World Economy towards OWO

[dre]

The stack isn't that high.

Gotcha, sorry Mike, I didnt read carefully. I thought you meant infusions of cash like this were managable.

[Michael Hardner]

Gotcha, sorry Mike, I didnt read carefully. I thought you meant infusions of cash like this were managable.

Still a few questions for you two posts up, though...

[dre]

I didn't realize you responded here.

Printing dollars means deficit spending yes ? Means borrowing against the future and pumping the money into the economy ?

Yes, although I wouldnt described it as borrowing against the future in monetary terms... Future generations could probably settle all that monetary debt for a bottle of whiskey and a box of cigars. What we are really taking from them is natural resources.

I don't understand how this works.

Ok lets start here.... This is a pretty good basic example of how a floating currency exchange is meant to correct trade imbalances, followed by a description of how China manipulation works.

When a consumer in the U.S. buys a Chinese product, Chinese manufacturers are paid in US dollars. These U.S. dollars are then deposited in a U.S. bank account. At this point, the Chinese exporter needs to convert dollars into yuan. Through its commercial bank it sells the U.S. dollars to the Chinese central bank, the People's Bank of China. Since the trade between the United States and China does not balance, there is a shortage of yuan and a surplus of U.S. dollars in the Chinese central bank (therefore the Yuan must be 'created'). The usual remedy to this situation used in international trade would be for the Chinese central bank sell its dollars on international currency markets and buy yuan in exchange, resulting in a self-correcting system: the U.S. dollar weakens and the Chinese yuan strengthens, until equilibrium is restored and the trade gap closes.

However, in order to avoid this situation (which would decrease Chinese exports), the Chinese central bank chooses a different solution: it slows the appreciation of the Yuan, or in some cases effectively pegs the CNY against the USD. The central bank net buys USD, then sterilizes the excess dollar flows by buying dollar-denominated assets, such as U.S. treasuries. This has the effect of keeping the excess dollars out of the currency exchange markets, where they would cause a correction in the exchange rates. Thus, the Chinese central bank manipulates the exchange rates by creating yuan and buying U.S. debt.

Thats the basic Wikipedia definition, and its pretty good so Im not going to add much. Basically instead of china taking all those US dollars and trading them on international currency markets to get the yuan they need for chinese manufacturers to purchase supplies and pay wages, they spend all that money on US treasuries and simply issue new yuan. This reduces the ammount of US dollars availabe in the currency exchange which puts upward pressure on the value of the dollar, and decreases the demand on the exchange for yuan which puts downward pressure on the yuan.

Tweak things just right and its basically a yuan to dollar "peg".

If China allowed their currency to float it would be worth roughly 3 times what it is now on international exchanges. A chinese DVD player that costs $25 US dollars would cost $75 dollars, and domestic US producers would be competetive (or at least a lot closer). US domestic production would increase and jobs would be created, and chinese exports would decrease and jobs would be lost there.

Edited February 3, 2012 by dre

[Michael Hardner]

If China allowed their currency to float it would be worth roughly 3 times what it is now on international exchanges. A chinese DVD player that costs $25 US dollars would cost $75 dollars, and domestic US producers would be competetive (or at least a lot closer). US domestic production would increase and jobs would be created, and chinese exports would decrease and jobs would be lost there.

http://en.wikipedia.org/wiki/Renminbi#Purchasing_power_parity

Trying to understand this - but the wiki page above says

One recent study suggests 37.5% undervaluation

[dre]

http://en.wikipedia.org/wiki/Renminbi#Purchasing_power_parity

Trying to understand this - but the wiki page above says

Iv read all kinds of estimates and Im not sure which one is right, so ill retract mine and well use yours. But even if we just use the number in your link, that still represents a hugely slanted playing field.

[Michael Hardner]

Iv read all kinds of estimates and Im not sure which one is right, so ill retract mine and well use yours. But even if we just use the number in your link, that still represents a hugely slanted playing field.

I have to keep reading on this topic, though... difficult to get your mind around some of the concepts. Thanks for discussing it with me.

[dre]

I have to keep reading on this topic, though... difficult to get your mind around some of the concepts. Thanks for discussing it with me.

China wants to keep the trade surplus for as long as it can, so it makes good sense for them to use the yuan as an intrument of policy. Its unclear how long they will be able to continue without the real risk of inflation. But my point wasnt to harp about chinas monetary policy, it was to point out that all this trade is temporary, and these trade deficits will disappear before too long, and local production will return. This particular aspect of "globalism" will be rolled back.