China spanks U.S. over downgrade

"A currency war would be very bad for the entire economy. China has an increasingly important pull," said Ashraf Laidi, chief executive officer of Intermarket Strategy Ltd, a London-based research firm. "Its bargaining power has increased. If the U.S. points fingers, it will be even worse for the dollar."

Also, isn't the U.S. more of a services-led economy these days anyway? Aren't "we" trying to export more to "them?" Fast food chain Yum Brands (YUM, Fortune 500), for example, now generates more revenue from China than in the U.S.

Luxury good retailer Coach (COH) is rapidly expanding its presence in China as well. Starbucks (SBUX, Fortune 500) also has aggressive plans to open more stores in China.

Do we really want to open up the door for China to retaliate and slap tariffs or more onerous restrictions on American companies?

"To change the trade dynamics between the U.S. and China is a tricky, delicate manner. You can't use a sledgehammer," said Andrew Busch, global currency and public policy strategist with BMO Capital Markets in Chicago.

"The repercussions will be swift and negative. There are other ways to address the issue that could be more productive," he added.

Can China save Europe?

It would be one thing if China could truly be singled out as the only major nation on the planet that manages its currency.

But as I've pointed out, the U.S. does it too. And one man's currency "manipulation" is another's currency "intervention." Many countries play funny games to move the value of their paper up or down.

The central banks of both Japan and Switzerland have taken steps this year to rein in the surging yen and franc. Both currencies have been bid up in speculative "safe haven" trades this year due to the deteriorating outlook for the dollar and euro.

Each country, but especially Japan, felt it necessary to act to protect their own economic interests. A runaway yen could be disastrous for Japan since it would make goods sold by companies ranging from Toyota (TM) and Honda (HMC) to Sony (SNE) and Panasonic more expensive overseas.

Sure, there is a difference between stepping in to stop the free markets from running amok and letting the free markets do their job in the first place.

But make no mistake. Everybody "manipulates" their currency in some fashion. The U.S. needs to recognize that and move on. Working with China, as opposed to more heated rhetoric, can help solve some of the world's economic problems.

"The party that loses the most in a trade war is the one that has a big deficit. We have a big dependency on China," said Axel Merk, president of Merk Mutual Funds, a Palo Alto, Calif.-based money manager specializing in currency investments.

"If you are always complaining about your lawn, you should cement it over and not have grass. It's always easier to blame somebody else for your own problems," Merk added.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

China isn't the only currency manipulator

NEW YORK (CNNMoney) -- A newsflash to the legislators in Washington who suddenly want to act tough against China for currency manipulation: Have you looked in the mirror lately?

How can anyone with a straight face declare that China needs to be punished for keeping the yuan artificially low when the United States is also aggressively trying to devalue the dollar with its monetary and fiscal policies?

The righteous indignation and holier-than-thou attitude is comical at best. The Federal Reserve, through two rounds of quantitative easing and now Operation Twist, has helped push the dollar lower.

Simply put, buying up U.S. Treasuries as if they were Missoni apparel at Target leads to lower interest rates and a weaker currency.

The do-nothing Congress hasn't made matters any better. The debt ceiling debacle this summer didn't help the dollar either.

The short-term economic outlook is dismal. Focusing solely on longer-term deficit reduction at the expense of the current health of the cash-strapped/underwater on their house/nervous about their job American consumer also makes the U.S. dollar less attractive.

You may not agree with President Obama's latest jobs plan. But this economy needs some form of targeted and immediate stimulus to get it back on solid footing. Austerity isn't the answer. Just ask Greece.

Now don't get me wrong. I'm not endorsing China's policies per se. As much as China has opened itself up to the West and capitalist ideas, the government does not let the yuan trade as freely as it should. That's a huge problem.

GE: Partnering with China is better than being left out

However, the U.S. does need to concede that China has taken baby steps to let the yuan appreciate. After all, it is up against both the dollar and the euro this year.

Should the yuan be even higher? Probably. But provoking China into a possible trade war is not the answer.

Are U.S. manufacturers hurt by the fact that an artificially low yuan makes Chinese exports cheaper? Of course.

Funk metal band Primus (at least I think they're funk metal?) wryly comments on this in a song called "Eternal Consumption Engine" on their new album. Lyric: "Every time I get a little bit bored. Head to the Wally-Mart store. Livin' high on the greasy hog. As long as they don't deport my job. Cause everything's made in China."

