Posted on 10/17/2006 12:06:17 PM PDT by Toddsterpatriot
In 1966, I was traveling the Pacific aboard a freighter. I was 19 years old at the time and attending the U.S. Merchant Marine Academy at Kings Point, N.Y.
As part of my academy education, I spent a year as a student officer on freighters, passenger liners, oil tankers, and even tugboats. It was a great way to see and study the world.
An Instructive Exchange
One of the earliest lessons I learned at sea was about currency exchange rates. Even though currency valuation was not a subject taught at the Merchant Marine academy, my ship constantly traveled from one country to the next, so my education in what is today called FX -- or foreign exchange -- began.
Back then, the formal exchange rate in the banks was 360 Japanese yen to one U.S. dollar. On the black market in Hong Kong, I could get 366 yen to the dollar.
This made me aware of the games banks and countries play with their currencies: In 1966, the six-yen difference told me that Japan was buying more from Hong Kong, which is why yen was cheaper in the then-British colony.
A six-yen difference might not seem like much, but for a student earning just $105 a month every little bit counts. So I would wait for my ship to stop in Hong Kong and then trade U.S. dollars for yen. Then I would travel back to Japan and go shopping with the yen. Although the money I saved wasn't substantial, the lessons it offered in currency exchange were priceless.
The End of the Golden Age
It was pretty easy to understand foreign exchange back in the mid-‘60s, since much of the world was following the Bretton Woods Agreement. Enacted in 1944, this agreement made the U.S. dollar the global medium of exchange.
Because the U.S. dollar was pegged to gold, figuring exchange rates was a cinch. If we purchased too much from Japan, then the Japanese could ask us for gold. If we had less gold, we had less money.
In 1971, President Richard Nixon changed everything by removing the U.S. dollar from the gold standard. Suddenly, the dollar was still the world's currency, but now it was backed by nothing. The United States was free to print as much money as it wanted, and the world went along.
Because of this change, understanding foreign exchange became a bit more complex. Today, to understand the world of currency, you need to think a little differently -- essentially because things don't make sense.
For example, today, the United States is perceived to be the richest country in the world. In reality, though, we're the biggest debtor nation in the world. And who are we indebted to? What many consider to be a Third World country: China.
For Richer and Poorer
The irony is that many Americans think we're rich and China is poor. Exactly the opposite is true. This is because the removal of gold's backing from paper money has created a virtual explosion in credit and liquidity. The sheer amount of liquidity around the globe is incalculable.
This excess funny money causes people to feel rich and almost everything to be more expensive. Today, stocks, real estate, automobiles, and gasoline become more expensive as the dollar becomes cheaper.
While some people do become richer in this system, funny money actually punishes working people who save money. It devalues the value of your work and your savings, even though you may feel wealthier.
In overly simplistic terms, China and many countries in the world today lend us billions of dollars to buy their goods. They send us products like computers, televisions, cars, candies, and wines, and we send them funny money in return.
Since they can't spend those dollars at home, they simply lend them back to us so we'll buy more of their products. That would be like me going to my local grocery store and asking them for a loan so I could buy their tomatoes. A logical person would say, "That makes no sense." Yet it's exactly what happened after 1971, and to many highly educated people -- bankers and politicians, for instance -- it somehow does make sense.
An Uneven Trade
You can find current smaller examples of such financial insanity. For example, many people refinance their homes to pay off their credit cards. This makes no sense; you and I know that someday that debt will have to be paid.
Yet getting deeper into debt does make sense as long as you can repay your lender with cheaper dollars, and as long as your lender is willing to take those cheaper, less-valuable dollars. To use my earlier analogy, it would be like buying an orange for $1 on credit and then paying him back for it a year later with 80 cents. As long as the grocer is happy with this arrangement, things are fine.
In real-world terms, one of the reasons the U.S. dollar only buys approximately 110 yen instead of 360 yen today is because the Japanese allowed us to continually devalue the dollar -- that is, to pay our debts with cheaper dollars.
Over the years, the yen got stronger and the dollar got weaker simply because we, as a nation, printed more and more money, all the while consuming more and producing less. Japan would lend us money and we would buy their products. Japan's economy boomed, and so did ours.
Game Over?
The problem today is that China isn't willing to play the game the way the Japanese did. If we drop the purchasing power of the dollar, the Chinese, by pegging their currency to the dollar, also drop the value of their currency. The United States then pays back its debt with a cheaper dollar.
The irony is that we accuse China of playing games with their money. It's more honest to say that China just isn't willing to play the game we want to play.
But an even bigger problem is looming: It seems like the rest of the world is less willing to play our money game. That's why the European Union introduced the Euro. If China creates an Asian equivalent of the Euro (which, admittedly, is a long shot) then the U.S. dollar could be in real trouble.
