Last month, China made what economic expert and radio host Dawn J. Bennett sees as a drastic move by devaluing their currency. The aim of this action is to increase employment rates and enrich the country by lowering the prices of goods going out into the international market. The Chinese Premiere was hoping that this would lead to more investment and long-term stability for the country. However, analysts like Bennett believe that there’s an ulterior motive to this move: namely, to hurt the currency of their competitors by cutting into their profits.
How does this happen? When currency is devalued, it doesn’t just cut the price of outgoing exports; it raises the cost of imports. The result of this is that people within the country will be more inclined to purchase domestic products, regardless of their quality, because they can no longer afford the higher price of goods from other countries. Thus, anyone selling in China is going to be seeing their profits go down, meanwhile China will make a killing on its cheaper-than-normal goods. This is definitively bad for the U.S., and could have ripple effects across the globe.
Why else is this bad? Aside from the simple fact that it will harm many international businesses, devaluing currency can actually hurt the country that chooses to do it. Having such a disparity between exports and imports can actually fuel inflation.
On top of that, America knows from experience that destabilizing currency can be dicey. When Nixon dropped the gold standard, as adopted by the Breton Woods agreement towards the end of World War II, it caused international currencies to appreciate, and opened our own system up to control by the central government and the market. The gold standard, in this case, meant that the U.S. dollar could be directly converted to gold, providing a set worth for it and avoiding the unnatural manipulation of our currency by foreign markets. Since the so-called “Nixon Shock,” we have had multiple financial crises and our inflation has only gone up and up over time.
Dawn Bennett foresees this same result in store for China, if they keep lowering the value of their currency. And according to many experts, China could go as far as decreasing the value of the Yuan by as much as 10% before they are finished. The world will need to brace itself.