Still, we need to ask ourselves this. While trying to protect manufacturing jobs in the U.S., do we risk damaging the broader economy even more by antagonizing China?

Like it or not, China holds nearly $1.2 trillion in U.S. Treasury debt. The Chinese are already not thrilled that the same dollar-damaging policies I've written about have also withered away the yields on long-term bonds.

Greek default believed to be just a matter of time

 It was once unthinkable but is now widely expected: Greece is headed toward default. Not if -- but when.

"A default is likely," said Wolfango Piccoli, director of the London office of the Eurasia Group. "At this stage, the question is about the timing."
The timing is important because Europeanauthorities are scrambling to build a "firewall" that will protect banks and other euro area nations from the fallout of a Greek default.

The first step is to overhaul an existing bailout fund for Europe, which is expected to be officially approved by all 17 eurozone nations by the end of October.

The goal, analysts say, is to create conditions for Greece to default in an organized way, rather than an abrupt collapse that could cause chaos in global financial markets.

Euro area officials have said repeatedly that Greece will meet its obligations and avoid a default. Yet the inevitability of a Greek default has become conventional wisdom in financial circles.

"The debt level of Greece is not sustainable," said Farid Abolfathi, senior director of the Risk Center at IHS Global. "No matter how much austerity, they will not be able to pay their creditors. At some point in time, they are going to default."

The argument is that Greece owes more money than it can realistically repay, considering that its economy has been in recession for years and is not expected to turn around any time soon.

For the past 15 months, Greece has been kept afloat by billions of euros in bailout money from the International Monetary Fund and its European "partners."

But the nation has had limited success when it comes to enacting the painful reforms necessary to bring down its budget deficits, and has yet to begin the process of restructuring its bloated public sector.

The Greek government disclosed over the weekend that it will not meet its budget goals this year and next, citing a worse-than-expected economic environment.

The shortfall, while not a surprise, has complicated the politically fraught negotiations over the latest *8 billion installment of emergency funding for Greece from last year's *110 billion bailout.

For one thing, the nations providing the bailout money are having a hard time convincing taxpayers that supporting Greece is absolutely necessary. There is limited political appetite in places like Germany, Austria and Finland for an open-ended commitment to a nation that did not manage its finances very well.

At the same time, there is evidence to suggest that the reforms Greece must make to qualify for its bailout money will only push its economy deeper into recession.

The nation is also facing an increasing political backlash in the form of protests and strikes in Athens. A one-day general strike got underway Wednesday morning. The halting progress has also raised questions about a plan to provide a second *109 billion bailout for Greece.

"This discussion about a second Greek bailout could easily morph into a debate about an orderly Greek default," said Holger Schmieding, chief economist at Berenberg Bank. "This discussion is likely to start in earnest in mid-October and come to a head before the next tranche for Greece is due in December."

As part of the proposed second bailout, banks and private sector investors agreed to take a 21% writedown on the face value of the Greek bonds on their books.

But there is now widespread speculation that bondholders may need to accept "haircuts" of up to 50% in order for Greece to recover. That would represent a significant liability for the European banking sector, which is already seen as woefully undercapitalized.

The threat of a banking crisis is one of the main reasons why euro area politicians have pledged to do whatever it takes to prevent a Greek default.

In addition, officials in Europe are afraid a messy default would lead to a so-called debt contagion that would undermine larger economies such as Italy.

Euro area governments are expected to unanimously approve a proposed expansion of the European Financial Stability Facility by the end of October. The revamped bailout fund will have greater flexibility to intervene in sovereign debt markets and provide financing for troubled banks.

But many analysts say governments will need to pony up much more cash in order for the *440 billion fund to be effective. Euro area officials have said they are working on ways to "enhance" the funds lending capacity, while ruling out an increase in its price tag.

"At some point, they will have to cough up money that is required," said Abolfathi. "There's a need for a big and credible fund so that markets don't bet against these countries and banks."

In the meantime, there are still serious questions about what a Greek default would mean. No euro area nation has ever defaulted, and analysts say a break up of the 12-year old currency union cannot be ruled out.

At the same time, it's not clear what Greece could do to boost its economic competitiveness after it defaults.

A government-fueled recovery seems unlikely, given that Greece would have difficulty borrowing money in the public market. Even after a default, Greece may be dependent on outside support for years to come.