The US took this meaningless step because some individuals in the US government are arrogant, whiny, little brats that do not truly understand the nature of free market economics. They are reacting to declining US productivity and exports—or, perhaps their advisers don’t understand the self-balancing nature of capital markets.
The relationship between two global currencies cannot be manipulated apart from very short intervals. This short term manipulation is driven by short-sighted motives—and it ultimately backfires when assessed against the original goals.
If you depress the value of something by creating an “official” exchange rate, you would quickly bankrupt the government that made such a goofy proclamation. That’s why these announcements rarely produce lasting results. Economists recognize that when you closely track the outcome (with other factors normalized), results are almost always in opposition to original goals.
Chinese currency doesn’t need to be devalued, because the Chinese have been so incredibly productive over the past 30 years. They are producing so many high quality shoes, toys, computers, car parts, underwear and construction materials, that other nations are becoming lazy. Their currency has a low value, because they continue to ship huge quantities of low-price products to us and are willing to continue accumulating dollars. That is, throughout an enormous trade imbalance, they trust our ability to repay.*
This is why China’s Yuan is ‘cheap’. It is not because of anything that the US government does as a reaction to transient political or economic issues.
Likewise, attempting to ban a country from selling products internationally below what it costs in the domestic market is a useless and counterproductive law, even from the perspective of the consumer nation.
There is rarely a justifiable and rational “manipulation”—or more accurately, action—imposed by consumer nations on its trading partners (other than figuring out how to reboot their own industries!)
For every rule of thumb, there is an exception. I can think of a few punitive actions that are justifiable, because they protect things that cannot protect themselves in a free market: The use of prison labor, child labor, slave labor or any production that poses a health hazard (for workers or buyers) or that harms the global environment.
The problem with these practices is not they create an unfair marketplace. Rather, they represent morally and universally condemned activities that kill or subjugate. And so, pressure and uniform restrictions from outside nations helps to quarantine a practice and ultimately make it unprofitable. But economic pressure applied by coalitions or trading blocks for any other reason is destined to fail. You just can’t fly against the headwind of widely disbursed, free market, capitalist economics.
With respect to currency “manipulation”, monopoly trading blocks or underpricing, sanctions are not only ineffective, they are unnecessary. If we allow the economic activity to play itself out in a free, fluid and unregulated manner, these things not only work themselves out, they actually backfire on the manipulator!
* When I refer to America’s “ability to repay” (i.e. for all the things that we have consumed without exchanging products of equal value), I am not referring to handing the Chinese more and more green pieces of paper with portraits of dead presidents. Dollars can be created out of thin air by transient politicians who continuously raise the debt ceiling. This can lead to a collapse in value and the Chinese know this.
Rather, I am referring to the confidence that our trading partners have demonstrated (at least until very recently), that we will eventually restore the vigor and volume of our manufacturing industries—and also be willing to use most of these newly restored resources to work for them and not just to generate products for consumers back home.
Will nations, institutions and large pension funds continue to prop up the dollar at a time when industry is dying, exports are scant, and legislators keep raising debt—kicking the can down the road?
This unfounded trust in the great nation that triumphed in world wars and the space race cannot last forever. What will signal the turning point?
The signal has already been lit. This year, it’s just a flicker, but in the next two years, it may well ignite the tinder that leads to a global forest fire.
The reason that the US can get away with kicking the can so far down the road, is because the US dollar has been the de facto reserve currency for most international deals, even when neither party to a transaction is in the US or serving US interests. The use is milking a convenient truth: He who controls the reserve currency needn’t balance his books—not for a long while!
Very large contracts for ships, airplanes, oil, wheat, weapons and pork bellies are typically quoted and guaranteed in US dollars or dollar equivalents. This is not required by law, of course, but it arises from the fact that buyers and sellers do not trust the forward inflation of each others’ currencies. Since the US dollar tends to inflate very slowly, they agree to use dollars to settle their affairs.
This clearing house effect leads to an enormous US advantage and it is fed even by nations that despise America.
A few years ago, it seemed that the Chinese Yuan might take the mantle from the US dollar as de facto reserve currency. Even currencies of UAE or Qatar seemed like they might supersede US influence, because of their status as a banking hub or massive energy exporter. But this left many nations uncomfortable, because the Chinese government—though capitalist—is still communist. Energy and banking economies have shown signs of instability, and of course, the middle-east is constantly a source and target of terrorist activity.
All of these factors lead commercial interests to wonder if currencies backed by these nations will last for the decades of a big trade deal and if they will be sufficiently protected from manipulation or inflation by future kings or monetary Czars?
Sure Bitcoin is new; it’s controversial and it is requires a very different way of understanding money. But it is unquestionably fair, democratic, trustworthy and immutable. Nothing else even comes close.
Gradually, economists, banks, enterprises and governments are coming to the conclusion that the choice of a reserve currency is an issue of trust. And what can be more trustworthy than math and crowd-sourced bookkeeping?
What about volatility?
In the end, it’s not about volatility. Even today, payment processors will protect any vendor who accepts bitcoin, but wishes to convert revenue into local currency.
As Bitcoin becomes ubiquitous (not as an investment—but as a payment instrument, and ultimately as the value itself— it will also become stable. Ten years from now, if you observe a massive spike or dip in the dollar exchange rate, you will not wonder “What happened to Bitcoin today”? Rather, you will wonder what happened to the US dollar. That’s because you will be using bitcoin to pay for a head of lettuce, a new car or a vacation cruise, and the vendors will honor their current prices in bitcoin.