The Renminbi - Get Used to It

Submitted by kvaughn on Fri, 08/27/2010 - 05:32

You may have never heard of the renminbi before, but you will start hearing it more and more. It is the native Chinese currency that China is now promoting for international trade - and banks are listening...

Cross-border trade in renminbi totalled Rmb70.6bn ($10bn) in the first half of the year – about 20 times the Rmb3.6bn recorded in the second half of 2009.

But those figures remain tiny compared to the $2,800bn worth of goods and services that were traded across China’s borders last year, most of which was settled in dollars or euros.

Clearly this is just the beginning. So how does this impact you? Every dollar used in a foreign transaction represents a dollar of wealth. It is paper that the US government printed up (or electronically created) and then sold to someone for real value. If people stop trading in our currency, the value of our currency declines which means all imports become more expensive (e.g., oil, flat screens, etc.) In other words, it is one more indicator pointing towards inflation.

Yes, we have not seen inflation take off just yet, but that is only because domestic firms understand that we are headed into a deeper recession/depression and consumers across the US have drastically slowed their spending (we are actually saving money now). These are deflationary moves. In the near term, we may see deflation of US goods (and high unemployment), but at some point the market imbalances are going to get away from the Fed and you will see the dollar collapse and inflation go sky-high. The only way to solve this problem is to drastically cut federal spending (e.g., by at least 30%).

bailout, deficit, Barak Obama, economy