http://www.cnn.com/2011/10/13/business/china-us-currency-battle/index.html

In the article, it shows that China is keeping its trade currency lower so that they can continue to pay low wages and get low prices for products manufactured there. The senate voted in a kind of challenge against countries we trade with that seem to keep the price of their currency low against the price of the dollar in order to make more money from the US. The article goes on to explain that there are critics who believe China purposely lowers the exchange rate as a means to keep their prices and wages low so their products are more attractive to American consumers, which is good for their economy. What does any of that mean? How does it affect you?

This is how the worth of the dollar is reflected in world markets. Let’s say our dollar is worth two yuan in China. The trade value of exports bought from China become very cheap, so it attracts consumers because it’s affordable. The yuan’s worth being lower than the dollar means that those who work for Chinese manufacturers get a very low wage, the cost of living is somewhat lower, and the worth in the world economy goes up because of attractive prices. The economy booms, but falsely so. Even though the yuan’s worth should rise with the international worth, China has cut that worth or put a limit to how far it can rise in a manner that traps the true worth of the currency at a lower rate. This means that even though prices should actually rise for Chinese products, it doesn’t because the government has set the worth on a low setting. The revenue of the country soars, but the reality of evolving currency worth fails to meet the economic worth of the country in a manner that is healthy and produces international worth. Pressured by the US, China’s national bank raised the bar a tiny bit in order to reflect the proper evolution of the yuan. If the yuan is worth two to one dollar, the worth of dollar goes down. If the worth of the dollar is depressed, the amount of revenue we gain from what little business we do in the international arena shrinks. Think of it like a see saw, when our dollar worth is up in the air and the worth of other currency is low, we are able to make money easier. If the worth of the dollar is lower, other countries make more money. What China receives in revenue from the US buying the products is more if they keep the worth low, but not raising the worth of the yuan to match the worth of products in the international arena is, well, kind of wrong but good for their economy.

If the yuan’s worth was raised in order to reflect the country’s worth, the products we currently buy from Chinese companies would rise. So if we pay $1 for a tee shirt made in China now with the price of the yuan lower, the company selling the shirt is only paying $.25 or $.50 per shirt and making a killing while selling affordable shirts. If the worth of the yuan went up to where it actually should be, to reflect revenue and international worth, we would be paying anywhere between $2-$5 for the shirt, with the company buying the shirts at twice to three times the rate they were paying for it. The revenue is still there, but the attractiveness of the price for sale of the item has significantly changed. The consumer marketability would erode, and possibly, the market for manufacturing shirts in the US would become a feasible solution. Thus, with the demand pressing, the supply must respond and then satisfied with native products that would boost our economy. China, if politically savvy as I suspect them to be, would not want this to happen. To combat that, the worth of the yuan is kept low as is wages for workers which means revenue for the country because of attractive low prices. If they were forced to reflect true worth of the yuan, it would be the beginning of the economic decline for them.

Remember the carousel, where worth or interest in companies’ worth goes up and down naturally reflecting the ebb and swell of economy health from my previous post? It works the same for currency in the international marketplace. China does not want the horse of their worth to dip down because that means a loss of revenue. China would begin to have the significant woes the rest of the world is having with their economies. In order to prevent the dip, they keep the worth of their money lower. They also make sure that supply and demand for Chinese products remains hungry and does not stagnate in the international market. The senate, who understand that the low worth of the yuan also brings down the worth of the dollar, voted to take a measure against countries the US trades with that keep their currency values falsely low. The reason the dollar’s worth lowers is due to the ratio of currency in the country where the trade is going on. If an economy that we are trading with does not reflect the true net worth of exports and that country continues to retard the worth of their currency, the dollar lowers in value instead of increasing in value. It means that while we can enjoy low priced items being exported into our country, the less and less we can actually buy from them. When the dollar trades low, it hurts the worth of our country. When the dollar trades high, it is good for our country.

The consequences of the dollar’s worth going down affects our trade with other countries. The dollar is used to trade oil products on the international market. Because the dollar’s worth is low, the exporters of oil to our country will want their currency’s worth for the product. So the price of oil per barrel goes up. Other commodities traded on the dollar will also go up. So when the dollar is low, many products we have come to rely on become more expensive to buy. So that begs the question: If we have low dollar worth, wouldn’t printing money help it? No. As a matter of fact, if we print more money than what we actually have to spend, this drives the dollar’s worth down, too. Let’s say that we are going to bake a cake, but we don’t have enough flour. We cannot manufacture flour on the spot or make flour appear to fulfill our need for the cake. The same thing happens with the dollar. If there isn’t enough money to pay the bills, we cannot manufacture money and expect that to fill in the problem. Printing more money than we have worth is making phantom wealth, wealth we do not have. So the new money we printed to pay our bills has nothing to back it up. Money is used in lieu of gold and silver, which if we used that as money instead of paper our wallets and purses would be really, really heavy to carry around. Paper bills represent wealth equal to the worth of one dollar, and when that worth ebbs it doesn’t matter how much money you print and put into circulation if we have nothing of worth to back it up. So making all that new money does only one thing: it creates a glut of dollars that are not worth something. The existence of the wealth it represents is not present, so the worth of the dollar goes down even more.

The failure to raise the worth of the dollar when trading with countries like China does not make us money but we lose money on the deal. If China keeps driving down the worth of the dollar (going really far and saying ten yuan equal one dollar) our economy will suffer the ramifications of the dollar’s failed worth. What oil barrels cost today (two yuan to one dollar) is, say, $50 will nearly triple the price (ten yuan for one dollar) of barrels of oil. The solution to the economic problem of the dollar’s failing worth is to begin courting companies/corporations to move business to the US, raise our gross exports above our gross imports, employ Americans who will eventually spend money on items other than just commodities, and lower the taxpayers’ burden to give money to representatives over and beyond what they are worth when they should be making an average American salary. The amount of revenue gained by doing this may just help the country get employed and get back to a working economy not based on insatiable hunger for imported items. The rise of wages to reflect cost of living will assist in employing people or, worse for us, a sharp decline in the dollar’s worth will cause essential items (like food and utilities) to lower in price; though this scenario is highly doubtful to become reality. Somewhere, someone is going to have to give, the price of milk is $5 a gallon compared to last year when it was only $3.65 per gallon, to something more affordable by a larger amount of poverty stricken people in this country. It is likely to get much worse before it gets much better.

The fear of the corporate powerhouses of the US making hand over fist in cash that does not reflect into the pockets of the average American is palpable because their stranglehold control of representatives elected into their position is now becoming unsavory. They are going to have to do something other than line the pockets of legislature into giving them unreasonable tax breaks and no consequences for shipping jobs to other countries where they can easily afford two peanuts and a roll of toilet paper to hire Yang Li to make lead infused toys. The people have finally caught on to the game of the elite 2% and they are unwilling to give these people a free ride. The owners of the representatives will begin to pull their reigns in fear that they will no longer enjoy prosperity while the average person lives in their car with their 2.5 kids and dog. “Let them eat cake” Wall Street executives, sipping champagne while the little people suffer will only fuel this discontent of the growing poor. I would hate to predict a revolution, but the American spring has already begun and I seriously doubt it will stop until some balance and fair equity can be had by all not an elite few.

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