A friend of mine posted this in response to NIA's article about Obama Misinforming the American People about the U.S. Dollar and The Chinese Yuan.

It was so well written I had to steal it and share it.  I will ask my friend if he wants his name on the article...but just so you know I did not write it.

The Strong Watchman

Pot calling the kettle black (and who's the pot and who's the kettle?)
Here's the real skinny.

Countries that have a positive balance of trade with their trading partners will by necessity (unless they actively do something about it) see their currencies appreciate. In a closed system with two countries and no debt instruments, one country's surplus is the other country's deficit. Excess wealth in the surplus country drives up prices on products produced there (supply and demand principles apply to wealth as well) while conversely, in the deficit country, prices are driven down (in a race to the bottom for exporting). This was the case when the USA was exporting more than it imported (up until the late 60's if I'm not mistaken). At the time, the dollar was relatively strong against other currencies. Foreign travel was cheap as were imported products.

Today it is China that runs a surplus and as a result, her currency SHOULD be stronger. However, China did not sit passively and watch its currency appreciate against the dollar. What China did was to repatriate the surplus to the USA by buying bonds, and kept this circle of money flowing, each time accumulating more US debt. So, the Yuan remained cheap against the dollar at the cost to the USA of being in hock to China and to the benefit of China's manufacturing.

As a free country, the USA had neither the right nor the stomach to prevent the sale of bonds to the Chinese since bonds are sold on an open market (not to mention secondary markets where one private bond holder sells to another). China now holds so much dollar denomiated debt that she worries about a dollar devaluation.

However although the USA cannot prevent China from buying bonds, what the USA can do is "print money" whch amounts to a slow default since the dollars in which China will be repaid the debt she holds are worth less than those "on paper" - their buying power is diminished.

So actually, you might say that both countries are currency manipulators - both want to depress the value of their currency, although the Yuan is the real culprit in the story since it is already undervalued, while the dollar should fall since it is likely overvalued.

Now for another thing which I have mentioned a number of times - in a country such as the USA which is running a deficit in its balance of trade, a lower valued dollar is exactly the right medicine. It makes foreign imports more expensive and domestic products (relatively) cheaper. The result is that domestic manufacturers can more easily compete with others who make the same kind of goods in both the domestic market and when exporting. This creates jobs domestically and as more products are exported and fewer are imported because of the cheaper dollar, the balance of trade will tend to swing towards a more favorable position. China understands this principal very well (do you?) - why else would they want to maintain their currency at a lower value?

Yes - this "medicine" hurts for some products, especially commodities that are priced in dollars and sold all over the world to the highest bidder (petroleum being a prime example). But you have to question what is more important - having close to full employment and expensive gas, or having cheap gas but droves of people on the dole. I think the answer is pretty evident.

The big problem is that for various reasons, people and nations continue to demand dollars because of its status as a reserve currency and as a currency of international settlement. This also "unfairly" prices the dollar higher than it ought to be had it not had its status as a reserve currency.

And lastly, the NIA article makes the Chinese sound like innocent victims of the USA's inflationary policies. China's desire for a stable economy has much more to do with keeping 1.3 billion people peaceful and not revolting, than with being an international nice guy that finances the USA's gluttony. And if you tie your currency to another country's, you should expect to import that country's inflation.