Thursday, October 17, 2013

China’s Dagong credit rating agency on October 17th downgraded its United States sovereign credit rating to A- and maintained its negative outlook on America’s solvency. Dagong warned that despite Washington's last-minute resolution of the debt ceiling deadlock, “The fundamental situation that the debt growth rate significantly outpaces that of fiscal income and gross domestic product remains unchanged.”

China's official state-run news agency, Xinhua, reiterated its statements that because of the continuing risk of a U.S. debt default, it is “a good time for the befuddled world to start considering building a de-Americanized world.” This language is code for China wanting to abandon the U.S. dollar as the world’s “reserve currency” and move international financial transactions to the ren...minbi, the currency of the People's Republic of China.

Having benefited for twenty years from their under-valued currency, importing manufacturing jobs, and exporting lower priced products, China’s comparative advantage is being destroyed by America’s oil and natural gas fracking boom. The Chinese communist authorities are terrified their loss of competitiveness will cause unemployment and the social consequences that flow from it. But with the terms of trade now substantially against China, convincing the world to dump the U.S. dollar as reserve currency and switch to the Chinese “renminbi” is their best hope to try to save tens of millions of manufacturing jobs.

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