Economics Questions

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

David Sherin — Sat, 28 Nov 2009 08:11:54 GMT

Jonathan M. F. Catalán:

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.

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?).

Thanks for that explanation. It makes more sense now. I would laugh every time I learn more about this convoluted system we live in if it weren't so serious.

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Marko — Sat, 28 Nov 2009 07:07:33 GMT

krazy kaju:

Also, the Chinese government gets to build huge reserves in gold and foreign currencies, which could help them out a lot in the future.

Not sure if that is true. I mean if RMB was stronger they would export less produce, but they would get more foreign currency in return per unit, so it should even itself out no?

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Jonathan M. F. Catalán — Sat, 28 Nov 2009 05:57:25 GMT

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).

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Jonathan M. F. Catalán — Sat, 28 Nov 2009 05:54:06 GMT

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.

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?).

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

David Sherin — Sat, 28 Nov 2009 05:35:26 GMT

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.

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

krazy kaju — Sat, 28 Nov 2009 05:06:26 GMT

Snowflake:
How does devaluing currency help exports?

When a country devalues its currency, then the prices of its products fall in terms of other currencies. Thus, exports increase.

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

krazy kaju — Sat, 28 Nov 2009 04:57:01 GMT

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.

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

ThreeTrees — Sat, 28 Nov 2009 04:27:08 GMT

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.

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?

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Telemachus — Fri, 27 Nov 2009 20:56:48 GMT

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

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

azazel — Mon, 23 Nov 2009 17:37:53 GMT

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).

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

teuch — Mon, 23 Nov 2009 13:22:11 GMT

Ansury:

I hope the corrections happen slowly too but nothing seems to be happening slowly as of late...

The eye of the storm..

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Ansury — Mon, 23 Nov 2009 08:49:34 GMT

I hope the corrections happen slowly too but nothing seems to be happening slowly as of late...

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Esuric — Mon, 23 Nov 2009 05:12:45 GMT

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.

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

David Sherin — Mon, 23 Nov 2009 05:04:55 GMT

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.

Re: What Does China Have to Gain By Keeping Their Currency Undervalued?

Esuric — Mon, 23 Nov 2009 04:59:45 GMT

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.