The Chinese Communist Party joins the Money Printers

There was a time when the Chinese Communist Party was so export-dependent that it maintained an overly cheap renminbi (the local currency) vis a vis the dollar. The party generated a lot of criticism for the move (including from yours truly), before agreeing to let its currency slowly appreciate – mainly by slowing down its purchase of US Treasury notes. That’s right, the CCP has already been implementing its threat to “stop loaning money to the US” – and at our request, btw.

At least until yesterday, when the renminbi began a 3.5% drop in dollar value, at the behest of the regime (CNN).

China’s surprise decision to devalue its currency is turning up the heat on the rest of Asia.

The yuan has fallen roughly 3.5% over the past two days…

There is a real argument over whether the CCP is trying to push its currency downward against the market or merely following after the market. Either way, it is a recognition that the regime has fallen off the wagon, and is relying on export highs (pun intended) to keep the domestic economy afloat.

Globally, this means the CCP is joining Japan and Europe in turning on the money spigot to generate Keynesian demand of old (Financial Post). At present, our Federal Reserve’s decision to end its own quantitative easing has made its policy the tightest among the major world players – even with interest rates effectively at zero.

By the time you have seen this, dear reader, it is likely that you will also see calls for the Fed to end that unusual situation and get back into the depreciation game. You’ll hear about cheap imports that must be stopped and how our exporters need “help.” Odds are they won’t mention that a stronger dollar has made America a better investment for the rest of the world, meaning more funds available for startups or business expansions.

This is the flip side of “trade deficits” that are never really acknowledged: the rest of the world’s desperate search for yield brings them here, while neo-mercantilists get so fixated on the money that comes in from exports that they forget how much of it left in capital flight in the first place. After all, the jobs from the export industries are visible; the ones that would have been created had more financial investment stayed in the exporting country are not. Opportunity costs are usually the most expensive, either despite being unseen or (more often) because they are unseen.

Meanwhile, the CCP’s devalution also sent commodity markets tanking (Financial Post), which means lower inputs cost for businesses around the world.

From a supply-sider’s perspective, this is what we call a win-win.

That it turns the latest argument for the Iran nuclear deal into an incoherent pile of mush is just an added bonus (National Post).

@deejaymcguire | facebook.com/people/Dj-McGuire | DJ’s posts

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