If the oil-producing nations stop accepting the dollar and switch to gold or the Euro, things will definitely get sticky. The world might be tipped into a global recession and possibly even a depression.
For now, though, this funny money game continues. How long will it last? I don't know. I do know that throughout history, all paper money has eventually come back to its true value, which is zero. That's when the game truly ends, and a whole new cycle of pass the buck begins.
For example, today, the United States is perceived to be the richest country in the world. In reality, though, we're the biggest debtor nation in the world.
Ummm, Robert, it is possible to be the richest and the biggest debtor at the same time. Does Donald Trump have more debt than me? Sure. Is he richer than me? Sure. How hard was that?
And who are we indebted to? What many consider to be a Third World country: China.
You don't consider China to be a Third World Country? That's funny.
The irony is that many Americans think we're rich and China is poor. Exactly the opposite is true.
China is rich and we're poor? That must be why Chinese are sneaking into America, they want to go slumming.
Kiyosaki has been pretty well shown to be selling deception (phony military record claims, phony family hostiry, phony financial claims). Common sense, puffed up with personal lies, and he makes a ton of money.
Can anyone quote some real wisdom in this article?
The impact of China'a strategy of pegging their currency to the dollar is widely misunderstood -- especially by people who are among the loudest critics of China-U.S. trade policy. "We" don't really accuse China of anything. The reality is that China pegs their currency against the U.S. dollar not to keep the value of their currency artificially low against the dollar (to maintain their large trade surplus with the U.S.) . . . they peg their currency to the U.S. dollar because the yuan is totally worthless without this type of arrangement.
And THAT is the really irony . . . if the Chinese government let the yuan float freely agains the dollar, the value of the yuan would collapse overnight.
"If the oil-producing nations stop accepting the dollar and switch to gold or the Euro, things will definitely get sticky. The world might be tipped into a global recession and possibly even a depression."
He has a point. Particularly about paper money.
I think his comments about the Nixon administration in 1971 are right on. It was this deliberate inflation of the U.S. dollar -- not that so-called "Arab oil embargo" -- that actually drove the price of oil through the roof here in the U.S. in 1973.
Ping for later read.
What's his point? Oil priced in Euros would cause a global depression how?
Particularly about paper money.
Yeah, because a deflationary gold standard is better than paper money.
Yeah, that's why the 30 year bond rate is 4.90%. Because nobody wants the dollar.
He'd have a lot more credibility if he explained why this scenario is "a long shot."
Here's a real gem from the article
For example, many people refinance their homes to pay off their credit cards. This makes no sense; you and I know that someday that debt will have to be paid.
Yes, you have to pay it back, but at a lower interest rate and the interest is tax deductible. What's so hard to figure out?
I would never take advice from this clown.
GDP of China $8.8 trillion, population 1.3 billion, per capita GDP approx $6,800.
GDP of USA 12.5 trillion, population 300mm, per capita GDP approx $41,500.
Most people with any economic or Reserve accounting background can understand the concept of Fiat Currency or floating exchange rates.
As long as China wants to sell us products they will be buying US Financial and real assets including loans to America or the purchase of US Treasuries. If China decided it no longer wanted to sell to the US it would have much bigger problems than we would.
Additionally although China has recently widened the trading band for the Wan they are still pegging their currency to US$. In effect they are keeping their products cheap and adding to our Wealth or standard of living NOT reducing our wealth.
Think of this if I can buy a T-shirt made in the USA for $10 or get the same quality T-shirt made in China for $5. I will buy the Chinese T-shirt and get another product or invest the extra $5, thus increasing my wealth or living standards.
I presume he didn't bother since China suffered that recent banking collapse some time back. Makes it tough to create new money with nothing to back it, which I think is exactly his point. That, and how keeping it circulating is a 'false positive' economy. Just guessing.
In many parts of the U.S. he's absolutely right about this.
Yes, you have to pay it back, but at a lower interest rate and the interest is tax deductible. What's so hard to figure out?
He's right about that one, too. Taking out a second mortgage to pay off credit card debt only makes sense if you cut the cards in half or at least stop using them as debt instruments.
A general rule of thumb is that you should never finance a purchase for a period of time that exceeds the life of the purchase. Using a 15-year or 30-year mortgage to pay off a vacation or a new plasma TV is idiotic.
Their GDP is closer to $1.8 trillion . Other than that, I agree with your post.
Yeah, errors in economic thinking that even I can spot.
Rich Dad Poor Dad is still a good book.
Exactly. And by pegging their currency to the U.S. dollar and predicating their entire economy on their ability to manufacture products for sale in the U.S., they've basically done something that no "wealthy" country would ever do -- they've consigned themselves to function as a permanent source of slave labor for U.S. consumers.
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