“Let the Yuan appreciate!” is a widespread cry among those who worry themselves about the global economic scene.

While a rising yuan will help eliminate current account and capital flow “imbalances” this will also require less consumption in the deficit nations (USA, Australia, the west in general) and more consumption in the surplus nations (China, Asia generally, oil producers).

The Economist spells it out: “China imports many of the components it assembles into finished products; a strengthening yuan will make these components cheaper, eroding some of the effect on export prices. Nor is China’s competitive advantage limited to a cheap currency. And although China is one of the big funders of America’s current-account deficit, it is certainly not alone. Unless Americans curb their appetite for imports bought with borrowed money-and start making more things other countries want to buy-the deficit will continue to be a problem. This is roughly what the Chinese government has been saying”.

The western nations enjoy consumption far too much for this to happen quickly or painlessly. The current show can go on until the surplus nations decide to invest less in the deficit nation. If this happens on a large scale, adjustment comes by changes in currency values but also recession in the deficit nations, perhaps more widely, as the “invisible hand” sorts it all out.

“Givuss another drink, mate!” is Henry’s cry.

Oil prices fell to around $61 overnight, while 10-year bond yields have fallen nearly 20 points in the past week (they were up slightly overnight). However Wall St. seems confident that the US economy is landing softly, and corporate profits will remain high, as the Dow Jones reached its second highest point ever overnight as it jumped nearly 1% to 11,669.39. See Economic News – Henry’s Views. Clearly market participants aren’t spooked by “imbalances” at present.

Read more at Henry Thornton.

Peter Fray

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