A previous post featured a quote from GMU economist Don Boudreaux "Why should Americans complain about an overvalued dollar? The real victims of such currency manipulation are the Chinese people. Americans are beneficiaries."A recent article in the International Herald Tribune provides evidence to support the position that Americans are beneficiaries of a strong dollar, and Chinese people are victims:
1. Most central banks like China have invested heavily in U.S. securities, mostly Treasury bonds, but sometimes mortgage-backed securities as well. In recent years, these giant purchases by China and other countries have helped hold down interest rates that American home buyers pay for mortgages and the U.S. government pays to finance its budget deficits.
2. China's central bank has bought vast sums of dollars from its country's exporters, giving local currency in exchange. (Translation: print yuan to buy dollars.)
3. China's central bank has had to borrow yuan by issuing bonds to buy the dollars from exporters. (Translation: Chinese people can expect higher taxes in the future.)
Bottom Line: Americans benefit by having lower interest rates in the U.S. because of China's purchases of T-bonds and mortgage securities, and American consumers and businesses get a huge discount on all Chinese products because of a strong dollar and weak Yuan.
Chinese people suffer several ways: a) Purchases of dollars with Yuan creates inflationary pressures that devalue the value of currency holdings of the Chinese people, and b) taxes have to be higher to provide funds to purchase dollars, and c) government debt to purchase dollars means higher future taxes.
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