Oct 7, 2017 Employment Explosion
June 26, 2017 Why's the FED Panicking?
May 25, 2017 LFPR anyone?
Apr 26, 2017 What's up with the FED?
March 10, 2017 Feb Employment Situation
Oct 10, 2016 Tax Burden
Aug 1, 2016 Here Comes the Debt
June 26, 2016 Moribund US Economy
June 16 2016 Labor Update
Mar 10, 2016 Spring Renewal for Labor Markets?
Feb 21, 2016 GDP Gap
Feb 16, 2016 FED and Monetary Policy
Jan 19, 2016 Employment Gap Age Groups LFPR
Jan 10, 2016 A look at the Employment Situation
Dec 30, 2015 Fed Funds Rate up 25 Basis points...so what?
Dec 15, 2015 Fed Funds on the rise? Has Yellen 'Fell-in'?
Oct 15, 2015 Labor Markets Seven years of misery
Oct 6, 2015 Sept: Horrible Month for Labor
Sept 30, 2015 The FED: Interest Rate Angst
Sept 11, 2015 FED on the Monetary Policy Front
July 31, 2015 Trade and Foreign Exchange Rates
July 20, 2015 Economic Growth?
July 10, 2015 Labor Picture by Age Group
July 2, 2015 Disastrous Month in Labor Rpt
June 19, 2015 Minimum Wage - Income Distribution
Jun 5, 2015 Encouraged Worker Effect
May 8, 2015 Updated Employment Situation for April
May 4, 2015 Languishing Labor Markets
Apr 7, 2015 LFPR Doldrums on the Labor Front
March 8, 2015 Less than Zero Interest Rates - Trade War
2014 Articles
2013 Articles
2012 Articles
Dec 31, 2012 Fiscal Cliff --- Increased Spending
Dec 24, 2012 Fiscal Cliff---Rising Revenues with current tax cuts?
Dec 13, 2012 November Jobs Report
Nov 28, 2012 Regulation and the Financial System
Nov 17, 2012 Employment Escarpment - Moving the Jobs Needle
Oct 31, 2012 Update on Shale Gas and Tight Oil
Oct 11, 2012 Restructuring of an Industry: US Light Vehicles
Sep 4, 2012 Resuscitating the Moribund US Economy
August 4, 2012 Unemployment Rises Again
July 21, 2012 Misguided Fiscal Policy: Is it a case of fool’s gold, or the Consequences of Economic Ignorance?
July 6, 2012 Let Freedom  Ring!!! The Shale Gale
June 26 Productivity Macro
June 11, 2012 Painted into Corner
June 4, 2012 Encouraged Worker Effect
May 28, 2012 European Honeymoon Over
May 14, 2012 Back to Basics
May 4, 2012 Labor Force Participation Rate Shrinking
Apr 26, 2012 Income Distribution
Apr 15, 2012 Energy Independence
Apr 6, 2012 Jobs Jobs Jobs
Mar 27, 2012 Gas Prices Killing Economic Growth
Mar 15, 2012 Rough Road or Smooth Sailing?
March 9, 2012 Employment Challenges Ahead
Mar 6, 2012 Stalled US Economy?
Mar 1, 2012 FED Profitabiility
Feb 22, 2012 Population Changes
Feb 13, 2012 Bernanke on Unemployment
Feb 8, 2012 Lower Unemployment - Bad News?
Feb 3, 2012 Chinese Miracle???
Jan 12, 2012 Low Interest Rates - Why so low?
Jan 9, 2012 Labor Force Participation Rate
2011 & 2010 Articles
About us
Links of Interest
Straw Poll
Definitions & Miscellaneous

Economic Newsletter for the New Millennium
February 3, 2012

Donald R. Byrne, Ph.D.


Associate Editor
Edward T. Derbin, MA, MBA

For a downloadable version, click here



Very much like the Japanese and German economic miracles after WWII, we have been hearing about the Chinese economic miracle.  But a major reason for these so-called miracles was a willingness of the U.S. to accept an overvalued Dollar which led to persistent and significant U.S. Trade Deficits (technically called deficits on Merchandise and Services Account).


It’s been a long while since the Chinese decided to end the riots in China such as Tiananmen Square in spring and summer of 1989 and put their swelling ranks of city dwellers, especially the young ones, to work at what seemed to them reasonable wages.  It has been so long now that many have forgotten how they have achieved all of this. 

"The largely student-run demonstrations aimed for continued economic reform and liberalization."

Tiananmen Square Apr Jun 1989.jpg

"The largely student-run demonstrations aimed for continued economic reform and liberalization."


Few remember that further back, in 1984 and earlier, it cost $0.50 U.S. for 1 Chinese Yuan.  This was before Walmart became what many call them now, China Mart.  For quite a while it had been close to $0.125 U.S. for 1 Yuan.  That’s correct, from one-half of one dollar for 1 Yuan to 12 and one-half cents for 1 Chinese Yuan.  Even now, 1 Chinese Yuan costs about $0.16 U.S. or 16 cents for 1 Yuan (January 2012 = 6.3172 CNY Chinese Yuan per $1.00 U.S. Dollar USD). 

Beginning in the early 1980s, the Chinese government devalued the Yuan repeatedly.  It wasn't until well after 2000 that they began to allow it to drift downward.  It still remains greatly overvalued and the US has allowed this to go on for more than 25 years.

Yuan devaluation v Dollar1981-2012.jpg

Remember that in international trade and finance, there are two prices the buyer must face.  In this case, first it is the Yuan price of the good or service or the investment and secondly it is the Dollar price of the Yuan.  With no change in the former and a 75% reduction n the latter, the combined price falls by 75%.


