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China is Pulling the U.S. and World Economy Down


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 rather soon.

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 too.

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.”

Published Nov 18 2009, 02:19 PM by cartoon
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