There is a rather large issue regarding The Dollar that should be of interest to Americans. That big issue is China and more particularly the Chinese Yuan and how it could negatively affect the U.S. economy.
Recently, China made a decision to allow more flexibility in the trading of its currency, the Yuan. China seems to be calculated in everything it does especially when it comes to their economy. It comes as no surprise that it is China’s desire to be the dominant world currency. Many theorize that this is the main motivation behind China’s push to increase it’s gold reserve, but one of the prerequisites to becoming a world reserve currency is having an open trading environment as well. This puts them in direct competition with the United States in that currently the U.S. Dollar is the world reserve currency.
The United States has done much to jeopardize its own position on the world economic stage by exporting its debt to other countries and does not need any help from China rocking the boat. The governments of the U.S. and China have a unique relationship and up to now, both were addicted to debt, the U.S. in selling it and China in buying it. Lately though, with no one stepping up, the U.S. has been buying up its own debt, causing China to complain that the U.S. is in effect defaulting on its debt to China by printing huge amounts of currency to inject into the system. As China takes on more of a roll as a world currency then the U.S. will get a smaller portion of the “debt-buying” pie.
This is where the problem lies, in reduced demand. The U.S. is burdened with such a huge amount of debt that it must roll that debt over at low interest rates (a high interest rate would crush the economy), but if there are fewer buyers for U.S. debt (bonds), then the U.S. must raise the interest rate to attract buyers and higher interest rates usually means a trickle down of less money for consumers to spend which will additionally hurt the economy.
Another aspect of the higher trading of the Yuan is that companies with strong ties to China would feel the higher cost of doing business there and do what business’ do, and pass the increase on to consumers for another cycle of inflation. Currently we are seeing inflation at the high end of things with the risk of deflation on the low end. What we don’t need is inflation pressure on the whole range of consumer spending, but the latest move from China has turned up the likelihood of that eventuality on the dollar.