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This post was edited by abramicus at 2015-9-1 11:45|
THE ROAD TO LIBERATION FOR THE RENMINBI IS TO DEVALUE TO 6.50-7.00 CNY/USD, WHILE CONTINUED OVERVALUATION IS SURE SUICIDE.
Raising the Fed Rate will cause a contraction first of the financial sector, then of the manufacturing sector, and finally of the prices of consumer goods and services. This takes time, possibly three quarters to reach the consumer prices, which is why the Fed has to take both a short, intermediate, and long term look at the consequences of a rate hike. At the same time, the Fed cannot balk at hiking the rates because of the short and intermediate losses to be suffered by bond holders and stock holders, or otherwise when inflation hits the fan, they cannot do anything short term or intermediate term to curb it. Wage earners and retirees depending on fixed incomes cannot wait 3 quarters for the price of food, medicines, housing, transportation and energy to come down and then consume them. They may end up starving, homeless, or unable to get medical care, which has real social effects. Faced with the choice of bondholders and stockholders taking a hit of 15%-20% versus the breadwinners and retirees taking a hit of similar magnitude, the former will still survive, but the latter may actually get sick or die, so the decision of the Fed ultimately will be to hike interest rates. How much, how soon, and how often remains to be determined.
Now, China's peg to the dollar will cause Chinese exports to further drop with every interest rate hike by the Fed, because rising interest rates makes the dollar even more desirable by foreign investors. The exchange rate of the dollar vis-a-vis other currencies will naturally go up. But if the Yuan is pegged to the dollar at 6.39 Yuan/Dollar, fewer and fewer countries would be able to afford to buy Chinese products or services, as the dollar becomes more and more expensive for them to buy, i.e., their currencies will devalue not just against the US dollar, but also against the Chinese Yuan, to the same degree. With Chinese manufacturing in rapid decline, such a development would cause it to go into free fall, and factories will close faster than expected, banks that lent to the bankrupt factories will suffer losses from bad loans and themselves be forced to close, workers in the factories will lose jobs by the millions, and China would experience widespread strikes and social unrest to a fairly high degree.
Furthermore, strategically, this is a good chance for the US to put a stop to China's attempt to dethrone the dollar as the major international reserve currency. If China does not devalue, its economy collapses in the manner described above. If China devalues, then the Yuan will not be de facto accepted as a dollar equivalent, since it loses value relative to the dollar over time, and so why should any one wish to keep his savings in Yuans if he could keep them in Dollars? But, that is in the short term. In the long term, because the Yuan is devalued, it will be able to export to many more countries than it could right now. It would continue to accumulate its foreign currency reserves (unlike now, to support the overvalued Yuan, the PBOC has to sell dollars just to buy Yuans that it simply does not need because it could produce them for free, resulting ni a declining foreign currnecy reserve). High foreign currency reserves makes China the perennial "alternative reserve currency" which is good enough, and certainly is much better and more lucrative than merely being 6% at most of the SDR reserves, which account for only 4% of the world reserves, i.e., being only at most 0.24% of the currency reserves of the world.
In the long run, China becomes the ONLY ALTERNATIVE RESERVE CURRENCY OF THE WORLD, whcih practically ensures it will be the SOLE RESERVE CURRENCY OF THE WORLD. Not bad, not bad at all. Patience pays off.