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Obama, Bernanke and Romney Want a Weaker US dollar and Stronger Renminbi
Pinnacle Digest writes: Axel Merk’s latest article explains that Obama, Bernanke and even Romney want a weaker US dollar and stronger Chinese renminbi (RMB). They all seem to believe this will create a stronger US economy. Merk cautions to be careful what they wish for and pleads with investors to prepare for such a scenario.
In recent weeks Bernanke has been more adamant foreign governments, specifically developing nations, allow their currencies to appreciate. He has been cautioning developing nations to allow the dollar to depreciate without trying to fight back by depreciating their own currency (hence all our articles about the ongoing currency war). Obama and Romney have both been touting the same message, with harsher undertones. Romney has stated he will label China a currency manipulator if elected to office and Obama has bragged that the RMB has increased in value by 11% since he took office. Merk points out that according to his math, the RMB has only increased 9% since Obama took office. And the increase for the RMB is likely due to the Fed’s monetary policy and has very little to do with Obama.
Merk explains that a weaker US dollar is not the answer to stronger economic growth and a better life for Americans. For example, what happens to retirees if the dollar loses value while currencies like the RMB increase? Considering that the baby boomer population is the biggest demographic in America, a weakening US dollar could be catastrophic for many. Rising prices, with no rising income to offset, can spell financial hardship for retirees.
In addition to the baby boomer danger, Merk states “It may be superficially plausible that RMB appreciation is the key to alleviating our economic woes, by promoting exports and therefore jobs in the U.S. However, while lowering one’s currency might give a boost to corporate earnings for the next quarter (as foreign earnings are translated into higher U.S. dollar gains), it is difficult to imagine that the U.S. can truly compete on price – the day we export sneakers to Vietnam will hopefully never come. An advanced economy, in our assessment, must compete on value, not price.”
For a great example of an advanced economy competing on value, not price, just look at Germany. Germany has competed and become a manufacturing powerhouse because of its innovation (which leads to higher productivity) and the quality of goods it creates. To purchase its goods, countries must pay in the second most valuable currency in the world: the euro.
Merk also addresses how Americans have grown accustom to cheap Chinese products. While they may not be known for their great craftsmanship, the Chinese have made certain goods affordable for many Americans. What happens when the RMB rises and the dollar falls? You guessed it.
Merk states “We agree with our policy makers to the extent that the dollar may be generally overvalued and many Asian currencies undervalued; and therefore the path of least resistance may lead to Asian currencies grinding higher across the board. The below chart illustrates this trend. China’s appetite for currency appreciation against the dollar may have a good deal to do with its currency’s relative strength or weakness compared to its Asian neighbors, who are export competitors. As these other Asian currencies appreciate they provide the RMB more room to appreciate as well.”
Click here to read Axel Merk’s full report.