Martha Randolph Carr Martha Randolph Carr, 4/12/2010 [Archive]

The Currency Bubble

The Currency Bubble

By Martha Randolph Carr

One of the bigger obstacles to the US economy gaining substantial numbers of jobs is the battle over valuation of currency among different nations. The amount a currency is valued at is largely tied to the strength of their economy but it's possible for individual countries to manipulate the pricing in either direction so that they can gain an advantage on the international markets when exporting their own goods and services.

There's still a certain amount of balance that generally has to be maintained in order to avoid inflation as well as a recession but in times of international economic crises where things are already off kilter, like the Great Recession that's been rippling through countries, it's possible for a country to work their advantage.

Currently, China's yuan is seen as greatly undervalued at least since the beginning of 2008, which has given them a significant advantage in the export of goods and services. Made in China has lead to a trade imbalance and the US owing China billions of dollars, which can make foreign policy a little trickier. It's hard to press a controversial point home to someone who's holding all of your chits.

According to the US Census, the US international trade deficit in goods and services decreased to $37.3 billion in January from $39.9 billion in December, and even better news, our imports decreased more than our exports. That means we sold a little more and we bought a little less.

However, the report also showed that when it came to China the opposite was true. The goods deficit increased from $18.1 billion to $18.3 billion increasing the trade imbalance and our bill.

There are two ways to approach any market when it comes to pricing and making money. Either a price can be set higher and an established quality will be what drives the market to want the goods or the price can be set so competitively that the market buys the goods based primarily on low cost.

Think of it as Tiffany's jewelry counter versus Wal-Mart's. While Tiffany's little blue box ensures a certain cachet and quality and the prices can make most shoppers gasp, there are still enough shoppers. Wal-Mart does a bigger volume in jewelry sales but at a much lower price point. Both stores win because they're appealing to different markets.

However, when it comes to the world of imports and exports it's pricing that trumps and can mean the difference of billions of dollars and thousands of new jobs.

It was established awhile ago that Americans buy mostly on the basis of price rather than quality. But when we get something at a really low price, we still end up paying for it with a stalled economy. It's not possible to keep buying on the cheap without any kind of consequence.

As China started to develop a more commercial economy they began by developing foreign sources, such as the US who already had the means to pay for goods and services, rather than pour all of their time and efforts into strengthening domestic growth. Then, when the recession started and households had to make their money stretch further, China was able to take advantage of their established markets and push price and volume over quality till they became the largest player on the block.

That is now costing American jobs and slowing down our recovery. The European market and the euro is having its own crisis and has had to come to the rescue of individual countries, most prominently Greece, in order to avoid a sudden decline in the valuation of the euro. Greece's economic instability is another potential bubble in a general recovery and some believe the recent deal struck with the International Monetary Fund is not enough to stave off collapse. That could devastate our exports if the European market were to severely contract.

President Obama recently said in his January State of the Union address that he wanted to see US exports double in five years. It would have a tremendous impact on the employment rate in our country and have a positive impact on our economy that would be lasting and spread out to the general economy. In order to do that, the administration is going to have to negotiate with China and show them why it is to their advantage to also try to build a domestic market for their own goods. However, without a democratic push in a country without voters pushing for a better quality of life it may be a hard sell.

www.MarthaRandolphCarr.com. Email Martha at: Martha@caglecartoons.com.

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