Chinese Economic Problems Are Made In America

Peter Schiff spoke with Reason TV about the dramatic plunge in the Chinese stock market over the past three weeks. Peter explains how China mimics America’s money-printing economic policy to suppress the strength of the yuan. The effect is similar in both countries – currency inflation, which artificially stimulates investment in stocks. Despite the correction in Chinese markets, Peter believes China’s economy is still fundamentally stronger than that of the United States. Someday, he argues, China will drop its currency peg to the dollar and may begin backing the yuan with gold.

Follow along with this transcript:

Reason: What is going on there [in China]? Are you still bullish on that country long term, and what does it mean for the USA?

Peter: I am bullish, but they have an old expression – easy come, easy go. The paper wealth that you’re referring to didn’t exist a few months ago either. We had a spectacular rise, followed by a bust. Year-to-date, the Chinese market is actually still positive. That’s not true about the United States.

So you can’t talk about the wealth that was destroyed, unless you acknowledge what was created prior to that. You know, just like most of the products that Americans buy are made in China, most of the economic problems that the Chinese have are made in America. The reason the Chinese rushed into the stock market is interest rates are too low in China. The monetary policy is too weak. Why is that?

Because the Chinese have decided to peg their currency to the dollar, so they have imported our monetary policy in order to keep their currency from rising, which would be a good thing for the Chinese. Instead of doing that, they keep creating yuan, and they keep interest rates artificially low. So the Chinese who have lots of savings, they need a place to put it, because they can’t get much interest in the bank. There is a positive rate of inflation. So they’re chasing the stock market.

Reason: So will they react to this by changing their monetary policies at long last? And what is the possible short, near-term effects for America?

Peter: Eventually, this is going to happen. That’s something I’ve been forecasting for years. The timing is difficult. I guess only the Chinese know, and maybe the Chinese don’t know when they’re going to do this. But I do think that quietly they have been increasing their ownership of gold.

We don’t really know how much gold they have, but I think it’s significant. They haven’t reported their numbers in years. I think it’s because they don’t want the sellers of gold to know how much they’re buying, because they obviously want to buy it as cheaply as they can. But I think they’re doing this for a reason. I do believe that they do want to untether their currency from the dollar, but they don’t want it to just be backed by nothing. So rather than have it be backed by dollars, which really is tantamount to being backed by nothing, because the dollar is backed by nothing – but to back their currency by gold.

At one point, all paper currencies were backed by gold. If the Chinese were to back the RMB by gold, they would have the only gold-backed currency on the planet, and it would probably be the most desirable and the strongest currency. It would replace the dollar as the world’s reserve currency, were they to accomplish this.