YUAN DOLLAR EXCHANE RATE AND U S BUDGET DEFICIT
The American Economy accounts for nearly 30% of the world economy at a global scale. down from 50% at the end of World War II. During the recent presidential elections almost all political paries including a few Republicans from industrial states, spoke very critically of outsourcing. Keep US jobs at home seemed to be their credo. Fortunately for the World economy, Bush won the election and out sourcing is helping the USA as much as it helps other parts of the world. The US economy is now showing a dangerous trend, that could over the years undermine the very basis of is fiscal policy. The feds from time to time increase the interest rate in order to make the dollar more attractive to the investor. The rapid rise of the Euro as a parallel currency of world trade will futher put pressure on the US dollar. There is another silent factor that hardly any one has noticed: the dependence of the US economy on China.
Foreign Direct Investment is pouring into China at a rate beyond its capacity to absorb. The huge trade surplus of China both with USA and Japan is pushing up the value of the yuan . This works to the advantage of China, which is shipping the dollars back to the USA as investments even though the interest it gains is not that high.Last year alone the PRC bought dollar assets to the tune of 200 to 300 billion in the USA. Any student of ECO 101 will say that this is rather poor economics because China is comparatively poorer than USA. herefore China is lending money to the USA on low interest rate and this in turn has fuelled the HOUSING and CONSTRUCTION boom in the USA. The Chinese loans are a critical factor in the spread of home ownership that George Bush II trumpets as his great achievement. Under pressure, China may make its currency more in tune with existing ground reality, then interest rates in USA will rise affecting the Housing sector badly. USA has developed a dependence on forign loans and like any addiction this too will have adverse effects.