"Here I Go Again:" Foreign Exchange and Economic Development

  • William Laraque, Managing Director at US-International Trade Services

  • 12.08.2015 01:00 am
  • undisclosed
Mao said it best; "When you point your finger at the moon, the fool sees your finger, the wise man sees the moon."
China recently devalued the yuan, its externally traded currency with the U.S. Dollar, the USD. The yuan is a managed currency. It is allowed to vary within a band of + or - 2% against the USD. The People's Bank of China, the PBOC has in fact allowed the yuan to evaluate (increase in value) more than 2% when it is strong against the dollar but does not allow the yuan to devalue more than 2% against the same currency.
The PBOC devalued the yuan against the USD by 1.9%, sending shock waves throughout Asian and other markets. This devaluation occurred when it was revealed that Chinese exports fell 8.3% in July 2015, when compared to last July. The immediate fear is that this move by China's central bank will invite retaliation on the part of other central banks. You will recall that high tariff barriers and a cycle of competitive devaluations contributed heavily to the Great Depression.
Whereas economists will consider reliance on exports as the major culprit and will inveigh for additional consumer consumption to buoy up the Chinese economy, this will not solve the problem because of the continuance of what I like to call role/goal confusion. The world has moved on from the "Tom Clancy" model of global geopolitical competition. We now live in a collaborative world of shared services. 
It is not the role of central banks to control economies. Central bankers famously misread economic signals.
The clear economic signal from the devaluation of the yuan is the failure of China's geopolitical and geostrategic policies. These policies as I pointed out in the series "Songs in the Key of Light," are based on the R4I economic model. This Resources for Infrastructure Investment model does nothing to create an organic, native entrepreneurship in the countries with which China "trades." This gives rise to competition, not collaboration and bilateral trade.
I could elaborate further about the importance of collaborating, sharing and empowering the entrepreneur of every country in an entanglement of mutually supportive and bilateral international trade but I already have and "there is no education in the second kick of a mule."
We can only hope that central bankers and government leaders will become educated before the mule kicks again and we have another global depression.

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