Actually, Vipin has made a mistake in understanding how China has its surplus. Vipin commented that this was because they taxed their people. Not so. China exports billions worth of goods to the USA and lends all its earnings back to the US government by investing in US Treasury bills. The critical problem is that the US government does not have the ability to redeem these bills in anything but devalued paper dollars.
Do watch this video of Ron Paul on the floor of the US parliament during the debate on the US budget. He says that the actual deficit will be much more than the forecast. The US budget deficit is likely to be over 2 trillion dollars. Ron Paul says that this is “unsustainable.”
Ron Paul adds that governments do not go bankrupt: they simply default on their debts and repay them with bad money. This has the effect of reducing the real debt – via inflation. Of course, this penalizes savers and subsidizes borrowers. But this is all that the US government can do. If inflation rises by 25 per cent, the US reduces its debts by 25 per cent.
Therefore, all this talk of the G-20 “stimulating” the world economy to the tune of 1 trillion dollars is nonsense. It is a big April Fool joke on the world. Most of these governments are broke. This is the end game.
Of course, under a classical gold standard none of these problems would arise. If China had a trillion dollar trade surplus with the USA, a trillion dollars of gold would be transferred from the USA to China. This would raise prices in China, gradually offsetting China’s export advantage. China would export less and import more. The US would import less and export more. The system would be capable of achieving balance naturally.
Ron Paul laments the fact that the USA has become a “welfare-warfare state” and that the American people need to ask themselves the fundamental question once again: For what purpose have they constituted a government? Does the government exist to bail out entrepreneurs who make losses? Does the government exist in order to take over the rightful sphere of private charity?
Yes, we too need to ask ourselves fundamental questions of this kind. The critical problem of our time is not that capitalism has failed. On the contrary, the real problem is that Big Government – the “nanny state” funded by fiat paper – has failed. We need to get back to the drawing boards and redesign government. For this we need Principles. I will write on these Principles tomorrow. Stay tuned.
thanks for the post Sauvik.
ReplyDeleteWhat I meant to was this. Say the market exchange rate was 5 Yuan per dollar. When the Chinese government devalues it currency to say 10 Yuan per dollar, it taxes the consumption of its citizens. In other words, the same can be achieve by putting at 100% tax on all imported goods in China.
With free market exchange rates, you might well see Chinese exports rising or falling, but there will be no foreign exchange reserves with Chinese government, and thus no need to invest in American government securities.
The Chinese government maintains reserves precisely to devalue the exchange rate, it keeps buying Dollar and selling Yuan (with the aim of increasing "national" exports).
In otherwords, the present system is equivalent to taxing Chinese citizens and lending the money to American government.