Sunday, August 16, 2015

China Devalues Their Currency - Impact On Western Countries

China has devalued their currency, the Yuan, as a response to their stock market crash.   In all probability, the annual growth rate in China is below the 7% often reported.  The Chinese Communist government it deathly afraid of the instability that would come with job loss in China.  What China is attempting to do is to bring down further the cost of manufacturing in China, which will kill more jobs in the US and Europe.  This action is in effect part of a trade war, since the Yuan will now be worth about 3% less again the US Dollar.

In fairness to China, however, the US Federal Reserve has pumped billions of dollars into the US economy, in the last 6 years, by printing money thereby devaluing the Dollar, as well.   The only reason the Dollar has held up well against other currencies is because with the mess in Europe and Japan, the Dollar is viewed as a safer haven than the Euro, or the Yen.  Nevertheless, a cheaper Yuan, with this devaluation, the greatest in 20 years, will be a job killer in the United States.  This is happening at a time when Western countries have for years been trying to get China to raise the value of the Yuan against Western currencies to create more of a level playing field to implement fair trade.

This plays right into the hands of both Socialist Candidate for President Bernie Sanders and Republican Candidate for President Donald Trump who have been saying that China implements unfair trade practices that have killed manufacturing jobs in the US.   They are both right.  China has kept the value of the Yuan low to create more jobs in China for years.   This has led to incredible growth in China at the expense of the Middle Class in the US and other Western countries. 

Now it will be more difficult for the US and the European Union to raise interest rates, since lower Chinese prices for goods will mean lower global inflation.   In essence, the devaluation of the Chinese Yuan will have a ripple effect on all Western countries.  This contributes to deflation around the world, which is not necessarily a good thing at a time when Western leaders are attempting to revive GDP Growth and job creation. 

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