Last week I discussed the secrets of investing in China and how we can trick the system and earn high returns. Of course, this means strategic and careful investing in local currency and local markets.
Today I want to show you the direct and causal effect of what our misguided congressional members are attempting to unleash on us. I am talking about the bill that passed in Congress labeling China as a currency manipulator and demanding the yuan be revalued.
When I see that, I think: “It must be election season again!”
Each time we have an election, China has been blamed for all of America’s ills. The fact we spend too much and borrow too much is China’s fault. The fact we waste money on pork projects is China’s fault. The fact that we have let healthcare costs spiral out of control is also China’s fault. And while we are at that, let’s blame China for all the other problems we haven’t even thought of yet.
The reality of the situation is that for some reason, if China was to revalue the yuan, the U.S. economy would be crushed beyond belief.
I had presented the possible disastrous consequence of a yuan revaluation back in 2006 in Chicago first. Glad to see the world catching on finally!
If the yuan is to revalue, the first direct effect we will see is in commodity prices. The price of oil will close above $100 in the first two weeks after revaluation. Gold will hit $1,500 and all commodities priced in U.S. dollars will skyrocket.
The yuan revaluing is also called the U.S. dollar devaluation. So all products priced in U.S. dollars will become more expensive in dollar terms. Additionally, the Chinese, who are diversifying their holding beyond U.S. Treasuries for years, will now have more money to buy U.S. dollar-priced assets.
The next casualty of the misguided demand of the yuan revaluation will be soaring interest rates. If you think low interest rates are here to stay for a long time, you are right. But by demanding a higher yuan value, we will see the entire effort of the Federal Reserve come to naught.
Since the yuan revaluation will mean a lower total yuan denominated investments in US Treasuries, China will demand a higher rate of return for its reduced investment. So the interest rates will have to skyrocket in order to maintain status quo in the U.S. borrowing money from China.
The final victim of the yuan revaluation will be inflation in this country.
We are so used to trolling the isles of Wal-Mart for ultra-cheap trinkets and low-cost products. For many in this country, Wal-Mart has become a necessity to make ends meet. If the yuan revalues, you can kiss the low-priced products goodbye. Prices will go up seemingly overnight and we will see higher checkout bills for the daily products we buy. And this will add to the pressure on inflation in this country.
And if we think revaluing yuan will mean breaking the Chinese stranglehold on manufacturing and that jobs will come back to America, think again. The manufacturing will shift out of China but to the next lower-cost locale such as Vietnam, Malaysia, Indonesia and even Africa.
Thank God there is almost no will within the Senate to allow the yuan revaluation madness to proceed further and end up as a law that is presented to President Barack Obama to veto.
Once this election is over, the rhetoric around pushing yuan revaluation will die down and the economy can go back to its struggle without having to deal with a much stronger yuan.
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