Having the dollar tied to oil allows the US to devalue the dollar without losing it. To understand the significance of this in terms of the bigger picture with China, watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown) where he talks about the US/China "currency wars" and the "race to the bottom" http://www.charlierose.com/view/interview/11343).
The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.
China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?
"'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
"A weaker currency 'makes them more competitive and reduces the burden of debt," - makes them more competitive? It makes the pricing lower but not more competitive. China and any other country that is racing to the bottom is playing a losing game in the long term. In short term, there may be some benefit but as with anything that becomes commoditized manufacturing is only as good as your last price.
As far as relief of debt that theory has been shown wrong for a good number of years. Lowering the value of a currency may look good to someone who is in debt but it makes those hold the debt less likely to lend which freezes capital and we all go into recession.
Should the US currency not be tied to world gas/oil and other commodity markets we could be seeing what's happening in Japan (pre-quake) where they were a a neg interest rate and are the most highly in debt country. They tried lowering their debt by devaluing but it hasn't and won't work.
Comments
Having the dollar tied to oil allows the US to devalue the dollar without losing it. To understand the significance of this in terms of the bigger picture with China, watch this Charlie Rose interview with Gordon Brown (http://en.wikipedia.org/wiki/Gordon_Brown) where he talks about the US/China "currency wars" and the "race to the bottom" http://www.charlierose.com/view/interview/11343).
Kenneth Rogoff (http://www.economics.harvard.edu/faculty/rogoff/), a Harvard economics professor and former chief economist at the International Monetary Fund, says "A weak dollar isn’t necessarily a bad thing -- it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States" (http://www.washingtonpost.com/business/economy/the-dollar-le...).
The article goes on to say, "[Devaluing the dollar] effectively would be playing the China card against China in a battle for manufacturing jobs...Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.
China artificially lowers its currency so its goods are relatively cheaper ("it's pegged to the dollar"), which keeps its foreign trade prices down and therefore boosts its exports. So how does the US "compete" with an artificially-lowered foreign currency to discount its debt and keep its exports up? Or, in other words, how does the US devalue its own currency in a "race to the bottom"...?
"'Countries like the United States do race to the bottom,' said Gross (http://en.wikipedia.org/wiki/William_H._Gross), though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency 'makes them more competitive and reduces the burden of debt,' Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed 'as Tennessee Williams would say, to strangers, outside the U.S. If the United States can devalue the value of those dollars that they owe, then all the better.'"
"A weaker currency 'makes them more competitive and reduces the burden of debt," - makes them more competitive? It makes the pricing lower but not more competitive. China and any other country that is racing to the bottom is playing a losing game in the long term. In short term, there may be some benefit but as with anything that becomes commoditized manufacturing is only as good as your last price.
As far as relief of debt that theory has been shown wrong for a good number of years. Lowering the value of a currency may look good to someone who is in debt but it makes those hold the debt less likely to lend which freezes capital and we all go into recession.
Should the US currency not be tied to world gas/oil and other commodity markets we could be seeing what's happening in Japan (pre-quake) where they were a a neg interest rate and are the most highly in debt country. They tried lowering their debt by devaluing but it hasn't and won't work.