Importing Inflation

If you’ve been following this blog for any length of time, you know that I’ve been warning that Washington would be seeking to devalue the dollar to try and inflate its way out of the great financial crisis, and especially the patently unpayable $133 trillion in IOUs it has.


In much less certain terms and with greater reservations, I believed that China would eventually cooperate with Geithner & Co to revalue their yuan higher.

A higher yuan is essentially the same thing as a LOWER dollar.

Now, it’s all coming to pass. Over the weekend Beijing agreed to depeg its currency from the dollar and start pushing the value of the yuan higher.

To do so, China’s central bank will effectively have to start buying its own currency — largely by selling some of its reserve currencies, chiefly the dollar.

Already, the dollar is plunging. Gold — which has hit one new record high after another — is leaping again, up more than $7 in early morning trading today ( 6/22 ).

Most brokers will tell you stocks will now rally because China’s revaluation of the yuan means the U.S. can now create more jobs and compete with China.

But that’s hogwash and merely a cover for the truth: This is a dollar devaluation, and an attempt to inflate all dollar-denominated assets. Even the stock markets.

Think it through: Washington is telling you this is about creating more jobs in America and that China has had an unfair advantage with an undervalued currency. But there is simply no way the yuan can be pushed up enough to account for wage differentials between the two countries and create millions of jobs in the U.S.

Just ask yourself: How could a $25-an-hour worker in the United States ever compete with a 75-cents-per-day worker in China? China’s currency would have to gain nearly 3,333% to level the playing field on jobs.

Even at $12.50 an hour, China’s currency would have to gain something like 1,500% to level the playing field.

Or, there would have to still be some very punitive trade sanctions against China, which would put the world on the path to a major depression and war somewhere.

And quite frankly, although there are some real dummies in Washington, I don’t think they’re stupid enough to knowingly put the world on that kind of course. 

So this is not about jobs. It’s about the dollar and inflation.

Keep in mind that when a currency strengthens in value, it effectively imports deflation into the country whose currency is rising. Put another way, its currency buys more.

Conversely, the currency that is losing value imports inflation, which is precisely what Obama, Geithner and Bernanke want for the U.S.

Bottom line: You are now witnessing Phase II of the Great Dollar Devaluation.

The Chinese will attempt to “control” the rise in the value of the yuan (and thereby, the devaluation of the dollar). And for a while, they may succeed at slowing down the yuan’s appreciation.

But history has repeatedly show that when a country depegs its currency from the dollar, market forces eventually take over, rapidly pushing the undervalued currency higher (in this case the yuan), and the dollar lower.

So while China is talking up a gradual appreciation of the yuan right now, don’t be surprised if they lose control, and the dollar starts to plummet.

Moreover, in the next phase, as the sovereign debt crisis leaps from Europe to the U.S. — you will see the worst of the dollar devaluation occur. Chairman Ben Bernanke and the Federal Reserve will use the sovereign debt crisis to create trillions of dollars out of thin air, further devaluing the U.S. dollar.

And in the final phase of the great dollar devaluation — you will see countries all over the world actively band together to replace the dollar as the world’s reserve currency.

Lest you forget: We already saw the opening acts of the move to replace the dollar last year, with China, Russia, India and even Japan calling for a new reserve currency.

And this weekend the G20 meet in Toronto, and Russian President Medvedev is already resurrecting the calls for a new world order and new world reserve currency to be put on the table at those G20 meetings.

Where will we be on Monday ?