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Buzz & Banter

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Apropos of my earlier missives about China in general and the Yuan specifically as they related to US economic growth and currency valuation issues, today's NYT has an excellent broadstroke article on the subject (front page, left column).

As the article suggests, the US administration, whether in an effort to kowtow to manufacturing unions or out of an actual sense of economic need, is increasingly coming to the view that a stronger Yuan would make US products more competitive against their Chinese counterparts. Whether such calls for currency revaluation are justified from a macroeconomic standpoint is moot really.

The more important aspect of this issue is how aggressive each party gets in "defending" their economic health via currency revaluations. With presidential elections coming up, with unemployment where it is, and with the democrats (keep a close eye on Howard Dean) focusing on Bush's soft spot (the economy), the ingredients are there for this to become a hot button issue quickly.

You already know the monetary bull case for gold: in a world where Fed Governor Bernanke has openly admitted that they would debase the US dollar to fight off deflation (and to pursue reflation), competitive devaluations between major economies of their currencies can only benefit gold. And now with the administration, and possibly the democrats, talking tough with China over their currency, again, the bullish case on gold potentially grows.

Perhaps more important, however, is the impact that such competitive devaluations would have on overall economic growth. Recall the protectionist policies of our past for their populist benefit but their macroeconomic harm. Make no mistake, protectionist trade policies and competitive currency devaluations are close cousins: both can stymie overall economic growth. And at a time when we are on a knife's edge between growth and contraction, such issues like the one described in today's NYT matter.

Keep a close eye on this; Secretary Snow will be in China next week.

No positions in stocks mentioned.

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