Surely all these stories are directly related?

Obama urged to act on China’s currency manipulation

Ok, so according to the US government, China is manipulating their currency, that is, devaluing it to make their exports cheaper than they should be. Now I’m not at all convinced that China is doing this, because they have an interest rate of 5.31% and an inflation rate of 3.5%. That is not at all high for a country with such large GDP growth. From what I understand, a devalued currency should push up exports, and hence impact inflation and interest rates rather strongly. But maybe something else is going on as well, in any event, the US is determined to accuse China of currency manipulation. Probably because of this next story…

US trade deficit with China balloons to new record

So, the US trade deficit reaches it’s highest ever at 46.3 billion for the month of August, due to a jump in imports and no change in exports. And 28 billion of that deficit, is trade with China! So the US has every motivation to encourage China to increase the value of their currency. And China has flatly refused saying the US should not blame China for the US’s economic problems. So what is the US to do now? Probably the next story is the answer.

Bernanke signals Fed poised to further boost economy

The Federal Reserve to buy a large amount of Treasury Bonds. Now understand with how fractional reserve banking works, and how the Federal Reserve can use these bonds as the capital reserves to loan masses of money to banks, this is just technical jargon that really just means in layman’s terms, the Federal Reserve is going to print a lot of new money. The plan appears to be to devalue the US dollar. Which should make US exports more attractive, and imports less attractive to US consumers. Talk about currency manipulation! There is one slight issue though, this money will be handed to the banks, how much of an impact it makes, really depends on banks willingness to lend and consumers/companies willingness to get into more debt.
Still, when Bernanke says ‘the risk of deflation is higher than desirable’ that’s technical speak for a double dip recession, as deflationary spirals, are the worst thing an economy can go through. So he is right to print more money to try and avoid it.
In any event, this currency war between China and the US, does not benefit anyone, it’s a risk to the global economy, which needs both China and the US to be strong.

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