The Makings of a Currency Crisis

China’s economy, as measured by gross domestic product, expanded by 11.9% in the second quarter of this year — the quickest pace in 12 years. Inflation also rose in China in the second quarter to 4.4%, higher than the government’s three percent target rate.

Strong economic growth in China means interest rates there are rising again. For the third time since March, interest rates in China are going up. The widely followed Chinese lending rate is going up to 6.84% to a new eight-year high.

Years ago, China was a small player in the economic picture. Today, China is the world’s fastest-growing economy, accounting for about 10% of all global economic growth. An unbelievable feat, but one you can really thank America for.

Because of the creation of mega super-retailers like Wal-Mart, cheap “made in China” goods are in big demand in the U.S. and all over the world. Savvy consumers want to pay less and get more — something that can only be achieved with the cheap and large labor pools that exist in developing nations like China.

The negatives of the China boom to the U.S. are obvious: Our trade deficit is out of whack and our dollar is under immense pressure because (1) interest rates are rising around the world except in America, and (2) too many U.S. dollars are going overseas to pay for goods in China.

What will China do with the one trillion U.S. dollars it is sitting on? That question is on many an investors’ mind. Too many of anything causes prices to go down, including currencies. So the pressure continues on the greenback to fall in value against most world currencies. So far, a lower-priced American dollar is something the stock market likes. But buyer beware!

The makings of a currency crisis could be underway right now. What will happen if the U.S. does not raise interest rates to support the U.S. dollar? Will the American greenback plummet in value against other world currencies? Likely.

Will Euros or other currencies be demanded for oil and goods imported into the U.S.? Yes. In fact this phenomenon is already starting. That’s something the American economy and stock market won’t like. And to think, it can all be traced back to Wal- Mart. Shocking how our capitalism ended up killing our own currency.