Aside from making their exports more attractive, what does China have to gain by keeping their currency undervalued?
It seems as if this is hurting them more than it helps them.....so why would they do this?
Ansury: I don't think he's wrong, I do think the corrections will have to happen some day, but I'm not sure it's going to happen so soon. Perhaps if some major event setting off a chain reaction of some kind occurs it would be sped up...
I don't think he's wrong, I do think the corrections will have to happen some day, but I'm not sure it's going to happen so soon. Perhaps if some major event setting off a chain reaction of some kind occurs it would be sped up...
I personally hope that the corrections happen slowly; Grampa Wen is no Yeltsin and Hu Jintao is no Gorbachev - if the communist party felt itself losing their grip on power, suddenly Taiwan might start looking conveniently belligerent, or some of the few extant Maoists might crawl up into the politburo.
Perhaps a second great leap, with the peasants melting down their shovels to buy more US government debt. Couldn't get much worse than that.
Esuric: Snowflake: David Sherin:I've wondered this myself. If you keep your currency weak, doesn't that mean your prices go up? I believe Bush wanted a weak dollar to encourage exports and our trade deficit exploded in the last decade.This logic is all messed up. Every time I hear it, my Austrian sense starts tingling. If there is any truth to it, it has to be because of fiat banking. Markets would not operate like this. Yeah, people get confused because there are 3 types of international monetary systems, and all 3 operate differently. The system we're currently in is fiat monetary nationalism where local currencies never truly leave their respective nations, but rather, the exchange rates merely adjust. Devaluing your currency in this system makes your products more expensive at home, but cheaper on the international market. The problem is that every nation does this, so it's like a race, or a competition. Not to mention this reduces our interest rates leading to capital flight out of your nation towards nations with higher interest rates. There's a kicker though, the lower interest rates stimulate the equity markets, and if your market is seen as safe, capital will flow back. It's all very complicated. I would suggest Monetary Nationalism and International Stability by F.A Hayek.
Snowflake: David Sherin:I've wondered this myself. If you keep your currency weak, doesn't that mean your prices go up? I believe Bush wanted a weak dollar to encourage exports and our trade deficit exploded in the last decade.This logic is all messed up. Every time I hear it, my Austrian sense starts tingling. If there is any truth to it, it has to be because of fiat banking. Markets would not operate like this.
David Sherin:I've wondered this myself. If you keep your currency weak, doesn't that mean your prices go up? I believe Bush wanted a weak dollar to encourage exports and our trade deficit exploded in the last decade.
If there is any truth to it, it has to be because of fiat banking. Markets would not operate like this.
Yeah, people get confused because there are 3 types of international monetary systems, and all 3 operate differently. The system we're currently in is fiat monetary nationalism where local currencies never truly leave their respective nations, but rather, the exchange rates merely adjust. Devaluing your currency in this system makes your products more expensive at home, but cheaper on the international market. The problem is that every nation does this, so it's like a race, or a competition. Not to mention this reduces our interest rates leading to capital flight out of your nation towards nations with higher interest rates. There's a kicker though, the lower interest rates stimulate the equity markets, and if your market is seen as safe, capital will flow back. It's all very complicated. I would suggest Monetary Nationalism and International Stability by F.A Hayek.
Thanks, I will definitely check that out once I get some Christmas and birthday money :D
David Sherin:Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that.
No, when the currency strengthens, domestic prices fall, but our products become more expensive on the international market.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Esuric: David Sherin:Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that. No, when the currency strengthens, domestic prices fall, but our products become more expensive on the international market.
I posted that before I read your other post. Hopefully that book you suggested can shed some light on this for me. It seems very paradoxical, but thanks.
David Sherin:It seems very paradoxical, but thanks.
What do you expect? It's the bastard child of Keynes and Friedman. There are no self-correcting forces, it must inevitably lead to an international disaster.
I hope the corrections happen slowly too but nothing seems to be happening slowly as of late...
Ansury: I hope the corrections happen slowly too but nothing seems to be happening slowly as of late...
The eye of the storm..
China is basically subsidizing exports by pegging the $. Why do they want to have large exports? Having lived in communist country I have some insight in the phenomena. Export are counted in GDP and politicians want to show the raise in the GDP as their success. However, it's very hard for a controlled communist economy to show domestic growth, at least after some basic level. Every factory government builds, fails miserably. So they switch to foreign demand. In order to boost export, they have to push real wages down (to be competitive).
Boosting the domestic demand would require control of the economy to lessen to a much wider extent then communist party is willing (turn to capitalism basically). Also, since probably every communist country has problem with foreign currencies (they lack it desperately), hoarding the reserves is the bonus. Since communist economies are generally incapable of providing for basic needs of it citizens, they rely on imports of strategic products (food for example). Failure to provide food for your citizens of course can lead to nasty riots (given that living under communist control is unpleasant, there is always lot of discontent that can just explode).
