Let's think about what might happen in the United States, if the dollar is allowed to weaken relative to the yuan.
So, the most obvious thing is that Chinese imports will become more expensive.
[Chinese imports will become more expensive].
A less obvious effect is whether that will reduce the demand for Chinese imports or whether that will
have any impact on American inflation. The reason why that is not as clear as when you go buy
your cell phone carrying case at your cell phone store and you pay $30 for it.
That $30 is not the cost that some Chinese manufacturer is getting for.
The Chinese manufacturer is probably charging on the order of 60 cents or may be 80 cents
or a dollar to produce that cell phone case. The rest of the money that you pay is really going to the retailer,
to the suppliers, or essentially pay for the shipping cost from China to the US. So, this 60 cents which was how much it costs to make in China.
This, if this now goes upto 80 cents or if this goes upto a dollar, it is not clear whether
this price even has to change. Or, if it were to change from $30 to $31, it is not clear whether that would affect the demand much.
Now, if the impact that this weakening of the dollar would have on inflation
is that the idea is that all the imports will become more expensive.
[All imports will become more expensive].
Potentially, this would impact on how other countries react to the weakening dollar. But, [all imports could become more expensive].
Probably, the most important import is once again this depends on
how these currencies would react to some of the oil producing currencies or oil producers actually
pegged to the dollar, so it might not be as dramatic as one would think.
But, in general, when you have weakening dollar, the most important from an American point of view
the most important import of all will probably on the margin become more expensive. [That is, Oil.]
We also potentially will have one less buyer going out there and motivating
either directly buying or motivating other people to buy US debt.
The debt might become more expensive. [So, debt could become more expensive in the United States].
When I say, debt becomes expensive, interest rates would go up. Of course, this is hugely dependent on what the US FED does.
what the US FED does. It could step in, it could continue to print more money and essentially could
keep debt cheap. It doesn't look as good optically. Now, the last and probably most important question is
to some degree, once again not a clear cut answer. [What happens to US manufacturing?]
The argument has been that essentially China has been able to produce cheaper than they would have
naturally would have able to produce, by keeping their currency devalue.
That essentially steal the industrial base from the United States. Will this come back or will some of this come back from China or other countries?
It is true that the weaker US currency will help the US exports.
What's less clear is whether the industries that are labor dependent and require may be huge amount of skill.
Whether those are going to come back from Asia? I suspect, like as I said in video on China. Those are either probably going to stay in Asia or where
they might move if the Chinese currency got stronger. I would think that other parts of Asia. May be South Asia, may be Latin America, if they could get their act together.
Those are may be more natural places to go, as they have the cheap labor and lower standards of living right now.
What they would need to compete with China in particular is essentially have the infrastructure,
the systems, the efficiency, the scale in place to compete effectively. So, these are probably the people
that China has to worry about the most if they revalue their currency, not so much the United States,
although it will help the US manufacturing on the margin to have a weaker currency.
This is Salman Khan of the KhanAcademy for CNBC.
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