Volume 11, Issue 14
The United States and China are today’s Dickens' London and Paris.
The U.S. dollar is the world’s reserve currency. Every country’s economy in the world is impacted directly by how America manages its currency. Currently, the United States is deficit spending by approximately $1.7 trillion annually. Such deficits are projected for the foreseeable future. Deficits are borrowed, not earned income, adding money to the global supply of dollars without accountability for economic growth. Such spending is inflationary and directly opposed to the stated government mandate and monetary need of getting inflation under control.
China has mismanaged its currency since the opening of the Bamboo Curtain in 1991. The Chinese yuan is under the same pressure that the Soviet Union’s ruble experienced under the doctrine of a command economy. At its foundation, communism imposes massive price controls. The lack of free economic choice, and therefore distorted free enterprise demand, like the ruble, has resulted in the yuan being untradable in a free-floating exchange rate with other currencies. This pricing discomfiture extends to components of the manufacturing supply chain.
Both the United States and China are in excessive debt in ratio to their Gross Domestic Product (GDP). To continue to do whatever they want to do for as long as they choose to do it requires their currencies to be hegemonic economically.
Only one country can achieve this goal.
It is critical to China’s plan that the yuan dislodge the dollar as the world’s reserve currency. They cannot continue to pursue their current economic policy without being able to purchase critical commodities denominated in yuan. Their attempt to establish a new petrocurrency with Russia is part of this strategy. Luring Brazil and India into a BRICS economic matrix based on the yuan as the reserve currency is the next phase.
The unseen threat bereft of recognition is the slow grass burn of developing countries left without options for the use of their local currencies. Kenya must purchase critical earth rare minerals and certain basic needs of food and medicines in the open market. These commodities are priced solely in dollars. Inflation is exacerbated when Kenya must exchange shillings for dollars to make strategic purchases. An 8%-15% exchange transaction fee is added on to the cost. The brokerage’s handling charges increase with inflation. The weaker the country’s currency, the higher the transaction exchange costs. China has offered for Kenya to make direct purchases of Chinese manufactured goods in their currency, eliminating any transaction exchange fees. In return, China will expect to make purchases of Kenyan products in yuans. This appears on its face to be insignificant given the small size of Kenya’s economy. However, there are over 100 countries in the same precarious economic state, vis-à-vis their currencies, as Kenya. As these countries slowly, one-by-one, engage China out of necessity, the slow burn continues.
At some point, enough countries will be settling accounts in yuan for strategic purposes, lacking any other option, the grassfire will reach the economic underbrush of the entire forest. Metaphorically, the underbrush on fire is the recalibration of world debt denominated in dollars. How will sovereign debt be paid when world commerce is being conducted in two currencies that cannot be calibrated in a free-floating exchange rate?
The United States could cure inflation and stabilize the dollar as the world’s reserve currency if it would cut its deficits, balance its budget, and recognize the fact that the U.S. federal reserve is the world’s federal reserve. Most developing countries want freedom and free trade, not totalitarianism. Yet, survivability in the short term may dictate decisions opposing their ideological desires.
Dickens went on from his iconic opening line to include:
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
And so we could say of the times in which we live today.
In a tale of two countries, the world is held in economic captivity that could devolve into economic paralysis.
Both the United States and China must take action to respect eternal principles of righteous governance lest they face the fate of Great Britain and France in the 18th century. One was challenged by revolution externally in 1776; the other by revolution internally in 1789.
Pray for our leaders to open their eyes and escape the fog of denial. And remember…
Our hope and faith lies in our local communities. For in the alliance of neighbors is the strength of America.
My name is Marc Nuttle and this is what I believe.
What do you believe?