QE2 and China

I have been hearing a common theory on many liberal and/or keynesian websites since the announcement of QE2. That theory goes something like; QE2 will devalue the currency, just as China is doing and if we do this we can regain our lost exports. It is time that we end this unfair trade deficit.

I will leave out any moral or ethical reasonings.....

There are several problems with this theory.

1) You are living in a vacuum if you believe this will work.

2) The devaluation isn't as big as China's 

3) Investment will be lost

4) Savings will be lost


There are many different factors going into our trade deficit with China and currency devaluation is not the main culprit. It does play a role, but that role has a lot more to do with wage differences than currency devaluation. The regulations in China are non-existent, along with no real minimum wage laws. Companies right now are functioning on minimum profit margins (except Big Banks) and many have let go of workers. With our minimum wage laws we have numerous people that could do some light labor for a small wage, but aren't allowed to. If a restaurant wants to hire a 16 year old to work 15 hrs. a week to do dishes for $6/hr he should be able to, but since the minimum wage law is higher than that, the 16 year old does not have a job and someone already working will have that piled onto their already expanding work load. Couple this with our tax laws for non-global companies and we are screwed. Large corporations can keep their taxes low by using global accounting methods, but those smaller companies that don't have a large overseas client base are not able to use those methods and are thus forced to pay our extremely high taxes. Couple this with all of the new regulations within the Obama Healthcare Legislation and you have a very unfriendly environment for companies to succeed in. A chinese company doesn't have to worry about environmental regulations or worker safety or paying their employees a minimum wage. All of these factors cause far more detriment to the U.S. economy than chinese currency devaluation does. In fact, this currency devaluation acts as a way to lower the wages of workers already being paid little to nothing in China, but over here we raise the minimum wage every few years causing the wage difference to become even larger.

Along with that, our QE2 package isn't even big enough to match the currency devaluation of China. If we use our own CPI data (ya, I know its a junk stat) we are at 1.1 inflation while China is in the 4% range. If we were to make a dent through this theory of currency devaluation we would need an even larger package. We have been devaluing our currency since the Fed came into existence in 1913 and to an even larger extent since the end of Bretton Woods, but our trade gap has increased.

Also this theory completely ignores the loss of savings and investment that are effects of inflation. With the increase in the money supply comes higher prices. While we are in a weak economy we have had average wages decrease and unemployment up around 9.5% (U-3). So having prices rise while wages are shrinking makes it very hard for people to save (not to mention low interest rates from the fed). If people don't have the money to save and can't make any money from their savings due to the low interest rates we have absolutely nothing to invest. Investment has already been going abroad due to our high tax rates and heavy regulations, but couple that with low yields from saving and there is nothing to invest for the future.

This theory does not work in reality and never will.

9% raises for White House Workers

9%??? Seriously????

I wish I could get a raise for doing horrible work. I love the part where there was a pay freeze..... as long as you kept the same title. Different title? Give that person a raise.

I wonder if the private sector can give raises with lower incoming revenue......

The Recession: Margin Collapse

The next battle this country is going to take in this never ending recession has to do with margins. Profit margins. Due to the idiotic QE2 policy of our favorite person at the Fed, Bernanke, commodity prices are going through the roof and I see no stop to it. The part of the problem that we are just getting into has to do with food prices. Due to the inflationary tendencies of the people in Washington food prices are on a rocket ship.

http://www.caseyresearch.com/editorial/3791?ppref=FCB175ED1010A&ref=nf

This is going to cause food companies such as Kraft and General Mills to do one of two things: either they can eat the cost and not raise their prices or they can raise their prices into lower national wages and high unemployment. Neither of these are good choices, but they will have to do one of them. If they eat the cost then they will be forced to lay off workers, if they raise prices then there will be falling sales, which again leads to layoffs. But people have to eat you say? Well that's right!! That's why its not going to be falling sales in their company, but in other companies. The luxuries will be gone, no money for new computers, cars, T.V.s, Cell Phones, etc. etc. etc......

Here is where the problem is. Food companies will survive off of low profit margins (for a while anyways), but those food products will eat into any spending that is for the fun stuff. When you eat into that spending everything collapses. This country is a consumer driven market and without the consumer spending there is no market. It's done. Finished. Gone. Especially when all of those fun tech toys take silver and lithium. Which are both on the rise. So we are going to have higher food prices, leading to less consumer spending on goods that now cost even more..... and apparently this makes perfect sense to people in Washington?!?!?!

$#%! Them!!!!