The knee jerk reaction in the media that the Chinese were
devaluing the Yuan on purpose shows how shallow U.S. reporting on financial
markets has become. The facts are that there is a capital flight out of
China that has been putting severe downward pressure on the Yuan.
The Chinese did not “devalue”, which implies they are
playing the typical mercantile economic game of manipulating their currency downward
against the dollar to improve trade by "buying" U.S. Treasuries. To
the contrary, the Chinese had to "sell" $100B in U.S. Treasuries (See Bloomberg News, August 27, 2015) just to
maintain the peg they have set against the U.S. dollar for the Yuan in order to support their own their own declining economy.
What this means to the Fed is that financing the U.S. debt
has just reached a tipping point. What China did by selling $100B U.S.
Treasuries will have the same effect as the FED buying Treasuries. It
floods the market with more dollars. The problem in this instance is that
the FED now faces the real possibility that it might be the only buyer left
that wants U.S. Treasury paper if this trend continues. Raising rates is
very likely to become the only means the Fed has to support the huge financing
appetite of the U.S. government since the supply chain from emerging market
mercantile economies like China and petrodollar fixed income supplies from
Saudi Arabia are beginning to dry up.
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