Ya'll,
If there's anybody still watching this post, I'd like to follow up with some questions.
(1) An elementary question: when one refers to X buying Y's debt, what exactly does this mean? In the case of the U.S. and China? Is this private debt, public debt, or both?
(2) How is China capable of buying U.S. debt if their currency is "weaker" than that of the U.S.? I supposed that this is probably answered by (1).
(3) Is there an actual useful "trade circuit" being formed (for lack of a better term) by the symbiotic relationship of these two nations, or is the U.S. / China trade relationship merely one of emptying one bucket to fill another (in terms of currency, physical capital, resources, etc.)? By "trade circuit," I'm trying to get at the idea that the U.S. trades A for China's B, then B is used to create C, which China trades for the U.S.'s D, which then gets turned into A. I know this is simplistic, but that's essentially how global trade works, albeit with thousands of different tradable things and many, many countries.
I ask these questions mainly because I don't understand how a trade relationship like that of the U.S. and China is possible, even in the short term. To the casual observer, it just looks like the U.S. has money, China has goods, and since the U.S.'s currency is "stronger" than that of China, we are able to buy more goods from China that its own citizens are able to buy. You can see why there are people basically saying that we need to punish China to stop them from pegging their currency lower, or that a global currency is desirable, or whatever.
I definitely agree that it is not China as a whole benefitting from this relationship, but mainly the political class.The country appears to in the process of physical destruction as resources exit the country, pollution is spreading everywhere, and the people of the country seem to be stuck in a terrible poverty. I would like to add that the U.S. political class is benefitting from this by making it look like "plenty is at our doorstep" in perpetuum.
Happy Thanksgiving,Tele
David Sherin: Snowflake:How does devaluing currency help exports? I've wondered this myself. If you keep your currency weak, doesn't that mean your prices go up? I believe Bush wanted a weak dollar to encourage exports and our trade deficit exploded in the last decade.
Snowflake:How does devaluing currency help exports?
I've wondered this myself. If you keep your currency weak, doesn't that mean your prices go up? I believe Bush wanted a weak dollar to encourage exports and our trade deficit exploded in the last decade.
Because the peg is against the USD and the US is their primary export market. As long as the ratio between the two currencies is the same then demand for Chinese goods in the US doesn't change (due to the relative value of the currencies). I'm sure the effect on prices shows up somewhere, just not in USD denominated commodities/goods.
Just throwing that out there, it's little more than speculation. Anybody got any information that corroborates or refutes this?
Honestly, it doesn't do anything except artificially inflate their GDP numbers by making exporting more profitable. The catch here is, of course, that they import less than they otherwise would. In other words, although the PRC's GDP is high, their living standards are very low, since most they cannot actually afford anything.
Also, the Chinese government gets to build huge reserves in gold and foreign currencies, which could help them out a lot in the future.
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When a country devalues its currency, then the prices of its products fall in terms of other currencies. Thus, exports increase.
ThreeTrees:Because the peg is against the USD and the US is their primary export market.
Could you explain this a little more? I'm no expert when it comes to how different fiat currencies interact with each other.
David Sherin: Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that.
Same here. I just read an article that said when a currency strengthens, prices in that country go up (???). I've never heard an explanation for this, but it makes no sense to me. Maybe there is a reason for it, something to do with fiat money or central banking (I don't know), but I agree that a free market would not operate like that.
At least in the current currency system in place, it has to do with dollar conversion. Take for example Germany and the BMW. The BMW factory in Germany sells the product to distributors in the United States in Euros. Let's say it's worth 50,000€. A strong euro means that it takes more dollars to convert to the necessary euros to buy the car. So, in the United States a Euro that is worth twice as much as the dollar would make a BMW cost $100,000, while a weaker euro would make it cheaper in dollars.
So, Ensuric is right. They make the product cheaper for the importer, but more expensive for their own people. Over the long run it just means global poverty (especially since it's really spiraling, as every country depreciates its currency). The problem is that they don't take into account the transfer of capital, and they overplay the importance of not having a trade deficit (which is a ridiculous notion, anyways; why would an individual economic actor trade for something that he gets less utlity out of than what he gave in return?).
David Sherin: Could you explain this a little more? I'm no expert when it comes to how different fiat currencies interact with each other.
If the two currencies are floating, then the exchange ratio is based on the ratio (more or less) between the demand for either currency. The renminbi is pegged to the dollar, and usually that means that the Chinese have to maintain some sort of ratio between their monetary base and the monetary base of the dollar in order to make sure that that constant exchange ratio can exist (which usually means high inflation in China).