10A072 What a Yuan's Worth by Jim Davies, 11/13/2010

This week leaders of the 20 most lethal governments on Earth met in Seoul, Korea, to compare notes on how badly they've all failed in managing their respective economies - though I didn't hear either that they phrased it that way or that any plan to stop trying. The elephant in the room was China, and many of the other money manipulators bitched that the Yuan is being manipulated too much; it's more or less pegged to the US Dollar, by decree.

That's unusual. Normally, if you want to shop for a shipload of Toyotas in Tokyo (yes, I know, they are mostly assembled these days in Huntsville, AL - but that's much less onomatopoeic) you check the $ exchange rate, pay the exchanger his fair profit, and set sail. But the Chinese government controls its rate of exchange, artificially; that market is forbidden to function. The currency is the Renminbi and its unit is the Yuan, symbol also .

Now, what's it worth? Check the Wiki entry and note that China's GDP (Gross Domestic Product, the sum of all its people produce in a year) is $5.7 trillion, or $4,283 per capita. Compare that with the US' $12 trillion, or $40,000 per capita. So China's a poor country, right?

Not so fast. That GDP title is followed by "(nominal)" because the figure is calculated at the forced, artificial, fixed exchange rate of around $1 = 1. Close by it is another entry, parenthesized "PPP" and that is explained as "Purchasing Power Parity." Someone deep within Wiki has worked out about what the Yuan would be worth, if people were allowed to buy and sell it freely. And on that basis, China's GDP is $10.1 trillion, or just a hare's tail behind America's. Oops! It seems that informed guesswork led to a "true" exchange rate of around (1 x 10.1/5.7 =) $1.77 to the . Again, oops.

The wily ChinGov is imposing a barrier, to "protect" its domestic companies - similar in effect to a 77% import tax, except that it applies to all goods priced in US dollars and that no tax is collected from it. Chinese exporters are having a ball, importers not so much; the converse is true here and I'm not complaining. What Chinese exporters are doing with the loads of dollars they earn is not my business, though I'm surprised to hear they trust some of them to the US Government as loans. Doesn't seem to me too safe an investment strategy.

The hypocrisy stank, in Seoul. All the G20 governments manipulate their currencies to bring perceived advantage to them, the politicians - people who generally have never in their lives run a business to meet a payroll; our own is reducing the value of the dollar by printing an extra $600B (or 5% of the total supply) so Obama has no excuse to bleat, yet they are all blaming each other. We are fortunate that so far, these mandarins are trading only words, not missiles. When they have dissolved in favor of zero government societies, the resulting worldwide market will choose something of solid value, such as gold, and all their paper monies will be worthless.

Except perhaps as historical curiosities, or as wallpaper.

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