The US dollar pegged to the yuan

What is the net effect of the dollar being pegged to the yuan?

Dispassionate said:

What is the net effect of the dollar being pegged to the yuan?

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IMHO although monetarily disadvantageous at the moment everybody benefits as it is keeping inflation down in the importing countries

China has a huge trade surplus, the US has a huge trade deficit.

China has an “uncompetitive advantage” in that its currency is perceived (by the US) to be grossly undervalued. A cheap currency generates exports, undermines imports and increases (reduces) the trade surplus (deficit).

An increasing deficit could lead to lower bond prices/higher yields without increasing domestic rates (which would hinder businesses). This could undermine the domestic currency – who’s going to buy wasting assets? Which may partly explain why China is seeking to diversify its reserve currencies from predominantly dollar to the Euro.

China is not playing on a level playing field. Horrible communists – sorry, capitalists, like the US.

The Saudi Rhiyal (not sure about the spelling) is pegged to the dollar. As is their oil.

Grant.

Grant.

Being a "newbie" i hope this works............but i agree with you hence my " monetarily disadvantageous" comment earlier but to me the real question is not whether the politicians, whom lets face it know diddlesquat anyway, but rather the Fed and our good old BoE are taking a very passive stance due to the inflationary implications.
To explain my thoughts most inflationary models have CPI/RPI running at 8% under these economic conditions, but most were created pre-china, so one might argue that the "dis-inflation" that China is exporting.......and i do have a "book" on the go at the moment as to how many xmas presents you get that are not made in china, but to be fair i haven't had many takers so far.........anyway their cheap imports are basically keeping our inflation down so the bankers are happy but sweaty and the aforementioned politicos are the real problem as they may force the issue for votes and go for a decoupling or extra duties or somesuch.
Be interesting how it plays out as everyone knows it is an economic injustice but at the moment nobody dares rock the boat because,say, if they de-coupled then the Fed would have only just started rather than (possibly) just finished with their rate rises......now that would be scary. However with the whip hand with the Chinese i think their "diversification" shows they understand economics a far sight better than OPEC now or back in the 70's.

Jimmy,

It may be the case that importing cheap, Chinese goods is anti-inflationary and therefore, beneficial. I think the fear of consumer-based/driven economies – US and UK, for example - is of potential stagflation, ie low inflation, low or falling growth.

You say politicians may force the issue (I presume you’re referring to de-coupling) but can they? I am out of my depth, here but can the US decide whether a foreign currency de-couples? I can’t see it. Also, what is the actual mechanism of a currency peg; how, and by whom, is the rate determined and maintained - selling dollars against the Chinese currency?

You can impose duties, tariffs and trade barriers – as the US did (do?) on steel imports but the benefits to the domestic economy have to be weighed against greater political and economic interests - lose a few votes from the rust-belts or gain/maintain votes from the greater consumer economy. Detroit is not what I would regard as a Republican stronghold.

(Why didn’t the US lean on OPEC to increase production when oil was heading north? Presumably the religious dimension.)

I think the problem is one of perception by US politicians who equated communism to cretinism or economic/ financial naivety. And they’ve been wrong-footed. Stalin may have been evil, but he wasn’t stupid. Both countries could be regarded as extreme capitalist – really exploiting the workers (who now hark back to the good old days of Uncle Joe). Sure, Peking/Beijing has magnificent apartment blocks for the wealthy but the country is still a stih-hole for the have-nots.

Russia and China (also India) don’t need the US, but more and more countries need China, and depend on Russia, for sustainability of their own economies. The US is losing influence and status.

Grant.

Hi Grant

Small point but i always thought stagflation was rising inflation and falling growth, if not negative GDP, the worst of both worlds so to speak, which at the moment the "great consumer" ie. USA, has the rising inflation and slowing growth, the problem, or balancing act, is to keep inflation in check but not overdo the rate rises so that you slow the economy too much. The proverbial sweet spot, which is virtually impossible to achieve without a huge dose of (economic) luck IMHO.
So the way i see it is if the great consumer forces a de-coupling whether it be by tarriffs or imbargoes or whatever they run the risk of now importing inflation and if that happens then the jury is still out as to whether their economy could handle another year of rate rises. Of course this should have happened two years ago but then as you say they can't exactly force China to do anything in reality, in fact the only real weapon is the strength of their own economy and the old adage "don't bite the hand that feeds you".

With China now holding over 1trillion greenbacks and talking about using currency swaps it doesn't appear to me that they are that bothered now just as they weren't two years ago. So i agree about Russia and China becoming less dependent on the great consumer but they still are to a very large extent, in regard to India i think they have become more so not so much by exporting prowess but by being the outsourcing home of (almost) every major multinational company listed. Be interesting to see the level of diligence carried out in respect of disaster recovery systems were anything to occur in that extremly stable country (sic).

It's only beneficial so long as the US dollar remains the hedegmonic safe-haven currency.
The equilibrium is currently being maintained by the fact that export money from china goes straight back into the US. Now if that were'nt the case and the capital went elsewhere...............

Luckily so far I can't see a country which has an economy that is as mobile or as efficient as the US so can't see that happening any time real soon.