The effects of China devaluing the Yuan in terms of the U.S. Dollar

Before devaluation of the Yuan

1,000 Yuan flat screen TV set


At $0.50 for 1 Yuan to the dollar, the cost of the TV set is $500. U. S.


After Chinese intervention in the foreign exchange market to devalue the Yuan to $0.125 for 1 Yuan, the Dollar cost of the same TV set fell to $125 for the U. S. importer or a reduction of 75% 


Voila, witness the Chinese Miracle?????


Nor does it end there.  Before devaluation of the Yuan, 100 bushels of wheat at $5.00 per bushel cost $500 or at 2 Yuan for $1, a total of 1,000 Yuan.  After the devaluation of the Yuan  to 8 Yuan for 1 Dollar, the cost of the 100 bushels of wheat rose to 4,000 Yuan or a 300% increase in the Yuan price of the wheat.


The result, U.S imports from China rise and U.S. exports to China fall and our trade deficit with China rises precipitously.  Jobs in the U.S. are lost in large numbers.


No, it is not a Chinese miracle, but it is a U.S. policy debacle. 


In this scenario, the 1,000 Yuan price of the flat screen TV to the American company (e.g., Walmart) would be $500 for the TV when the Yuan is at $0.50 per Yuan.  After Chinese intervention in the foreign exchange market by selling Yuan and buying Dollars   the Dollar price of a Yuan moves to $0.125 per Yuan and the television now costs $125 (75% discount).  This is why we buy Chinese goods!  While the exchange rate has moved to $0.16 per 1 Yuan, the Yuan is still very much undervalued relative to the $0.500 per 1 Yuan.  The current discount from the mid 1980s is still about 70%.

The longstanding and increasing US Trade Deficit with China can only really be explained in the context of foreign exchange...selling dollar denominated products and then reinvesting those dollars in US Treasurys

US China Trade Deficit.jpg

This has caused the U.S. to develop a persistently large trade deficit with China and the need to finance it by borrowing large amounts from the Chinese and thus accumulating a large outstanding debt with them.

The Chinese and other foreign interests own a large chunk of US Federal Debt...US Treasury Securities

US Federal Debt 2009.jpg

The Chinese have increased their absolute dollar-denominated US Treasury securities, but it is the FED that has nearly doubled their position (in the guise of quantitative easing)



US Federal Debt Sept 2011.jpg

This is a major reason why it can be truthfully said that the U.S. lost jobs to China.  Of course overcompensated and bloated management and labor, especially labor represented in collective bargaining by unions, played an important role. 
Automation in U.S. manufacturing spurred on by such high costs of doing business has helped cause the job loss in the U.S. as well.  But when you reduce the cost of a 1 Chinese Yuan by 75% from $0.50 U.S. $0.125 U.S. for 1 Yuan and maintain that exchange rate for a long period, U.S. imports of goods and services from China will be persistently higher than before the Yuan was depreciated of it you prefer, devalued.  

At the same time this means that U.S. goods are much more expensive because the cost of imports from the U.S. by China rose by 300% as the cost of 1 Dollar increased by 300% from 2 Yuan to 8 Yuan per Dollar.


The benefit to the U.S. from this benign policy of not countering  China in the foreign exchange markets (by selling Dollars and buying Yuan) and the resulting Trade Deficit, was to allow the U.S. to operate beyond it product possibility curve in terms of total consumption and real investment. 

The US is able to move beyond its Production Possibility Curve to consume more goods (both capital and consumer if it chooses)

US Production Possibility Curve.jpg

Likewise, while the Chinese are able to produce along their production possibility curve, since they are heavy exporters, they are unable to consume those goods...hence, the inward shift on the consumption side in terms of capital and or consumer goods.

China Production Possibility Curve.jpg

We have gone into the production possibility constraints and consumption aspects of the relationship with China in a number of previous newsletters: 


Why 25+ Years of Trade Deficits?

A tale of High Real Risk-adjusted Interest Rates and the Appreciating/Depreciating Dollar



U.S. Trade Deficit: Good, Bad, or Irrelevant?



The cost to China was the necessity of operating within their production possibility curve in terms of combined consumption and real investment.  This persistently rising personal income of the Chinese but less goods and services available for domestic purchase has resulted in significant inflationary pressures in China.  In the U.S., it has led to a reduction in inflationary pressures and at times, the fear of deflation occurring.


Recall from foreign exchange theory that China purchased Dollars and sold Yuan to devalue the Yuan by 75% bringing the Dollar price of the Yuan from $.50 per 1 Yuan down to about $.125 U.S. per 1 Yuan.  The U.S. chose not to counter these moves.  Under severe criticism from critics in the U.S., the Chinese let the Dollar depreciate a little from around $.125 per 1 Yuan to around $0.16 per 1 Yuan. 

The relatively small depreciation of the Dollar (same as appreciation of the Yuan) still leaves the Yuan nearly 70% cheaper than it was when all this began, now many years ago.  Since several presidents and Congressional majorities from both political parties have been in power over this time period, it would seem a splendid example of bipartisanship in this disastrous policy!!!


A Chinese miracle?  



An American bipartisan policy debacle?  



The resulting debt to China will still remain but forcing the exchange rate back to its t rue equilibrium will eliminate the trade deficit with China.  A secondary effect of the Dollar depreciation would be to substantially reduce the Yuan value of their accumulated investment in the U.S.  Future Chinese investments and imports from the U. S. would be much cheaper at something closer to 2 Yuan for a Dollar instead of the current 6+ Yuan for one dollar.