I've been thinking a lot about the US government's "weak dollar" policy, mostly as I watch in awe as the C$ goes up and gas prices get cheaper(!).
I'm wondering if the US government is being simply brilliant. Here's the logic. Arguably the #1 problem facing the US is China. It's growth in international stature (look at the Iran stuff happening right now), empirical designs, and trade with the US must all be alarming to the US Neo-cons.
So how to hurt China the most? My thinking is that the fixed Yuan/US$ exchange rate. The US has been publicly trying to get Yuan/$ exchange rate floated. This would make US goods more attractive to export to china and make chinese imports (currently happening at a huge amount). Anything to improve the trade balance would help the US economy.
But China has balked, for obvious reasons. Fixed exchange rate helps them.
By allowing the US $ to drop against the Yuan, the US puts enormous pressure on China. How long can the Chinese continue to prop up their exchange rate by repatriating the US dollars?
We have some historical evidence about exchange rates. George Soros made billions in 1992 when he bet that the British Pound couldn't participate in fixed exchange rates. It's argued that Soros successfully bet that Asian currencies couldn't handle fixed exchange rates, though there is at least one argument that Soros didn't cause the ringgit to crash. Allegedly, he had some help from various circles that wanted a break in the exchange rates.
I'd guess that the US government does not need help in going "eyeball to eyeball" with the Chinese government on currency, if that's what it is doing. I wonder if there will be some spectacular results. Last couple times, the world felt some pretty big shocks. It sure hurt the Far east economies, yet England seems to be doing just fine now. This time around, it may be the current and "next" super power duking it out so the aftershocks could be even bigger.
In an aside, it seems that China has used the trade surplus to buy up lots of US things, including bonds and stocks. One theory that I heard about the 1987 stock market crash was that the Japanese finally stopped buying US things when they had a fixed exchange rate with the US. There's some interesting analysis about the drop-off in non-governmental purchases of US things and the rise in governmental purchases in the past few months. Maybe another stock crash coming if the Chinese stop buying US things?
I'm not sure how I would take advantage of what I'm guessing at. I don't really know how to "short" the Yuan for example. I could be selling securities on the assumption they will blink and let the exchange rate float. It might be really interesting to see what happens with exchange rates and stock markets.
I wonder if this is W's game plan, and if not, what the game plan is. He might just be executing a brilliant game plan right now.
