"Democracy is at risk when ideology overpowers reality. If
lawmakers and the public can't agree on a set of core facts about
how the world works, there's little chance they'll be able to
devise solutions to problems" - Bloomberg BusinessWeek
Amongst all the disagreements between the candidates in this
year's Presidential election, there appears one economic policy
both candidates do actually agree on. Unfortunately, this
issue is based ona completely wrong underlying thesis.
Is China a Currency Manipulator? What does it Mean
for the US Dollar?
In the Presidential debates, a heated topic has been the
President's stance on China. The key takeaway from both
candidates is that China's currency devaluation is a primary reason
manufacturing jobs have left America for China. Again, in
this week's debate that topic was front and center and again both
candidates seem to be handicapped by lack of actual research on the
The problem is the data just doesn't support either candidate's
view that China's weaker currency has been a negative factor in US
manufacturing jobs. They need to find another scapegoat for
the 30+ year deterioration of manufacturing jobs in America.
Below is the updated research I originally published on 10/17
and shows why both candidates are wrong in their foreign exchange
policy when it comes to jobs in America and what it may mean for
the US dollar.
Currency Manipulation Revealed
China's Yuan is in a "controlled peg" relative to a basket of
currencies. They control the exchange rate of their currency
by purchasing the currencies of other countries, including the US
Dollar, and many argue that the Chinese are buying a
disproportional amount of dollars in order to keep their currency
at a rate lower than it would be in a free market. This would
allow them to produce (and sell) products cheaper as exports.
If this is true, then there may be an argument that China
(NYSEARCA:FXI) is "stealing" manufacturing jobs from the United
States by attracting companies such as General Electric (
), Ford (
), and Caterpillar (
) with cheaper costs than would otherwise be available under freer
As with most economic debates there are two or more differing
opinions on the topic, but the majority of opinions is that the
Chinese currency is undervalued. Some measurements that
support such claims are the popular "Big Mac Index", the
International Monetary Fund's analysis, as well as academic
purchasing power parity studies.
The Big Mac Index, which was popularized by The
magazine, measures the prices of a Big Mac burger in McDonalds (
) around the world adjusted for exchange rates. A Big Mac in
China updated in July 2012 costs a US dollar equivalent of only
$2.45. The average price in the United States is $4.33.
This implies that the Chinese Yuan is undervalued by a little over
40% based on purchasing power parity.
as well as some academic
also support that the Yuan is being undervalued between 30 and
50%. But so what and has this really affected American
Who is Correct - Romney or Obama?
In the first debate, President Obama rebutted Romney's
accusation that he was soft on China claiming, "as far as currency
manipulation, the currency has actually gone up 11 percent since
I've been president because we have pushed them hard. And we've put
unprecedented trade pressure on China (NYSEARCA:GXC). That's why
exports have significantly increased under my presidency. That's
going to help to create jobs here."
The chart below shows that Obama is correct in the short term as
the Yuan has gained in strength since he took office, and Romney is
correct over the long term. China's pegged currency has
devalued significantly since its lows just above 1Yuan/Dollar in
the early 80's to a high of above 8 Yuan/Dollar through 2006 and
above 6 Yuan today.
Since 2006 the Yuan has strengthened about 26% and since Obama
took office in 2009, the Yuan has increased in value around 11%
from just over 7 Yuan to just over 6 Yuan per Dollar. So,
Obama is correct that the Yuan has increased 11% (but it also
increased in the early 2000's as well).
That value of just over 6 Yuan today would be more like 3 or 4
Yuan in a "freer" market. Keep in mind currencies are always
measured relatively, so a strengthening Yuan implies a weakening US
If Governor Romney is elected it sounds like he will pressure
the Chinese to continue to strengthen their currency.
Prevailing wisdom is that if China's currency strengthens the US
Dollar will devalue. If the US Dollar devalues then US goods
become cheaper relative to other countries and manufacturing picks
up as other countries demand our goods. To take advantage of
a devaluing dollar, the bearish PowerShares DB ETP (NYSEARCA:UDN)
moves inversely to the US Dollar and the Wisdom Tree Dreyfus
Chinese Yuan Fund (NYSEARCA:CYB) takes advantage of a strengthening
If Obama is re-elected it sounds like a similar outcome is
expected. He also likely will continue to pressure the
Chinese to strengthen their currency.
But will it really help the US economy (NYSEARCA:IWM) and
Currency Devaluation does not Drive Manufacturing
Against prevailing thought, academia teachings, and economic
theory, a declining currency is not correlated with an increase in
manufacturing jobs. This means that having a weaker US dollar
and stronger Chinese Yuan does not at all mean manufacturing jobs
will necessarily return to America.
The below chart shows the US dollar since 1980 (top half) along
with the St. Louis Fed's US Manufacturing Jobs Data since 1980
(bottom half). Together they sum up the manufacturing jobs
debate quite nicely.
Both candidates are wrong in their assumptions about the US
Dollar and manufacturing jobs. Since the mid 80's the US
Dollar has been in a long-term devaluation. Based on the
candidate's logic, that would imply manufacturing jobs should be
increasing in America. That simply has not been the
case. Even in the 1980's through the early 90's when the
Chinese Yuan devalued significantly by 700%, manufacturing jobs
actually did not decline in America.
More recently, since 2002 (red shaded boxes), a decline in the
US dollar's value has sped up, yet manufacturing jobs still
declined, significantly. This is directly contrary to what
both candidates are saying.
There is very little support that a declining US Dollar amounts
to more US manufacturing jobs. If anything, the analysis
shows that a stronger dollar actually may be a better policy for
attracting manufacturing jobs. In the late 90's the dollar
strengthened and so did manufacturing jobs. More recently
since 2009, the dollar also has stabilized and so have
Both Obama and Romney are wrong when it comes to China's
currency manipulation and its role in the loss of manufacturing
jobs in America. They need to look for other reasons besides
China's "currency manipulation" for reasons US manufacturing jobs
continue to decline.
The November issue of the
Profit Strategy Newsletter
analyzes various markets, along with a short, mid, and long-term
outlook for the US markets. We monitor global events and
formulate high probability profit strategies based on fundamental,
technical, and sentiment research including the various "currency
wars" and other mega investment themes.