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Reblogged: Who Was Pegged to Whom?

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China's recent devaluation of the yuan has financial analyst Peter Schiff concernedabout our the fate of our fiat currency. Indeed, he sees the move as born of concern that its currency being coupled to the dollar was placing China at an economic disadvantage, and hurting Chinese trade. Indeed, he sees the global dollar rally as a bubble and this move as an indicator of how and why that bubble might burst:

... [W]hen the dollar starts to fall in earnest, China may not be there to catch it. This will also mean that the biggest foreign buyer of Treasury bonds will likely be sitting on its hands when deteriorating U.S. finances force the Treasury to begin issuing trillions of new bonds annually. So when the U.S. needs China's help the most, it will be unwilling to provide it.

In the absence of a Chinese backstop that the U.S. has for too long taken for granted, when the dollar resumes its decline, the fall will be much more pronounced. This will also generate significant upward pressure on both U.S. consumer prices and interest rates that was absent five years ago, when Chinese buying provided a huge cushion to the U.S. economy. In fact, data indicates that China is already paring the amount of Treasuries held in reserve. That means
a full blown dollar crisis may not have been averted, but merely postponed, with the dire warnings of U.S. hyperinflation potentially coming true after all
. [bold added]

I have been wondering why we haven't yet experienced much more dramatic inflation due to the Fed's recent orgy of money printing. I hope Schiff is wrong, but feel more like I have been warned.

-- CAV

Updates

Today: Corrected capitalization errors.

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From the Schiff article:

The last round of the currency wars began around 2010, when pronounced dollar weakness resulting from the Fed's Quantitative easing experiment and the Federal government's annual trillion dollar plus deficits had caused the dollar to fall sharply against most other major currencies except the yuan, which did not rise because the Chinese were enforcing a peg against the dollar. To affect the linkage, China had to accumulate trillions of U.S. dollar reserves. , with the added benefit to America of keeping a lid on long-term interest rates and consumer prices, that would not have been there absent China's help.

The claim here is that China has accumulated over $2trillion, in the past five years. But China's foreign currency reserves have only risen by the equivalent of about $1 trillion in that period, and only 60% of those reserves is actually in US dollars.

It's hard to take seriously someone who continuously overstates the role China plays in propping up the US economy. This is an agenda driven narrative, not economic analysis.

 

The last round of the currency wars began around 2010, when pronounced dollar weakness resulting from the Fed's Quantitative easing experiment and the Federal government's annual trillion dollar plus deficits had caused the dollar to fall sharply against most other major currencies except the yuan, which did not rise because the Chinese were enforcing a peg against the dollar.

 

But...but...the CHY was not pegged to the dollar between 2010 and 2014. It did rise, from $0.146 to 0.164 (that, without bothering with a calculator app, looks like about 13-14% - pretty much the same as other major currencies in that same time period):

 

http://www.xe.com/currencycharts/?from=CNY&to=USD&view=10Y

 

So, clearly, the Chinese aren't decoupling from the dollar NOW. They decoupled back in 2010. This devaluation doesn't seem to have much to do with the US. If I had to guess, I'd say it's probably in response to Abenomics more than anything else.

Edited by Nicky
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