STEVE PIECZENIK TALKS

Recent Devaluation of Chinese Yuan:  “Mama-Hoohoo”! Half-Tiger/Half-Zebra!

Chinese President Xi Jinping assumed control of his failing economy then he suddenly devalued the Yuan by 4%. What does it really mean for China and the world currencies? What does that mean to me and to us?

I think it’s a mixed picture hence the blog header: half tiger/half zebra. It’s not indicative of anything in particular except for the following considerations:

▪ a highly inflated Yuan had to drop against the dollar in order to realign it’s true value for spot market [denominated in dollars].

▪ US exports will decrease markedly as the dollar climbs in value making all products sold to China and Asia in general exceedingly expensive.

▪ Yuan dropped in anticipation of the Chinese President’s impending visit to POTUS.

▪ Yuan drop is an attempt to break away from the worldwide dollar-based currencies created by the 1944 Bretton Woods Conference in New Hampshire.

▪ China wants Yuan to be considered by the IMF as part of the universal sovereign funds consisting of the Euros, Yen and the US dollar.

The above list is a rational assessment of what China thinks it is doing as a one-off depreciation. However, I am not all that impressed by how President Xi has been able to manage a highly restricted, manipulated economy that has been based on political favors, subsidized by State Owned Entities [SOE’s] and which has changed from an export driven to a domestic consumption economy. I believe that China is in a very serious financial and possibly political trouble.

Why do I think that right now?

China has a top down artificial economy based on exports and false numbers related to growth [average GDP about 6-7%]. Such figures were all highly exaggerated from the very beginning as Deng Xiaoping encouraged his 1.2 billion former Communists to become ‘more capitalistic’. From the beginning, the Central Banks of China had created a structured economy that could not endure for more than a few decades. The past and present economic concerns have never been the free flow of capital or profits. China’s primary concern has always been it’s transformation to a ‘free market’ economy; providing jobs for hundreds of millions of people.

That initial hypothesis was correct –up to a point.

When the workers became successful a strong middle class arose which like America demanded high quality consumer goods. For a period of time that Middle Class acted appropriately. They worked limited hours. They bought their houses and even bought second ones for investments.

However, China was no longer able to export quality goods at a cheap enough prices to USA [primary client]. Instead, our manufacturers who had shipped their respective factories to China realized that the quality of Chinese goods were poor and relatively expensive when one considers the cost of shipping, handling and delayed deliveries.

So what did our  manufacturers do? 

They went to Mexico where they could build cheaper factories which in turn produced cheaper cars which did not need to be shipped over the expansive Pacific Ocean.

The Yuan was no longer attractive to American industrialists who also left China because of severe pollution and restrictive trading practices and realigned their central offices to the more friendly, financial oriented states like Singapore and Vietnam.

What is the state of the Yuan today?
The cheaper Yuan will create a massive deflationary spiral all over Asia and possibly throw China into a severe recession if not depression.

But what do I know?

I have owned a few banks here and there. Lately, I found that banks were outdated modes of currency exchange as the internet created such powerful virtual entities as Pay Pal and Lending Tree. I see a major restructuring of the financial markets all over the worlds where the Euro, the Ruble and other weaker currencies will have to be seriously devaluated if not eliminated, as in the case of the Euro. As most of you know by now, I feel that the Euro entity/currency is not sustainable politically/financially because it was an artificial construct initiated by the French in an attempt to control Germany’s rise after WWII. We all know how that turned out. I would say that Germany should pull out of the Euro and introduce its powerful Deutschmark once again.

For those of you who are worried about the Dollar, don’t! The idiot pundits in the Washington who are screaming that “American xenophobia will be destructive” are completely wrong. Our economy will continue to grow at a 2-3% level with the present administration if the Federal Reserve does not do something stupid like ‘choke off’ our dollar liquidity in the name of a non-existent ‘inflation’ –by raising interest rates.

America’s exceptionalism resides in one simple fact. We are an ‘Entrepreneurial State’ which means that we depend on the ability of many of our citizens to create and implement small businesses of all types which in the aggregate create economic growth. Even if our dollar is too strong we can offset our trade inbalances with creative financing which is what sophisticated manufacturers will have to do in the course of doing business.

If we elect candidates who are attuned to specifically creating a growth economy based on sound principles of business, then we will become an even stronger economic, political entity. America first! That will continue to sustain us as the Financial Tiger of the World….