The American Administration would like China to increase the value of its currency.
By increasing the cost of Chinese goods, it is believed that the U.S. Trade Deficit would go down and the U.S. Government would go less deeply into debt.
On the other side of the Pacific the Chinese Government is concerned about inflation. The Chinese economy is predicted to rise 11% in 2010.
The entire world is buying Chinese products. The Chinese Government and the Chinese people have managed to capture an enormous share of the world’s manufacturing capacity.
They have done this because they have a common goal. The Chinese do not have an independent group of Money Managers whose goal is self aggrandizement at the cost of the public.
However, this Chinese success story has its dangers. The greatest danger is inflation.
Once inflation takes hold in any country, the normal economic standards are quickly broken. Government employees and other fixed income groups find that their incomes are insufficient to meet their needs. The financial system and banks are thrown into disarray as interest rates roil upwards to cover the cheapening of the money supply.
By raising the value of the Yuan, supposedly less goods will be sold on the world market and less profit will pour into China.
Today, Bloomberg has an article on the re-evaluation of the Chinese Yuan.
Feb. 15 (Bloomberg) — Goldman Sachs Group Inc. Chief Economist Jim OÃ¢â‚¬â„¢Neill said China may be poised to let its currency strengthen as much as 5 percent to slow the worldÃ¢â‚¬â„¢s fastest growing major economy
OÃ¢â‚¬â„¢Neill, who coined the term Ã¢â‚¬Å“BRICsÃ¢â‚¬Â in 2001, anticipating the boom in the emerging economies of Brazil, Russia, India and China, said China may allow the Yuan to rise as much as 5 percent in a one-off revaluation and to then trade within a bigger band or against a larger basket of currencies. That would help counter international pressure, he said.
Ã¢â‚¬ËœSooner the BetterÃ¢â‚¬â„¢
Ã¢â‚¬Å“They need to do something to slow the economy down and deal with the inflation consequences,Ã¢â‚¬Â said OÃ¢â‚¬â„¢Neill, who forecasts the Chinese economy is currently growing between 12 percent and 14 percent and will expand 11.4 percent over the year. Ã¢â‚¬Å“The more they do — and the sooner — the better.Ã¢â‚¬Â
WILL IT WORK?
According to the Law of Supply and Demand, if you raise the price the demand will fall. Then less money will go to China and its economy will cool.
However, if the supply is the only supply, then the demand will stay constant regardless of the price. This is called an inelastic product, like salt or sugar or medicine to keep you alive.
In the U.S. Chinese goods are irreplaceable. Wal Mart and Costco would have to close without them. American manufacturing of household goods does not exist.
A BIGGER DEFICIT
When China revalues the Yuan five percent higher, it may simply make China richer and its trading partners poorer.
This may the new method of conquering the World.