A disgraced dollar, an enfeebled euro - who benefits?

The renminbi is China’s paper currency; the word translates as the people’s currency and features one of history’s greatest criminals. Hearing the word “renminbi” first a few years ago I’ve rarely heard it uttered since. Americans, and Europeans, too, ought to know much more about China and its currency.

The story of the renminbi begins in 1944 when the representatives of 44 countries met in the cozy Vermont town of Bretton Woods. There they mapped the post war economic future, which eventually established the US as the world’s reserve currency.

Only thirty-one years after Bretton Woods, in 1971, President Richard Nixon severed the relationship between the dollar and gold, letting the dollar value float against other currencies. Here is where China comes into the picture. The same President that floated the dollar also re-established diplomatic relations and trade with the Communist dictatorship.

China then artificially pegged, or assigned a constant relationship, between the dollar and the renminbi. This means the Chinese currency doesn’t float but moves up or down in constant relation to the dollar. This fixed relationship is a great burden on the American economy.

As Paul Craig Roberts illustrates,

This [The US trade deficit] imbalance cannot be corrected as long as China maintains the peg. As the dollar falls against the Euro and other currencies, the Chinese currency falls with it, thus maintaining China’s advantage over US goods in world markets.

Both the Clinton and Bush administrations are guilty of permitting China to maintain a grossly undervalued currency that sucks productive capacity out of the US. The combination of cheap Chinese labor and an undervalued currency are destroying US middle class living standards.

As ‘third world momentum’ builds in the US might one ask “is the Euro to be the new reserve currency”?

The euro is unlikely, according to Roberts, to become the reserve currency for two reasons: 1) the euro is perceived as being a political currency, and 2) Europe’s well pampered and aging population will extract whatever wealth is generated redirecting it into the welfare state.

In a future which features a disgraced dollar and an enfeebled Euro who is likely to benefit? Expect to hear the word renminbi more often.

Posted by leslie on Monday, November 22, 2004 at 02:25 PM in Economics & Finance
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