Steve Antler of Econopundit, one of my daily reads, has a typically excellent post on the falling dollar and the role of China in all of this:
The problem over the long term is not what Alan Greenspan will or won’t do to slow or not slow the dollar’s decline. The problem is one major trading partner (1) knows how to make things we want much more cheaply than we can, and (2) saves too much and spends too little.
The Peoples Republic of China is an almost unimaginably huge market. All it would take could be a tiny fraction of a decimal point of her awesomely-low MPC to completely swamp our capacity to produce for her market.
Now let’s think about this for a moment. Hmmmm. What kind of autos do we make? Might some of these actually be more attractive to Chinese managers, professionals, and highly skilled workers than would be, say, Japanese autos? Yes? No? Maybe?
What I think Steve is missing (and what many of the experts miss) is that although China is a very large market when measured in dollars, dollar-volume does not a market make. A market requires the ability to make purchasing decisions and the number of people who are making such decisions in China is very, very small. I’ve believed for thirty years that trade with China was actually quite risky and now our chickens may be coming home to roost.
The dollar, as predicted is being crushed. We are now at Par with the Canadian Dollar, the Loonie as it is called. This was all so predictable. You cannot run an 800 bilion dollar trade deficit and have your currency in demand. We have a lot farther to fall. Within 5 years from 2008 we should see the Canadian Dollar worth 25 % more than the U.S. dollar. The Euro at 1.40 now, should move to near 2.50, as China buys more and more of the Euro.
The pound at 2.04 as I write this will be near 3.00. Be ready for CHINA. When they finally let their currency float it will appreciate 70% over a 36 month period. The US trade deficit will be cut in half and then some by 2020.