- Posted February 29, 2012 by
This iReport is part of an assignment:
Dynamics of Yin-Yang Economics
China pegged its currency to the value of the US dollar so it would remain low to make goods China produces cheaper than those manufactured in other countries.
This may at first sound like a clever way to compete in the global marketplace.
According to Yin-Yang theory, however, every front has a back, and this is no exception.
Industrialized countries, lured by the ability to get goods and services cheaper from China than elsewhere, flocked to China to manufacture their goods.
The old adage, “There's no free lunch” applies here. To accomplish this feat of cost-undercutting everyone else, Chinese companies had to trim their costs for labor and raw materials.
Consequently, Chinese laborers are among the lowest paid in the world, little more than indentured servants who cannot afford much more than the basic necessities of life.
To keep costs of materials low enough to compete successfully, Chinese manufacturers cut corners on the quality of raw materials and manufacturing methods to turn out goods that look acceptable, but fail more quickly than their better-made, higher-quality counterparts manufactured in the USA and elsewhere.
Consequently, Western nations had to close operations due to inability to compete with the flood of cheap, poorly-made goods from China. China is now the primary producer of most consumer goods available.
As a result, American industries are largely gone, and American workers are out of work. Consequently the American economy is declining, and along with it, the US dollar's value, because American industry and workers, the tax-revenue generators, are out of work or relocated to China, and consequently the tax base that supported the American way of life is insufficient to fund demands of government and the economy.
Now the chickens are coming home to roost.
The Chinese government, by keeping its exchange rate artificially low, created an unfair advantage for Chinese commerce. At first this seemed like a simple way to capitalize on cheap Chinese labor, since China has so many people who are willing to work for low wages. Supply and demand: many people willing to work for meager wages to survive created a virtual slave state controlled by the government.
Consumers in Western countries, mostly oblivious to the consequences of supporting Chinese production of low-cost goods, gutted the very infrastructure which supported the American economic engine.
As American workers were laid off, the tax base that supported the American economy was lost. Being out of work, the housing base was also lost, creating a huge default of bank-sponsored real estate loans that also took, and continues to take, its toll.
Printing money to cover government obligations has now led to dilution of the value of the US currency.
As the value of the US dollar declines, the value of debt instruments the Chinese government purchases from the US government declines in value too.
The Chinese government is now watching billions of dollars of American debt they own decrease in value. If the Chinese don't continue repurchasing American debt so we can continue to make payments for the debt we already owe, America would have to declare insolvency and the debt would cease to be worth anything.
The Chinese government is faced with a real dilemma. If they allow their currency to float on the global currency markets to the level market forces support, Chinese currency would increase in value, making Chinese goods and services much more expensive and no longer competitive in the global marketplace.
If the Chinese do nothing the value of their investments in US debt will continue to decrease.
What Chinese government officials may fail to realize is what has happened is partly their fault. By pegging the value of their currency to the USD, they created an unbalanced condition which allows them to succeed at the expense of trading partners such as the USA. A sustainable trade system must be balanced for all partners.