If America wants to know what is the best method to deal with our debts tomorrow, we should watch with eagerness what is happening in Britain today. Many experts have come out saying that the British has accumulated too much debt in the past 24 months, and there may be consequences.

Experts like Morgan Stanley have suggested that the UK has spent too much in the past couple of years in trying to prop up the economy. It has a tremendous amount of debt; its debt vs GDP ratio is much higher than ours here in the US.

Most experts still agree that the UK would not crash as yet; but an outcome would be that her currency , the Pound Sterling, would have to be weakened . While there would be many businesses that rejoice at that news, it is not all that rosy.

For one, a weakening of the pound would mean a rise in inflation for the local Brits. Imported goods would cost more. Most of the products made in the United Kingdom are, like most countries, made in China. So there would be a rise in prices in Chinese products.

We here, across the Atlantic should take note. While our debt vs GDP is not as bad as it is for Japan, India, Italy or the United Kingdom, we still have more debt than all of them put together. We still have got issues to sort out, like our lack of tax income and our terrible health care problem. We are still borrowing more and more money from the Chinese. A few bad moves in the next few years might make us experience the bad outcome before the United Kingdom.

Of course there are advantages with our system. For one, if we want to, we can virtually produce everything in America. That is something that the United Kingdom can only dream of. Technically speaking, if we lower the value of our dollar, companies would be more interested in opening factories and production centers in America. We have the resources as our country is huge, the United Kingdom does not. Also with full employment as the result of the factories, there would come the demand which would strengthen the dollar back to what it is supposed to be in the long run. We do have a juggernaut of an economy that is much larger than the Brits’.

That being said,football games are not won on paper. We need to play the game well to win. In this case, anything could go wrong; from bad leadership to counter measures by the Chinese. There are lots of things that could happen.

So it is very essential that we sit back and watch how the British handle their debt problem. If they do it well, we should model ours based on their techniques. If they screw up, we should learn from their mistakes and avoid making them. It is something that is very important for the future of our nation.

We should do our part as a people and read up on the situation. We should be keen about what is going on over there. In that manner, we can vote the person with the right solution into power.

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I am not being a skeptic here. I am not painting a picture of doom. I am going one above what the President and his economic advisors say. I am also following the trend of the Dollar which has sunk to 15 month lows amidst a cloud of economic good news.

Basically, I am basing this on the President’s wish to boost exports and cut the trade deficit. I think that this could be good and this could spell jobs in the short and the middle term. However, are we really ready to get things coming from Tennessee rather than Tokyo or, Boston rather than Beijing?

To make things exportable, we need to have the top technology or the bottom price. So while we have certain rights and America dominates in sectors that requires technology such as bio-technology, medicine and green technology, many of these are easily copied overseas and they would compete with us in that field.

E.g. We created drugs that slow down AIDS, India created the same drug at 1/10th the cost. We were pioneers of green technology, yet America is not the biggest producers China is. In the same way, we have been overtaken by the Singaporeans and the South Koreans in the production of bio-medical industries. So that is a problem with these sectors contributing to the export numbers.

So to export more things, we got to make our production cheaper. To do that, we got to increase productivity dramatically which is very unlikely; Or we got to weaken our currency. That is more likely to happen.

First lets see the cons of having a weaker currency. We would see inflation increase. Expect to see oil and gold prices rising. Things would be more expensive and the bite may be painful when it happens. It would most likely drag over sometime, which would be unpopular with the populace as they would feel the pinch and would cause the ruling party to lose elections. It would also make imports more expensive. Again, something that would not be popular with the American population.

Another impact could be coming from immigration. A weaker dollar could shun immigration. While this may be music to former Representative Tom Tancreado’s ears , it is actually not a great thing. A lot of talent in America today comes from overseas. India and Eastern Europe give us a lot of IT professionals. Asians dominate sciences in our country. So this could be a commonly neglected aspect of having a weaker dollar.

There are pros of having a weaker dollar too. First and foremost, it would make American labor cheaper. When American labor becomes cheaper, more investors would like to open their factories or places of production. That would lead to higher employment. More people get employed means more demand which would allow more people to set up shop here and the positive cycle carries on. So a weaker dollar means more jobs.

