You can relax now. We’ve made it through another Christmas without waking the Grinch. Whoville shopped with impunity, stocking its houses with food, toys, clothes, and lots of electronic stuff. Thanks to Wal-Mart and Sam’s Club, thousands of five-year olds are now driving $300 battery powered Hummers, awaiting the day they can drive the real thing and cover two parking spots with one vehicle.
We worried a bit, but the Grinch didn’t come and steal our stuff. Indeed, today piles of things that weren’t purchased before Christmas will be on sale. Maybe even a toy Hummer or two.
This year, unlike last year, we know where the Grinch lives.
He lives in China. Well, we’re pretty sure he lives in China. But there are rumors that he has spent some time in Russia, Japan, and the Middle East. What we know for certain is that the Grinch is the guy who holds the dollars we’ve been exporting from Whoville. As long as the Grinch holds the dollars, we can celebrate Christmas.
When the Grinch decides he’d rather have something else— something that isn’t dollars— that’s when Whoville gets a reality show makeover. It’s something we in the media have been wringing our hands about all year. Worse, the newsletter writers have been portending, and that’s never good. For all the fear that the dollar will suddenly become the Edsel of currencies, there’s a good chance we’ll be buying our underwear, TV sets, and everything else, cheap a good deal longer.
Why?
Because we’ve got a great standoff going. Let me explain by answering three questions.
What does China get out of pegging its currency to the dollar? China gets enormous economic growth. It gets job growth. By having everyone certain that the Yuan will be revalued substantially higher, China attracts investment dollars and consumer dollars. Capital that fled China years ago is returning to China. It is returning to be invested in new plants and equipment. It is building the high tech foundation for an economy that will quickly be globally competitive. When China gets all its Peking ducks in a row its size will guarantee that it is the high volume producer of any good it chooses to make. It will be the low cost producer because of efficiency, not just wage levels.
For the Chinese, limiting domestic consumption is a small price to pay. Generational sacrifice is a tradition in China. Job growth reduces hunger. Hunger trumps niceties. We have a terrorist attack that levels two gigantic buildings and our government tells us to shop. It wasn’t long ago in China that your family had to pay for the bullets to kill you if you annoyed the government sufficiently. Big difference.
Is there an alternative to the dollar? If one existed, we’d be in deep trouble. But there isn’t a ready alternative. Whatever our problems— and they are substantial—we are in better shape than most of the other industrialized nations. Euroland is sinking with age, over-regulation, and high taxes. Japan owes more money than we do, albeit to itself. It’s also one of the fastest aging countries in the world.
Other governments would have to invent us if we didn’t exist because it is our consumption that keeps other governments in power. Without our buying, unemployment would be massively higher throughout the world.
What happens if the dollar continues to fall? We can see the results with the euro. America is already a bargain. Next summer, if the euro continues to rise, you’ll need to speak French to visit New York and German to visit Disneyland. Canadians and Brits will out-bid us for our favorite places in Mexico.
Wages are so low in China that a small exchange rate adjustment won’t have much impact on our trade deficit with China— it will still be the low cost producer. It will continue to undercut the rest of the world, developed and less developed.
What does it all mean?
Simply this: someday things will change. Unlike the Japanese, our debts aren’t just to ourselves. We owe money around the globe. Check the latest Treasury International Capital report, released December 15, and you’ll see that we sold foreign securities on balance while foreigners bought our securities on balance. That can’t go on forever.
Someday the Yuan will rise. But it won’t be next month. It probably won’t be next year. The only thing we can be certain of is that someday we won’t be the global consumer of last resort. When that day comes, we’ll pay a lot more for everything.
On the Web:
Treasury International Capital System:
http://www.treas.gov/tic/
Major holdings of U.S. Treasury Securities:
http://www.treas.gov/tic/mfh.txt
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) Scott Burns, 2022