The Dollar Meltdown
The Fed is working hard to cheapen the dollar, specifically against the yuan. Here's how to make the Chinese currency work for you.
The Federal Reserve Board is working to raise the inflation rate while the U.S. Treasury is trying to talk down the dollar exchange rate. Not every day does the world's hegemonic power pursue a policy of currency debasement. Still less frequently does it have the courtesy to tell its creditors what it's doing to them.
To judge by the summertime spike in yields, the bond market is absorbing the message. On the evidence of the relatively stable U.S. dollar exchange rate, the currency markets are denying it. However, the currency markets are not so much in denial as they are under a thumb. In the short run the relationship between the dollar and the Japanese yen, and the dollar and the Chinese yuan (to pick just two Asian currency-dollar exchange rates) are influenced, if not controlled, by governments. But in the long run it's arithmetic that decides.
And what the arithmetic will decide, I believe, is that the dollar will cheapen, particularly against the Chinese yuan, fixed for the past nine years at 8.28 or so to the greenback. The story of the yuan is the story of the jury-rigged, lopsided international monetary system--therefore, the story of the dollar. It would make a fine movie script.
On the face of things, you'd suppose that the yuan would be exactly the currency not to own. It's inconvertible, meaning the Chinese government does not allow its free exchange into alternative currencies. And it's fast-multiplying, with the Chinese money supply leaping by 20% a year.
Moreover, this paper currency--the currency of the workers and peasants and the Chinese Communist Party--yields next to nothing. Besides which, the Chinese banking system is broke.
But for all that, I believe the yuan will appreciate. One source of
this colossal paradox is the dollar itself, the greatest success in the history of money. The pound sterling ruled the commercial world for 100 years, but the pound was convertible into gold. The dollar is faith-based.
So much is the dollar the world's currency that central bankers willingly accumulate it. They prefer the dollar to gold, to euros--to anything. This is especially so in Asia, where labor is cheap, savings are high and exports are held to be precious.
China sends the U.S. its merchandise, produced at an average daily wage rate of maybe $3.50. We send them our dollars, produced at a marginal cost of roughly zero. Empty shipping containers from Asia pile up outside deepwater U.S. ports, because there isn't enough westbound, American-made merchandise to fill them for the return voyage home. And the dollars pile up on the balance sheet of the People's Bank of China at the rate of $10 billion a month. The bank acquires them at the aforementioned rate: 8.28-to-1.
The People's Bank could, of course, refuse to acquire those dollars at that rate. By stepping aside it could let the greenback find its own, presumably lower, rate--"presumably" because the Chinese surplus with the U.S. is running at $100 billion a year. And China should, and will, I believe, let the yuan appreciate, not because it is in America's interest, but because it is in China's. The influx of dollars is seeding a huge and destabilizing monetary expansion in China.
It is therefore no accident that the Shanghai real estate market is on fire, that Chinese loan growth is burgeoning or that frightened Chinese monetary authorities have been unable to keep the lid on Chinese money-supply growth. By making the yuan too cheap, they have also, necessarily, made it too plentiful.
The eminent French economist Jacques Rueff once reflected on the chronic "oversupply of dollars outside the U.S. as a consequence of the prolonged deficit of the U.S. balance of payments." He sounded that warning in 1967, 36 years before the warning now in front of you. So there is another warning: Timing is problematical.
For those who believe that, in the shadow of a presidential election year, the U.S. government will somehow succeed in its quest to make the dollar cheaper (and the bilateral deficit with China smaller): How to invest?
For anyone who does not happen to have a derivatives dealer on call, there is only one easy way to play the yuan. That is to open a yuan-denominated account at Everbank World Markets, a division of First Alliance Bank, Jacksonville, Fla. You, the federally insured depositor, would own virtual yuan (recall that the currency is inconvertible). But if there were a revaluation versus the dollar, you would be a winner. It costs one-half of 1% to get in and one-half of 1% to get out. While awaiting the triumph of arithmetic, you would earn interest of one-half of 1% a year. And you could wait a while.
The inevitable always happens, but not always when it's most convenient.jobar.p9.org.uk/weiter2.gif" style="max-width:560px" >
