or the decrease in the purchasing power of a dollar.

This becomes a second element alongside the Quantitative Easing policies in our country (printing dollars) which I argue will stoke inflation and cause the value of the US dollar to drop significantly. Here is the cycle: The US Government pressures the Chinese to let the Yuan increase in value, Chinese goods become more expensive prompting the US consumer to buy less Chinese goods, which in turn causes the Chinese to chose to not lend us money if we won't buy their goods which means they will have decreased interest in buying our Treasury Bills and Agency Debt from Fannie Mae and Freddie Mac and may even start selling such debt they hold to finance their own stimulus packages for domestic consumption and growth.

The fall-out from this last element is severe: We do not want China to stop buying our IOU's precisely at the moment when we have to issue record-breaking amounts of new US debt (~$2Trillion in Obama's first and second years each, most likely). If they were to do so: a) the value of that debt would go down and the value of each US dollar would decrease and b) less agency debt purchases by foreign investors (I know China isn't the only one, but it happens to be the biggest such purchaser) would mean that Fannie Mae and Freddie Mac would purchase less mortgages from US banks because it wouldn't be able to package them up for resale to the global investors, and this would cause US banks in turn to give fewer mortgages to US consumers, meaning less homes would be sold exacerbating the housing declines and those in the economy at large.

The only upside to a revaluation of the Chinese currency would be that American goods would be cheaper for the Chinese consumer to purchase and become more expensive for Americans. Let's play out the scenario: America already has let its manufacturing base decline and shifted to a service-based economy with consumers who do not save and spend more than they earn. China is a manufacturing nation with consumers who save, and 95% of the time do not buy with credit! The average Chinese worker saves 35% of every dollar they earn, therefore, there must be a sizable amount of yuan in savings accounts in China. If the yuan gains dramatically in value, all of those savings accounts now can purchase far more goods and services, making the growing Chinese middleclass of 300mm+ the potential engine of global consumption, usurping that title from the US. I can imagine that many Chinese, with newfound purchasing power, will want Maytag washer/dryers, Frigidaire refrigerators, and many other less expensive American goods.

I am certainly not proposing that this scenario will commence tomorrow. More so, it is a process that is occurring over time, but one which has very real effects on our families and lives.

In the past year there was a flight to safety for investors: commodities plunged as US Treasuries soared. The dollar gained against major currencies except the Yen (which the Japanese Government will probably intervene on given it is killing their exports, the center of their economy) as investors deleveraged and bought dollars.

I believe, however, that this is a swansong for the US dollar, which may sound like a bold statement. But ask yourself if you think the rally in Treasuries can continue as the US Government dumps trillions more in Treasuries for sale onto the open market?

I am betting the Yen will drop in value, gold will continue to rise, oil will reverse (2h of 09), and the dollar will drop in value. I have been investigating some questions on the current system of fiat currency trading, given they trade in pairs (dollar vs yen, euro vs british pound etc). Given many central banks including the US, the UK, and Japan will probably begin flooding the markets with their currency to make their goods cheaper for foreign buyers, how do we value each currency when we have no idea how much of it is in circulation. I will tell you this, if there was a google of dollars on the planet, they wouldn't be worth very much, and likewise if there were only 12 dollars on the planet, they would be worth quite a lot! We are somewhere in between. Given all of this, Obama needs to tread very carefully when dealing with China given the precarious state of our own economy.

Debunking Myth That BioFuels Drive Food Prices Higher

http://www.bloomberg.com/apps/news?pid=20601109&sid=aDmUKZXaaFlg&refer=home

The article attached above excellently debunks the myth that biofuels derived from food sources were the primary driver of food prices globally, even if the primary source is a spokesman for the Renewable Energy industry. I want to reiterate that I do not support food-to-fuel initiatives, nor have I pursued such in my business ventures, given long-term demographics calling for a population increase to 9 billion by 2030 which will require every unit of available food for human consumption. But, I also must clarify the inaccurately held views by many that wholely equate the sharp rise in prices for foodstuffs with corn- or sugar- based ethanol or soy-based biodiesel production because they tarnish public opinion on biofuels in general.

Food-based fuel represents the past decade+ of technology development; my work has exposed me to current and forward-looking technologies such as cellulosic ethanol, which derive fuel from non-food-based inputs such as agricultural waste (corn cobs, sugar cane husk) or municipal solid waste (garbage). I believe that as long as the combustion engine commands the bulk of the vehicular market, these technologies will increasingly contribute to domestic fuel, keep dollars in circulation in local and regional markets, and reduce the adverse effects of garbage accumulation.

The larger point in the article is that commodity prices for corn have dropped precipitously while production of ethanol from corn has increased! As noted, it was demand, speculation, and high energy costs that drove food prices higher, not simply food-to-fuel entities. The curiosity of the 'Chart Link' on that page is that food prices have not dropped nearly as significantly as commodity prices in the past four months. Biofuels include a wider range of fuels than many realize and are simply one element in the fluctuations of global food prices.

One sidenote: Bush attempted unsuccessfully to privatize Social Security especially in his second term. The article attached below, regarding losses sustained by Israel's retirement funds, is a potential outcome when potential greed in the private sector is allowed access to the public's retirement coffers.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aawaWZBTZNQE&refer=home

As it is, here in the US, our companies' and governments' commitments to actually funding pensions has become far from dependable, in and of itself, to put it mildly. I am still thankful Bush's initiatives failed.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ahb6gcv6yWcs