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Re: [A-List] [Fwd: Re: [gang8] THE DOLLAR VS THE EURO]

The unemployment problem in China is complex. I will have something to
say about it in my next installment in central banking in Asia Times.
But one way to modrate unemployment in China is to stop the massive
layoffs by the state owned enterprises. SOE reform in China has been
heading down the wrong path for almost a decade.  The pension problem in
China is part of the unemployment picture because Chinese demographics
is such that retirees are rising in number faster than new workers
entering the market at the rate of almost 2 to one because of the one
child policy.  Simple math: two parents retire; they produce one child
to replace their jobs. If China lives up to its socialist commitment to
strengthen free education by extending the tertiary education time frame
and enlarging the college and graduate student population, it will be
helpful to the economy and the unemployment problem.

The yuan is also a complex issue.  The official GDP of China is around
$1 trillion in currenct exchange rate (8.2 to 1). But the PPP (purching
power parity) according to thw World Bank for China is 4 to 1 against
the US.  In other words, on a PPP basis, Chinese GDP is $4 trillion
against the US' $10 trillion.  If the RMB yuan is 50% undervalued, than
Chinese PPP GDP would double to $8 trillion.  No economists I know see
the Chinese economy as 80% in size as the US economy.  China will not
free float or free convert the RMB in the foreseeable future.  China
does not feel it can handle the internation currency market and the
manipulation og hedge funds and currency traders.

In an official speech at the Moscow State Institute
for International Relations on 28 May 2003, ,President Hu Jintao
declared that China will spend 20 years of hard work to strive to make
our gross domestic product in the year 2020 be four times what it was in
the year 2000, and to exceed the goal of $4 trillion, calculated
according to the current rate of exchange between the renminbi and the
dollar.  If PPP ratio remains the same, projected Chinese GDP would be
150% of US GDP, making China the larest economy, but still not on a per
capita basis.  But data from the past two decades indicate the Chinese
GDP has been growing at a slower pace than US GDP, and the GDP gap
between The uS and China increased rather than decreased between 1978
and 1988, while in absolute term Chinese GDP increased.


China needs an independent central bank and a freely convertoible
currency like Kennedy needed a trip to Dallas to assure a second term.

Henry

Anyutka wrote: 
I largely concur with Michael's and Henry's posts, and the currently rising
dollar is evidence that Europe is suffering from an appreciated euro.  I
disagree with Hale, and do not think the euro will hit 1.40; in fact, I hold
the position that the dollar is about to enter a multi-month rally with
first resistance at 100-102.  Time will tell who's correct.  (I believe the
dollar will plummet again and more severely than it has over the last 2
years either late this year, or next.)  But what's interesting is the
current US pressure on the Chinese to float the yuan (which they must do
before 2008 as a member of the WTO.)  Evergreen Bank is now offering yuan
accounts to Americans, and Warren Buffet took a huge position in Petrochina
as did BP.  As the yuan is about 50% undervalued, China is able to draw
tremendous direct investment at the expense of US and EU workers...I have
been told that China must create 10 million jobs a month in order to keep
the population "on board" with the govt.  Henry, is this correct?  And how
likely is it that China will knuckle under to US pressure and float the yuan
within the next 12 mo.s?  (BTW, if the US does get the Chinese to float, I
don't think the results will be quite what they expected.) -A.

----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <a-list@xxxxxxxxxxxxxxxxxxx>; <pkt@xxxxxxxxxxxxxxxx>;
<TheNewForum@xxxxxxxxxxxxxxx>
Sent: Saturday, June 28, 2003 3:28 PM
Subject: [A-List] [Fwd: Re: [gang8] THE DOLLAR VS THE EURO]




-------- Original Message --------
Subject: Re: [gang8] THE DOLLAR VS THE EURO
Date: Sat, 28 Jun 2003 12:53:24 -0400
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
Reply-To: gang8@xxxxxxxxxxxxxxx
To: gang8@xxxxxxxxxxxxxxx
References: <14d.20e5023f.2c2f0ba4@xxxxxxx>

The recent rise of the euro against the dollar, the first wave since the
euro's introduction, is the result of an EU version of the Plaza Accord
on the yen, albeit without a formal accord.  The strategic purpose is to
reduce the euro to the status of the yen, as a subordinated currency of
the dollar and the dollar system.  The real effect of the Plaza Accord
was to shift the support of the dollar, and the pain associated with it,
from New York to Tokyo.  What is happening to the euro now is far from
being the beginning of the demise of the dollar.  It is the beginning of
the reduction of the euro into a subservient currency to the dollar.  It
is a strategy to make the EU a structural supporter of a rising dollar
in the long run.  It is the equivalent of the Romans' brilliant strategy
in making a dissident Jew a Christian god, to pre-empt the domination of
Judaism over the Roman empire.  By allowing a trade surplus denominated
in dollars to be accumulated by non-dollar economy, such as yen, euro,
yuan, the cost of support the value of the dollar is then shifted to
these non-dollar economies, which manifest in low wages and weak
domestic consumption in these economies.

The anti-dollar crowd has nothing to celebrate.

Henry

Hudsonmi@xxxxxxx wrote:
>
> THE DOLLAR VS THE EURO
> There has been a lot of talk about OPEC and a number of other countries
> diversifying their foreign exchange reserves by shifting from dollars


to

> euros.
> In some quarters this has been viewed as a move to "bring down the
> American Empire." Moving out of the dollar, it is claimed, would stop
> America's free ride.
> Well, not exactly yet!
> On Thursday at the Forecasters Club I spoke with David Hale, who writes
> often for the Financial Times on international affairs and is quite


well

> connected with U.S. officials. He told me that he expects the euro to 

be

> forced up to $1.40 against the dollar this year. The expectation, he
> explained to the group, was that Europe and Asia would finance 60
> percent of the U.S. domestic budget deficit this year, as a result of
> the balance-of-payments deficit ending up in the hands of foreign
> central banks - mainly Asia and Europe - and placed in U.S. Treasury
bonds.
> Suppose that OPEC, Venezuela and some Islamic countries move out of the
> dollar into euros. This will put further upward pressure on the euro's
> exchange rate against the dollar. The main pressure would be felt by
> Germany, which went into the European monetary system with an


overvalued

> d-mark as a result of its merger with East Germany (which David likened
> to a leveraged buyout at too high a price for the entity being
> acquired). The pressure will be for Germany either to undertake
> structural reform (i.e., anti-labor, even Thatcherite market reforms,
> winding down of pension, social security, health and other public
> services) or - and this thought must have U.S. diplomatic strategists
> chuckling - forcing Germany to withdraw from the European monetary


union.

> So the currency diversification move, ostensibly threatening the
> dollar's free ride in the long run, would help break up its number one
> nemesis these days, the European monetary union, in the short run.
> The political issue is whether Germany will continue to subsidize
> Ireland, whose currency is undervalued. (Note: now that sterling is
> falling, it will make it easier for it to join the Euro without
> experiencing German-type problems later on.)
> Many of the opponents of America's free ride keep looking for instant
> victories without thinking tactically.
> Michael Hudson
>
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