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China's Yuan Policy Makes US Fed Irrelevant

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posted on Jun, 22 2010 @ 07:14 AM
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Yes China manipulation of the Yuan makes the US federal Reserve decision no longer important in the world of trade.


Simply put, Fed policy is much less relevant to U.S. growth and price stability than in the days of Paul Volcker. That's because China's yuan policy has substantially limited the importance of Fed interest rate decisions by severing the historic link between short interest rates -- like the federal funds rate it targets -- and long rates on mortgages, corporate bonds, and the securities banks use to finance lending on cars and credit cards.

Through the boom years of the last decade, Beijing printed yuan to purchase hundreds of billions of dollars in foreign exchange markets. That made the yuan and Chinese products on U.S. store shelves artificially cheap, and imports from China, coupled with higher prices for imported oil, pushed the U.S. trade deficit to more than 5% of gross domestic product from 2004 to 2008.

When Americans spend that much more abroad than foreigners purchase in the United States, American goods pile up in warehouses and a steep recession will result, unless Americans spend much more than they earn or produce.

During the boom, China facilitated such folly by using its dollars to purchase U.S. Treasury securities, and that kept U.S. long interest rates artificially low even in the face of Federal Reserve efforts to rein in spending.


We are no only losing our edge in the world while china get it but even policies are hinder because chinas hold in worlds economics.

www.economyincrisis.org...




 
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