Be Careful What You Wish For

As a kid, I was always wishing for something. Don't all kids do that? Anyway my Dad's favorite reply was "be careful what you wish for, you just might get it."

Today, I read where Senator Schumer, a Democrat from New York is sponsoring a bill that would slap large tariffs on Chinese goods coming to the U.S. if China does not revalue their currency. What is the matter with this guy? Does he really understand what he is asking for? I guess not.

The U.S. has a problem. We have a huge deficit both domestic and foreign. And yes, China, by pegging their currency to the dollar has given them a competitive advantage in world trade. U.S. consumers are hungry for cheap goods. If you don't believe me, just visit your local Wal-Mart. Wal-Mart is buying all they can to satisfy the hungry American consumers. All of those dollars are flowing overseas at an annual rate of $2.7 billion. If you were China and you wanted to get rid of some of those dollars, what would you do? Well, if you go out in the currency markets and try to buy other currencies, the flood of dollars will cause the exchange rate to change and China would lose lots of money. So, instead of going out into the open market, they purchase U.S. Bonds. Now they have guaranteed securities earning a little interest (very little) and they got rid of all of those dollars.

So why is this protectionist bill so disturbing? Because if you slap China's hands by imposing tariffs it starts a chain of events that we might not be able to stop.

First and foremost, it raises the costs of those goods by almost 30%. That's quite a jolt to the average working guy. Most Americans will severely curtail their spending and then look out recession here we come. Not just in the U.S. but in China as well.

Second, if China gets ticked off because they feel that we are punishing them in some way, they may stop buying bonds. Then the Feds no longer have a way to raise cheap cash to pay bills.

Finally, China might just decide to let their currency float on the world markets and then prices will go up for sure. A recession would be the best we could hope for. What could be worse than a recession? Go back and read a little about the events leading up to the depression of the 1930's. A key ingredient was the protectionist measures put in place by the U.S. government. See the similarities?

As if this issue isn't bad enough, the House yesterday passed two measures that are aimed at stopping the proposed Chinese buyout of oil company Unocal Corp. What kind of message does this send to the Chinese? Accept our dollars for you products, but don't try to buy anything with those same dollars. While I hate to see U.S. companies and real estate being snapped up by foreign investors, I guess you have to expect it when you flood the world with paper dollars.