Anna: I have good news for you, home prices have increased for three consecutive months; I am thrilled!
Karla: Unfortunately I am not so hopeful as you are; artificial low
interest rates and a government tax credit are luring buyers but the
governmental help will not last too long, indeed it will likely expire
Anna: Don’t tell me that! I was so excited about the good news, what a pity. At least the stock market is doing better.
Karla: Companies have cut costs mostly by laying off employees and
investors don’t know where to place their money so they go to the stock
market as the best possible place. Even if the market doesn’t tell us
too much about the economy. You could say that what we are actually
witnessing is not actually a bull market but sometimes a bear market
Anna: I guess that’s true. Also I heard that some very important
banks are still weak; I know that banks are not lending yet and
therefore that’s going to be a very important factor negatively
impacting in the economic recovery.
Karla: That’s right. I have to say that for me, in the long run,
taking into account the worst of all possible factors the one that is
going to hurt us the most is China.
While a low dollar helps our exports the Chinese keep indexing the
Yuan’s value below the dollar and that will have a terrible effect in
our economic recovery.
Anna: Yes I know; a friend has also told me that China’s asset
buying in the U.S. helped inflate the housing bubble. By keeping its
currency attached to the dollar they are really hurting our chances of
growth and economic recovery.
Karla: Indeed they are hurting workers all over the world. Paul
Krugman recently wrote an article in the October 22, 2009, New York
Times about this issue:
“Chinese officials are, in effect, devaluing their currency against
everyone else’s. Meanwhile, productivity in China’s export industries
soared; combined with the de facto devaluation, this made Chinese goods
extremely cheap on world markets. The result was a huge Chinese trade
surplus. If supply and demand had been allowed to prevail, the value of
China’s currency would have risen sharply. But Chinese authorities
didn’t let it rise. They kept it down by selling vast quantities of the
currency, acquiring in return an enormous hoard of foreign assets,
mostly in dollars, currently worth about $2.1 trillion. China has been
keeping its currency pegged to the dollar which gives them a huge trade
surplus and a rapidly recovering economy. China is a country whose
currency should be rising in value and is in effect engineering a large
devaluation instead. And that’s a particularly bad thing to do at a
time when the world economy remains deeply depressed due to inadequate
overall demand. By pursuing a weak-currency policy, China is siphoning
some of that inadequate demand away from other nations, which is
hurting growth almost everywhere. The biggest victims, by the way, are
probably workers in other poor countries. In normal times, I’d be among
the first to reject claims that China is stealing other peoples’ jobs,
but right now it’s the simple truth.”