Paul Tudor Jones on a similar subject.
http://dealbreaker.com/2010/10/ten-...jones-had-an-acute-case-of-plantar-fasciitis/
The developed world, and the United States in particular, is suffering an economic malaise the likes of which weâve seen only rarely in the last 100 years. Policy makers are searching for solutions, but they are too focused on the painful symptoms of unemployment to see the misshapen structure causing it. In so doing, they are presenting some of the more wonderful trading opportunities in quite some time: winners and losers.
The root cause of the unemployment woes is quite obvious. In the United States alone, in the last two decades, nearly six million jobs in manufacturing have been lost overseas. This equates to nearly four percentage points of the
current 9.7% US unemployment rate. As importantly, the migration of these jobs contributed to the most unsustainable economic imbalance in the world todayâChinaâs persistent bilateral trade surplus with the United States. During the last decade, China accumulated almost $1.4 trillion of US debt and at least $2.3 trillion in global assets. These figures could grow to $3.8 trillion and $7 trillion, respectively, over the next decade if the current renminbi/US dollar (RMB/USD) exchange rate continues to be artificially suppressed from appreciating.
One entity owning this much debt of one debtor, let alone a foreign government, creates too much risk concentration, and has possibly repressed volatility for debtor and creditor alike. The risk may seem manageable now, but who knows what the nature and temperament of the Chinese and American leaders will be in ten years? Isnât it possible that either side could weaponize financial imbalances to the detriment of domestic and global stability?
How did we get here? On January 1, 1994, China devalued its currency by 50% in a single day, and since then has experienced a manufacturing boom. After 15 years of impressive productivity gains relative to its trading partners,
though, it now resists the smallest appreciation. (The IMF implies the RMB could be as much as 30% undervalued taking 2000 as a base, but absolute purchasing power parity would argue that undervaluation is even greaterâ
possibly as much as 60%.) Clearly, there is a direct correlation between the six million manufacturing jobs lost in the US and the close to twelve million manufacturing jobs gained in China over the last two decades. Robert E. Scott, a
Senior International Economist and Director of International Programs at the Economic Policy Institute, estimates that the growing trade deficit with China, a partial consequence of the undervalued RMB, cost the US 2.4 million jobs
between 2001 and 2008 alone, the equivalent of 1.6% of the current unemployment rate.
As someone who has traded foreign exchange since 1980, I believe the RMB/USD rate is currently the single most important of all exchange rates. It not only drives the largest foreign trade relationship in the world, it also drives
virtually every other exchange rate globally. Dozens of other emerging market countries suppress their exchange rate against the US dollar because the RMB is effectively pegged to the dollar. And what is remarkable is the lack of any
concrete policy initiative in the US to change this. For several years, the US Treasury has threatened to name China as a currency manipulator 2 but has always found a basis for avoidance. Even if Treasury cited China, it would just set in motion more negotiations that would likely go nowhere. The lone serious attempt to impose a cost on Chinaâs distortion of global financial markets this year was congressional action on the Currency Reform for Fair Trade Act, known as the Ryan Bill, which would allow US companies to file complaints against Chinaâs currency policies with the Commerce Department, and would empower the Department to levy tariffs and countervailing duties on imports from China.
