Monday, September 13, 2010

Currency manipulation destroys Capitalism

During the last century, the question about which economic system would survive was answered when the Soviet Union collapsed and China adopted capitalistic methods. China transformed itself into the second largest economy and attracted trillions of dollars from investors around the world. Meanwhile, the economies in the western world have imploded and their labor market is rapidly disappearing.

As effective as capitalism is, it requires free market economics to function. Currency manipulation, like China’s fixed exchange rate, destroys the free market system. Any country that agrees to trade with another country that uses a fixed rate currency cancels out the benefits of a free market in their own economy. A fixed currency controls the price by guaranteeing a lower cost of goods and labor as opposed to a free market economy where price is driven by quality, productivity, and demand.

The loss of the free market economy in the US has become so pervasive that Americans no longer even think of the country’s economic problems in terms of free markets or global competiveness but in terms of how government give-aways can be increased and extended.

American consumers have been happy to ignore China’s currency manipulation because it resulted in ever cheaper manufactured goods. American companies have been happy to ignore the currency manipulation because it guaranteed them an easy increase in profit by moving production overseas and lowing labor costs and taxes. Investors have been happy to ignore currency manipulation because it made it easy to “invest” their money in Chinese companies since it pays higher returns and is less risky than in a free market system. The big losers in the scheme have been the American workers and small business owners as the free market economy that rewarded them for being smart and working hard is all but gone and they alone are left to tax in order for the US government to fund their give-aways.

Allowing China to fix their currency to a value less than the US dollar, rather than floating it based on actual market value, has effectively ended capitalism in the US. Not only does a fixed currency make it impossible for US made products to compete, it makes it impossible for the US economy to compete for capital investments.  US produced goods will always be more expensive against an artificially, lower currency rate and capital investors will be drawn to an economy where the fixed currency rates assures them of a higher rate of return.

Capitalism is based on free markets. Without a free market there is no capitalism.

If we want to return to a capitalistic economy and restore jobs and the high standard of living that capitalism brought the US, all of our trading partners must allow their currencies to be traded freely in the global currency markets. If we allow the world's second largest economy to continue to operate with a fixed currency rate, we do so at our own peril, as the current situation in the US and Europe demonstrates.

Politicians in Washington have considered global currency manipulation a minor issue that is not worth their time. We can only hope that the unemployed and unhappy country of voters will “educate” our current politicians to the importance of the free market system for a healthy, capitalistic economy in the US.


Felix said...

Well, China was considered an enemy of the US and capitalism at one time. There are many ways to defeat your so called enemies. Economically the US has won the battle against China and there is no turning back now. China must play on the world stage and will come to realize in must give more rights to its citizens to be a player. This was all done by allowing there system to succeed. I think we focus to much on capitalism and not on how the effects of what we do affect the world in a positive way. We have won this battle and will continue to win. Capitalism as you describe it does not exist except in Mexico. True capitalism is what we have in Mexico. Where a few have all the money and the government does not extent a hand out to the people. What kind of society would we be if we thought the waitress is not as deserving as the CEO for healthcare. She or he is just as hardworking and needed in our society. In any case when a company becomes public and takes public money to increase its wealth on the top and expand around the world what makes you think they should not have a responsibility to give back to the very people who invested in them(the American public). There is a reason they went public. If they were true capitalist they would have stayed private and then done what they wanted with their money. What I am trying to say in a nutshell is that in a viable society there is a balance between capitalism and socialism. If this balance is not kept you have Mexico or Russia before the wall came down. We in America don't want to be either. Our battle with China continues and don't be sort sighted, we are winning and will be stronger then ever in the future. Sometimes we must suffer for the betterment of people all over the world, and it is OK. That is what good people do and that is what the world is doing with China. But we will emerge stronger than ever..

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