President Barack Obama continued his efforts to make China stronger and America weaker during last weekend’s Asia-Pacific Economic Cooperation (APEC) summit in Hawaii. How? By pressuring Chinese President Hu Jintao to increase the value of the yuan relative to the dollar. If successful, this policy will make Americans poorer relative to the Chinese.
The theory behind the Obama Administration’s weak dollar policy is seductive, but wrong. A rise in the value of the yuan relative to the dollar is supposed to make Chinese imports more expensive, and U.S. exports to China less expensive, thereby reducing Chinese imports and increasing U.S. exports. The problem is this theory has failed miserably ever since President Nixon broke the dollar’s link to gold and devalued the dollar in 1971. Since then, the dollar has fallen by more than 70% against the euro/German mark and the Japanese yen. And the net trade account has gone from near balance in 1971 to massive deficits today.
Read Full Article »