Tuesday, November 17, 2009

Dollar Drops 16% since March

Warren Buffet on Charlie Rose said it clearly: China has sold a lot more in the US than the US has sold there so they have a mountain of dollars that is stuck out of the USA. If they sell it to the French then it is still out of the USA. The only way to get those back in the USA is to buy something with it such as soybeans or gold that they can ship back to China. This is just saying that the capital account plus current account must equal zero. This is similar to Japan in the 1980s and 1990s that exported huge amounts of manufactures to the USA but ignited a bubble that burst and has been mired in recession since then. I was telling Klaus they were just being slaves by working hard to build stuff for the USA and were not going to get much in return.

I think China will want to buy stuff to ship back to China so that some of the poorer inland people can have beef, soybeans, foods and other items to help keep down envy of the rich in the coastal cities. USA is importing less from China and elsewhere. It may take some time to get back to balance. If they let their currency rise in value they could get more goods per yuan.

Most importantly China should start manufacturing more for domestic consumption instead of shipping so much to the USA. Like the Japanese this is unsustainable and does not benefit their own people. China too may be in a boom and get stuck in decades of recession if they continue on an unsustainable amount of exports to the USA.

I see the Fed is worried about the weakening dollar and I hope that Obama gets a dose of reality in China and acts to prevent a dollar collapse.

I would prefer higher interest rates to stop a bubble in asset prices and a big tax cut to stimulate the economy.