China Starts Floating Yuan Deval Balloon

How many economic and financial commentators have you heard call for the death of the dollar and also say that China or its currency is strong? They are all clueless. The death of the dollar part is likely because all fiat currencies head toward the same terminal value, but what I have been saying here for a decade or more is what is actually happening: dedollarization happens via U.S. dollar strength and deflation because the rest of the world's central banks and fiat currencies are even worse. The dollar is popular when it inflates.

China is building the infrastructure for an international currency, and eventually a reserve currency, but it's actions today are the exact opposite. Meanwhile, the dollar system dies a slow death with every instance of depegging and/or hyperinflation in foreign currencies. Credit, then fiat, burns from the periphery to the core.

Back in 2015: Doomsayers: This Is the Domino You Have Been Waiting For

Doomsayers have been predicting the collapse of the global financial system and the dethroning of the U.S. dollar as reserve currency (or at least a severe real devaluation of the dollar versus gold and other other hard assets) for years. They have been wrong to date because the thesis was predicated on pre-2008 trends continuing. There was a significant change in 2008. First, a regular cyclical shift from inflation to deflation. In addition, demographics across the developed world and China likely are part of an order of magnitude larger cyclical shift. We are in the deflationary downturn of a larger deflationary shift, almost the mirror opposite of the 1970s cyclical inflationary boom amid the 1945 to 2008 larger inflationary boom. Central bankers have tried, in vain, to push the global economy back to the pre-2008 inflationary trend. Those predicting collapse for the greenback also argued China was the strongest economy, instead of one of the worst serial money printers in the entire world running up a credit bubble that looks to be the largest, and one of the most poorly invested, in history.

My position has been and remains that the fiat currency system will burn from the periphery to the core. China's currency has been artificially propped up since 2011, arguably since 2008 since the Chinese stimulus debt binge was the main driver of a rebound in commodities and emerging markets. The deflationary downturn was aborted globally by concerted central bank action in 2008 (and since). Imbalances have only grown since. China printed money at a rate that falls in the same category as Argentina, Russia, Brazil and Turkey. Those four currencies have all collapsed to varying degrees. China's currency is not immune to the laws of economics.

When the yuan devalues, it will start a fire that will consume the world's monetary system. It is the first big domino because when it falls, it will cause torschlusspanik.

Well here we are again...

Global Times: The strong dollar should not become a sharp blade to cut the world

The US Federal Reserve will hold a new policy meeting on Tuesday and Wednesday, with the decision on interest rate growth being the limelight. It is widely anticipated that the Fed will deliver at least another 75-basis-point interest rate hike to tame inflation. This might further increase the value of the US dollar against other currencies, which is at its 20-year high. Driven by the Fed's aggressive rate hikes, the US dollar is viewed as "experiencing a once-in-a-generation rally." For many countries in the world, this might be the beginning of another nightmare.

Controlling inflation is a nightmare.

The meeting will witness the fifth time that the Fed will raise interest rates. The direct reason is to ease the high pressure of inflation in the US. But if people dig the root cause, this is an inevitable consequence of US' blind and unlimited money printing to temporarily maintain "prosperity." In other words, in the face of the deep-seated problems exposed by the 2008 financial crisis, Washington has been powerless, and unwilling as well, to solve them. Instead, it was extremely short-sighted to cover up the crisis and curry favor with the Wall Street, while taking advantage of the hegemony of the US dollar to quietly treat the crisis like dumping wastewater - draining it to the world.

Talk about a beam in your eye.

This has not only worsened the already weak economies of Europe and Japan, but also forced a large number of developing countries to swallow the bitter pills of the economic recession caused by imported inflation. Countless families were impoverished overnight. This is a very abnormal situation that is not supposed to occur, but it is the cruel truth behind the US "containment of inflation."

All of this talk of imported inflation...countries can only import inflation or deflation if they use the currency that's inflating or deflating. If China devalues the yuan, prices adjust for it. If China does a massive infrastructure stimulus, it causes price increases for raw materials such as copper and iron, and it could be forced to raise prices for wages, but that only translates abroad if other countries are willing to pay for it. If Vietnamese factories don't require wage hikes, they can take away market share, and Chinese businesses can move there over time. What actually happened the past decade as China increasingly relied on its real estate bubble for growth.

Each round of dollar appreciation in the past decades has been accompanied by extremely bad memories: The Latin American debt crisis broke out in the first round, Japan suffered from the "lost two decades" during the second round and the Asian financial crisis took place during the third. Particularly in the Asian crisis, which is still fresh in many people's memories, more than 100 million middle-class people in Asia fell into poverty, according to the World Bank estimation. The strengthened dollar, time and again, cuts the world like a sharp blade.

Why do foreign countries keep making the same mistake over and over? Why does the USA for that matter? It's always someone else's fault with communists though.

Poor financial decisions result in poor financial results. The U.S. is as stupid as many of these countries, but still far less stupid because it remains more capitalist and more open. As bad as the Federal Reserve is with monetary policy, foreign countries are worse.

The best way to restrain the rampaging hegemony is to practice true multilateralism. Whether it was the Asian financial crisis in 1997 or the global financial crisis in 2008, the world seemed to have stumbled more than once by the same stone, which, however, is not that firm anymore. The instability and fragility of international financial markets have once again become prominent. It is precisely at such times that the international community should be more determined to cooperate and build a reliable, systemic and long-term multilateral international financial system. This cannot wait.

The U.S. would be terminally stupid if it ever agrees to join a world system, but terminal stupidity is abundantly supplied by the Baizuo ruling class these days. The U.S. should abandon hegemony though, and let the rest of the world collapse to its natural socialist level. The U.S. was meant to be a "Shining City on the Hill," an example to the world. Not a hegemon, but a teacher. It was seduced by power after WWII and gone far away from its capitalist, Christian roots. Time to return.

As for China, they're floating a devaluation of the yuan. This editorial is out because they're finally screaming out loud from the dollar pain.