Let's think about what might
happen in the United States if the dollar is allowed to
weaken relative to the yuan. So the most obvious thing
is that Chinese imports will become more expensive. A less obvious effect
is whether that will reduce the demand
for Chinese imports, or whether that will have any
impact on American inflation. The reason why
that's not as clear is when you go buy your
cell phone carrying case at your cell phone store,
and you pay $30 for it, that $30 is not the cost that
some Chinese manufacturer is getting for it. That Chinese manufacturer is
probably charging on the order of $0.60, or maybe $0.80, or
a dollar to produce that cell phone case. The rest of the money
that you're paying is really going to the
retailer, or to the suppliers, or it's there to essentially
pay for shipping costs from China to the US. So this $0.60, which was how
much it cost to make this in China, if this
now goes up to $0.80, or if this goes up to $1.00 it's
not clear that this price even has to change, or even if it
were to change from $30 to $31 it's not clear that that
would affect demand much. Now the impact that the
weakening of the dollar would have on
inflation is the idea that all imports would
become more expensive. So all imports, potentially. And this depends
how other countries react to the weakening dollar. But all imports could
become more expensive. And probably the most important
import, and once again, this depends on how these
currencies react to some of the oil
producing currencies-- oil producers actually
peg to the dollar-- so it might not be as
dramatic as you would think. But in general, if you have
a weakening dollar, the most important, from an
American point of view, the most important
import of all, will probably on the margin
become more expensive. And that is oil. We also potentially
will have one less buyer going out there and motivating,
or at least directly buying, or motivating other
people to go buy US debt. So debt might become
more expensive. So debt could become more
expensive in the United States. And when I say debt
becomes expensive that means that
interest rates go up. And of course, this is
hugely dependent on what the US Fed does. It could step in. It could continue
to print more money and essentially
keep the debt cheap. But it doesn't look
as good optically. Now the last, and probably
the most important question, and this is to some degree once
again, not a clear cut answer, is what happens to
US manufacturing? The argument has been
to that essentially, China has been able
to a produce cheaper than they would have even
naturally been able to produce by keeping their
currency devalued. That's allowed them
to essentially steal an industrial base
from the United States, to deplete the industrial base. Will this come back? Will some of this come back
from China or other countries? And it is true, a
weaker US currency will help the US exports. But what's less clear
is whether industries that are labor dependent, and
require maybe huge amounts of skill, whether those are
going to come back from Asian. I suspect, like I said
in the video on China, that those are either going
to probably stay in Asia. Or if we had to think
about where they might move if the Chinese
currency got stronger, I would think that other parts
of Asia, maybe South Asia, or maybe Latin America. If they can get
their act together. Those are maybe more
natural places to go, because they have
the cheap labor. They have lower standards
of living right now. And what they would
need to do to compete with China in particular
is essentially have the infrastructure,
and the systems, and the efficiency,
and the scale in place to compete effectively. So these are probably
the people that China has to worry about the most if
they devalue their currency, not so much the United States. Although will help US
manufacturing on the margin to have a weaker currency. This a Salman Khan of the
Khan Academy for CNBC.