Asymmetrical Information

It's just more nannyism run amok. If China really is over-valuing their currency, then they will eventually suffer for that. If they are not, then we are overvaluing ours. And we will eventually suffer. Artificially changing the valuation just masks their/our problems.

Bring back gold.

Boring! A more interesting topic of discussion whould be Anakin Skywalker's motive for becoming Darth Vader.

Pardon my ignorance, but what would a revaluation mean in practical terms?

I'm too young to remember what the high rates of the Carter administration did to the housing market. Does anyone here remember?

If I sell my current home now while rates are still low I'm likely to get more buyers, no?

I could buy that bigger house now, knowing that interest rates won't likely be this cheap in the future.

On the other hand, a sharp rise in rates would likely constrict the housing market in general, making that new bigger home I just bought less valuable at least in the short run, if only because fewer people could afford it if I wanted to sell it for some reason.

Should I hoard cash, and invest it in the yuan?

Felix

Every time I read about Pegs, Currency Boards, and Floating Exchange Rates, I bow my head in shame and state "I don't get it". sigh...

Didn't we go through this with Japan? And when the yen rose against the dollar, didn't they just lower their prices to keep the price the same in dollars?

I think the effects on our overall trade deficit will be really small, i.e. 1% for every 10% move of the yuan/renminbi.

However, China's buying power for natural resources will significantly gain at U.S. expense. So their acquisition of, say, oil will accelerate with their additional buying power. How this affects the U.S. I think is much more detrimental than the trade deficit, which I think is the main political driver for the Treasury to keep nagging the Chinese about currency.

I hate it when the gov't gets involved with stuff like this.

And I agree that "any slowdown in the pace of the Chinese central bank's accumulation of dollar reserves would mean a hard landing for the US economy".

Damn non-economist pols trying to make economic policy! Leave it to the market for crying out loud!

Correct me if I misunderstand: China is madly flinging dollars at the US Treasure to deflate their money. This means that their workers cannot afford expensive American goods, and American workers cannot compete with cheap Chinese goods. This is good for Americans? This is completely good for Chinese workers?

The hard landing theory is that floating the yuan would let dollars accumulate in China, meaning fewer dollars flow into the US Treasury. It is claimed that this would suck dollars out of the US economy, causing deflation with its attendant ills. Why can't the Treasury simply print dollars as necessary to prevent this? (After all, they are already printing Treasury Bills at to keep it from happening.)

Inflating the Chinese money supply is not a lot different than a big pile of money catching on fire, as far as Americans are concerned. Either way the money is gone from the American economy, and replacements ought to be printed to prevent deflation.

Daniel,

Printing money won't prevent deflation. But it will cause inflation.

An increase in the money supply results in more dollars chasing the same amount of goods. This makes each dollar worth less than before, which is also known as inflation.

Correct me if I'm wrong, but aren't deflation and inflation opposites?

Hey,

Just to clarify the issue: the Chinese government has been under pressure both from the US government and Japan, which blames its devaluation on the Chinese Yuan. Some economists argue that both complaints are pure non-sense because China is a relatively small trading partner, constituting only 10% of US total trade (imports and exports). However, this 10% consists predominantly of US imports and it is for this reason that China's undervalued Yuan, and the competitive exports that come with it, are having such an effect on the US current account deficit. The Yuan is indeed undervalued, although no one is sure by how much. The Economist's Big Mac Index states shows a devaluation of 57%, although I personally think this value seems excessively high.
From the Chinese perspective now. When a currency is undervalued there is pressure either for the real exchange rate to rise (but China's exchange rate is fixed) or for the inflation to rise, which is what is now happening to China. Remember the Purchasing Power Parity? The Chinese government has been forced to buy American Government Bonds to maintain the level of reserves equal to the growing money supply and in this way it is helping the US government financing its fiscal deficit (government expenditure). It also had to implement restrictions on foreign exchange and a sterilisation policy in order to maintain price stability. These methods not only they are costly, but also short-term. It is for this reason that when an economy is booming, maintaining a fixed foreign exchange rate regime is not sustainable in the long-run. China's financial sector stability is also being threatened as through the exchange rate regime it is importing US policies and behaviours including high expenditure and high debt levels, but it lacks the regulatory bodies to ensure that these debts do not turn into bad-debts, causing a banking/financial crisis. This was the case of Thailand and the other East Asian Tigers. It is for all these reasons that the Chinese government has finally decided to float its currency and starting from June 8 pairs of currency will be traded over the Chinese Stock Exchange in order to train and prepare Chinese bankers.

"Correct me if I misunderstand: China is madly flinging dollars at the US Treasure to deflate their money. This means that their workers cannot afford expensive American goods, and American workers cannot compete with cheap Chinese goods. This is good for Americans? This is completely good for Chinese workers?"

This is called mercantilism. I think the idea is to enrich the Chinese government at the expense of the rest of the world as well as their own people. Of course, this used to be done somewhat differently, by demanding silver and gold delivered to the treasury, not foreign bonds. IIRC, China has a history of going to mercantile extremes. Back when the British were first developing their thirst for tea, the Chinese emperors made laws that foreign traders could only purchase Chinese products for hard currency, not sell any foreign products. According to their plan, the Brit ships would have hauled all the world's silver to China in exchange for tea. The Brits had a couple of different plans: they traded their products for cheap opium from Turkey and smuggled it into China, and they also gave guns to those seeking to make a new Emperor.

This bond-buying might be an even stupider policy than previous instances of mercantilism. If they buy up a whole lot of US government debt, what happens to that if for some reason we have to declare war on China?

"What bonds? Can you prove they were stored in that building before it was incinerated by a 24,000 pound bomb?

Couple of points:

While China's dollar reserves are huge, they're less than 10% of the Federal debt. And it's exceeded by the amount of bad loans held by Chinese banks. In some respects, China is broke.

China buys dollars because everything it wants is priced in dollars. Nobody want the yuan. It is in China's interest to keep the value of the dollar as low as possible.

Here's an older post that spells out some possibilities for China. And, when discussing China, we should always remember that it is far from a market economy and its government is known to manipulate data for its own benefit.

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