On Wednesday the Federal Reserve board announced that it was going to print more money and place it into the economy. This creating new money is called “quantitative easing”. The Fed has announced that it is expanding the money supply by hundreds of billions of dollars. This move will significantly lessen the value of the US dollar as compared to many currencies around the world.
In recent months the US has been engaged in an economic conflict with China. The US needs to begin domestic manufacturing to recover from the global economic crisis. The return of manufacturing is the only thing that has ever pulled an economy out of recession, except it is not happening this time. China already has a strong manufacturing sector; it is the world’s largest exporter. They have had no trouble recovering from the recession; in fact they have had to slow their growth to avoid credit bubbles and possibly another recession.
Now the US can’t begin domestic manufacturing again because it is far cheaper for economies to import from China than the US. This is because of tremendously reduced labour costs. In other words, the US manufacturing sector can’t compete with the Chinese manufacturing sector. In order for the US to compete, China has to raise the value of the Yuan making their products more expensive. This would encourage foreign markets to buy from the US instead.
However China is unwilling to increase the value of their currency because they need the export based manufacturing to keep their economy going. So basically both China and the US need to export, but there is not enough buying going on to purchase both their goods.
This move by the US drastically increasing the money supply is intended to weaken the US dollar so as to make it cheaper for foreign markets to begin buying from the US. The dramatic drop in dollar value is a very aggressive and even hostile act toward China. Previously after their last meeting at the G20 in October, the US had agreed not to decrease its currency value.
Right now the US is engaged in political manoeuvres trying to get leading European and Asian nations to pressure China to raise its currency. The “quantitative easing” is a kind of threat to exporting nations, telling them to back up the US against China or there will be consequences. Some nations have already begun defending themselves against US actions:
* Brazil doubled taxes on foreign purchases of Brazilian bonds.
* Thailand created a 15 percent withholding tax for interest payments and capital gains collected by foreign investors in Thai bonds.
* South Korea, to India, to Taiwan, has intervened in currency markets in an attempt to halt the rise in their exchange rates.
There is however a much more sinister aspect to this currency conflict that has gone unpublished. The US has a massive trade deficit and debt; and it is using this against any economic rivals that would challenge their power, or simply not do their bidding. The US is in a position of great power as the US dollar is the primary trading and reserve currency. The goal here is to take the US crisis and unload it onto the rest of the world by devaluing its own currency.
It was this type of situation that occurred after the Great Depression that caused so may military conflicts. If China does not bow to US government will, there very well could be a third World War. The US has already taken an aggressive stance by moving nuclear warships into Philippine territorial waters, and backing Japanese claims to the “Senkaku Islands” against Russia and China.