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Summer 2011: China To Devalue US Buying Power by 30%

The trade imbalance between the US and China, a hot button between the nations for the last decade or so, is finally going to start to stabilize in the summer of 2011. However, it is doing so with a de facto devaluation of the US dollar and its buying power. The average American will see a spike in the price of everything from their favorite jeans and T-shirts, to the cost of some electronics. The Chinese have decided to devalue the US dollar’s buying power, without devaluing the US Treasury holdings they hold. It is an elegant solution to their issues. It will be interesting to see if they can pull it off, while they try to prop up the European Sovereign debt markets at the same time. The Chinese are attempting, successfully so far, to introduce the Yuan as a global currency in which to settle international trade. China is pumping into its own internal currency markets so much liquidity, they need an export market to develop for the Yuan or their own internal markets will overheat. So China is going to start offering Yuan based savings accounts, to westerners as a vehicle in which to park capital. While this is a test case only, one might expect Yuan based accounts to be offered around the world sooner rather than later. If western investors take to Yuan based cash accounts as a way to try and gain an increase in value, the transition will drive the western banks to be more proactive in adding convertibility into their systems. To start, they are offering these Yuan accounts at three US based branches. The US Dollar devaluation will come in the form of an increase in the prices of all products. In reality it will represent the uniform cost push effects of inflation. The US can expect it on all Chinese based products of one form or another. The timing of the change is set to arrive with the products on the US shores in the summer of 2011.

1 Comments in Response to

Comment by Happy Landings
Entered on:

Ah....someone please explain exactly how they are gonna do this? Arbitrarily? Just by knocking off 30% on the peg? They could do that....but how does this not effect the value of their t-notes? Simple "book keeping"? Do the Wall Street Shuffle and just blatantly overstate the value on your books? And how doesn't that implode their value? Like nobody's gonna know? Or does this mean our treasuries are now backed by the full faith and credit of China?

Absent higher understanding from somebody out there, this just seems like a short term strategy to extract value while there's still some to be had. It's proposed as a magic bullet but it's looking more like an assassin's bullet to me.


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