A weaker dollar would may also increase interest rates. This could be a good or bad measure. For one, with higher interest rates, we encourage savings and lending to start-ups. With a lower interest rate, we encourage spending. That I leave it up to the readers to decide.

So I wish to inform the readers, get ready for a weaker dollar. How are we going to do that? I think the readers should know better than we on that. I also hope that you share your ideas with us.

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Most sources would tell you that the Chinese are worried because they feel that the Americans are spending their money recklessly and not paying any attention to their debt and thus worried in whether the Americans would repay the debt that it owes to China.

They are also worried that the US dollar would devalue and would make its trillion dollar investment in American debt would not be worth it. There is also concern that the investment in US debt would not be good as the Federal Reserve in the United States have is keeping interest as low as possible. This would mean that the Chinese government would earn more money by investing it elsewhere rather than keeping its money in US Treasuries and notes.

This also leaves the Americans worried. Most of the money for the Iraq war and for the lack of the revenue caused by the Bush tax cuts came from the Chinese. The money for the current stimulus package comes from the Chinese. And where exactly would the US find the money to pay back this trillion dollars to China? Another country, perhaps.

As of the time this article was being written, there is little change in the Dow Jones Industrial Average. It was trading up 0.1%. However, one has to take into context of the news that Citibank announcing that it would not need any more tax payers money to survive. These two news seem to cancel out each other so far. In other words this news is to a certain extent dragging the Dow Jones Industrial Average down.

China seems to threaten that it would not invest in US treasuries thereby forcing the Americans to raise money on their own. This is because, should the US print money to pay back this debt, it would raise inflation all across the world and this would make the money that China lent is less worthy.

But what is the real reason really? The answer lies in the trade deficit between China and the US. China was manipulating her currency (the Yuan) and keeping it artificially low by buying US debt. This created a thirst for even more Chinese goods and made the deficit bigger, giving China a bigger incentive to buy American treasuries.

With the current economic crisis, American consumers has decided not to spend and buy a lot of Chinese goods. This makes the trade deficit lower and virtually nullified according to Chinese sources. Now the value of a weak yuan would not do much as Americans has a lesser consuming power than they used to. So now the Chinese are saying “Why should I lend the Americans? What would I get int return?” Before they benefited by Americans buying more of their goods, now they do not.

That being said though, I dare the Chinese to stop playing these games and manipulate her currency in the long run. I really dare them to do so. America is China’s biggest customer. China has long benefited by this lop-sided trade deficit.

A good example would be comparing it to neighboring Japan. Both these economies are export driven economies. Due to the current global crisis, both have exports that have been hit badly. China’s exports are now three quarters of what it was a year ago while Japan’s export are half of what they were a year ago. Yet we do not see the same level of destruction in the Chinese economy as compared to the ravaged Japanese one. This is all down to the money that China lent the US.

What I suggest is for the US to bite the bullet now than suffer worse consequences later. The economy is already bad. Deflation is a problem right now, not inflation. I would rather have the Americans pay off the Chinese with “worthless” money right now than let them be at the whim and fancies of the Chinese later.

This would not be an easy decision for the Americans to make. For one, this would easily cost the American public a lot thanks to the inflation and in a time where there are no jobs, that would also cost the Democrats the elections in 2010. The US too would find it more difficult for them to carry out all the ambitious agendas that President Obama has laid out.

Here is my reason why. Firstly, if there is ever a need for inflation in America, this would be it. Secondly, when goods overseas become more expensive, American and other investors would spend more money in America thereby creating jobs in the mid term ( 4-6 months). In the long term everything would even out as foreign countries that also depend on the US for a market on their goods would also see their currencies gradually decrease against the dollar thereby strengthening it.

The last reason is that China has been reacting very brashly with the United States in recent days. First was the incident in the South China see where the American vessel was surrounded by Chinese vessels in international waters. A few days later came this threat about not investing in US Treasuries. And as long as the US owes China something, China would always leverage that against the US.

I think the US should stop the buck now. She should not allow China to use the debt that she bought for her own use against America. I believe that this should be a once and for all thing that the US should do. Taking action that would hurt China would also send a strong statement to the other countries that US owe its money to, against using the Treasuries to blackmail America.

I really hope that Premier Wen starts to regret ever outbursting like that just because there is some sentiment in China to take back this money in hard times.

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