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It appears that China has called the Bluff of the US policymakers as it signalled an end to the Yuan’s peg to the US Dollar a week before the G-20 Summit. China said it will allow a more flexible yuan.

President Barack Obama and his poster child, Treasury Secretary Tim Geithner, along with other G-20 leaders have blamed China for manipulating their currency and keeping it artificially weak to promote exports. It’s ironic however that the real currency manipulators are the United States of America. For all of the talk and politicking, it’s abundantly clear that the US are enforcing a weak dollar policy at all costs.

In reality, Geithner and the mainstream media who decry the “cheap” yuan reveal a shocking misunderstanding of what capital actually is and how free exchange really works. It’s unfortunate that Americans and the rest of the world economy all stand to suffer their false notions about money.

Capital is not money, nor is money wealth.

Simply put, capital constitutes access to human and physical inputs which enable producers to innovate or create. Money is simply a yard stick used to assign a value to the inputs that they’re accessing. Money is not wealth. It’s a simple way to measure the true wealth that producers and investors exchange.

A stable currency is therefore important in order to consistently and accurately measure the value of both physical and human inputs. When money prices fluctuate, so do the prices of investments and goods. That’s why Gold is currently breaking all time highs as investors seek stability in its nonproductive but stable store of value.

World leaders arguments that a weak currency aids a country’s economic growth is on the face, false. Realistically, when money is devalued investment flows away from small business and the entrepreneur. Without the creation of new businesses and jobs, real productivity decreases. Consumption is not growth. Inflation is anti-growth.

China doesn’t have a modern central banking system. As a result, it’s monetary authorities have duplicated the actions of numerous other countries around the world, which is to define their yuan in terms of dollars. This is logical as the dollar is 90% of the time the unit of account on the other side of any currency trade. The dollar is the world reserve currency thus many countries want a tight currency relationship with the dollar.

If we look at how the yuan is pegged to the dollar, and not the other way around, if the yuan is cheap then so must be the dollar! Since the yuan has risen over 20% against the dollar since 2005, if there’s a cheap currency to speak of, it’s the dollar. Yet we rarely hear our leaders or mainstream media mention how little the debased dollar has done for the U.S. economy.

The yuan is tied to the dollar and it’s inexpensive because the dollar is. It’s simple logic! If U.S. policy makers were really pursuing a “strong dollar” policy, they wouldn’t be worried since if their currency is strong the yuan would also be strong. China isn’t the currency manipulator here, it’s just mimicking U.S. manipulation of the greenback.

Now that China has agreed to strengthen the yuan versus the dollar they are in fact escaping the inflationary U.S. monetary policy. This will help tame inflation in their own country and lower the price of imports to China.

Chinese producers will not be hampered by a stronger yuan. As I stated earlier, money is simply a yard stick, and a stronger yuan means that the imported inputs that Chinese producers rely on to create exports would become cheaper in terms of the yuan. In addition, the yuan would buy far more dollars that would in turn buy more imported goods. These lower costs of inputs can translate into lower export prices regardless of the fact the yuan is stronger in relation to the dollar.

The U.S. should be careful what they wish for. It seems for now that China has called their bluff and will begin to escape the inflationary effects of the greenback. U.S. economic growth is likely to be compromised. All of the criticism that both Geithner and President Obama have given China for a weak currency signals that the Treasury Policy is in favour of a weak dollar. As they continue to devalue, investment will flow to other countries like China and into gold where inflation won’t erode returns. If the U.S. continue to listen to Geithner, Americans will be shocked at how weak their dollar becomes relative to China in the near future.