All IMHO!

Jimmy,

Stagflation. You’re right and I stand corrected.

Tariffs, etc will force up prices of imports but wouldn’t this reduce demand? Consumers may tolerate increasing prices but only so much before they stop buying.

If consumption is based on low prices – perhaps ‘competitive prices’ is more appropriate – equalising (raising) import prices to domestic prices doesn’t strikes me as being shaky.

Could you clarify your point re the risk of importing inflation. Wouldn’t this take a long time to materialise if import prices are that much lower?

Expanding on your point re outsourcing, this is obviously beneficial to the local economy in that it creates greater domestic demand through more wage income generation.

By way of analogy re China’s dollar reserves: if you owe the bank a few thousand, you have a problem; if you the bank a few millions, its their problem.

Re Dispassionate’s points. I think the Euro may be vying for safe-haven status. Export money from China may go back to the US but the US-China trade deficit is around $18 billion. That doesn’t look like equilibrium. The US accuses China of having an unfair advantage through their currency, and they can’t compete. So how do you define efficiency in US terms?

Do a search via Google for "US-China trade balance". Some interesting stuff.

Grant.

grantx - Euro may be vying for safe-haven status but what if one of the eurozone economies starts to slump whilst others are expanding? What this essentially means is that interest rates will have to go up in a country that needs them not to go up, but down. Wholesale job losses as interest rates go up will probably result in rioting in the street. And that will force a eurozone country to drop the Euro so it can adopt it's own exchange rate.

You have to remember that a lot of eurozone economies have a very regulated structure largely driven by socialist ideals. This creates a lot of inflexibility, and in my opinion it's ultimately flexibility that is the essential tool required to put things right (which the US has) - and quickly at that. You have to rememeber that the depth of the Japanese recession can be partly attributed to the fact that it had a very rigid structure.

Recessions are inevitable (as is inflation). It's who can dig their way out of a whole the fastest that counts. Who wants to be stuck in a recession for years and years?

Dispassionate,

I agree with on Europe and the Euro. I've always regarded the EEA with suspicion - diverse economies and goverments. May be fine theoretically but which government would compromise or sacrifice their countries' health for the sake of a greater economic stability or cohesion? Nobody is that socialist. Definite vote loser. Maybe they should drop the Euro and adopt the dollar or the Swiss franc.

At best, by its very nature, the EU promotes mediocrity; at worse, its a strait-jacket. However, all these ex-Soviet, third-world satellites lately admitted will certainly be laughing when they get the huge farm subsidies: part-ex the trabant for a Merc? They'll be in for a shock.

Who can dig there way out of recession the fastest? Your right, the US would seem the most likely. But given that the EU was formed as a counter to US dominance, it could be a question of whether the US can compete against the combined might of th EU.

Interesting times, as they say.

Grant.

Chump,

I’ve never heard of BRIC. A quick search on Google and came up with two good sites:

http://en.wikipedia.org/wiki/BRIC

This also provides a pdf file of the Goldman Sach’s research paper, the origination of the BRIC concept

http://news.bbc.co.uk/1/hi/programmes/documentary_archive/4287300.stm

This provides a series of 4 radio programmes on BRIC which can be downloaded.

To reiterate, If I understand you correctly, to counter the negative affects of BRIC we need to be looking at lowering growth and demand/consumption. Have we got a two-edged sword here? Potentially lower growth and unemployment due to BRIC; potentially lower growth and unemployment to counter BRIC.

Implementing solutions may be a problem of political will, ie if a policy is a potential vote loser (lower employment), and regardless of expedience or long-term benefits, will it be implemented? It’s questionable. Voters generally look at policy to see how it affects them on personal level.

If I read the above details I probably wouldn’t need to ask this, however “From this point forward the rate of growth in BRIC”: is it slowing or increasing?

Assuming the US, UK and Europe lower growth I think Asia, India and Russia, anyone else, may crank up supply.

Didn’t Japan suffer a long period of deflation? What was the affect?

Grant.

Good post Dispassionate, it's almost the lack of ideas in the u.s. economy , after all what happened to Marxism etc , if you have enough money you can almost buy a u.s. election , and perhaps not by design, this is a strength , the interests of business and also their economy are well looked after!!! I also agree with you grantx in that voters go for self interest , !! I think voters are much more basic than that , if they're well off they vote to the left , if they're struggling financially they vote to the right , which is a large part of why Thatcher was in power so long , and now Blair, ( we were pretty poor under thatcher for a long time , and now we've been well off for a long while ) , though i'm not suggesting they were responsible for the conditions underwhich they governed , quite the reverse , though Blair /Brown were smart enough not to squander their legacy until needed , ( about now in my opinion ), so i'm not optimistic about uk economy over next few years , I suspect we have some inefficiencies that have built up also , stagflation seems possible , and as mentioned Europe particularly france has tied itself in knots with socialist beaurocracy. I don't think it matters in terms of currency value wether central banks try to re inflate or not , low interest rates and inflation in a weak economy mean a weak currency , or keep interest rates high (er) and inflation low in a weak economy also means a weak currency , I'm guessing a little but the underlying economy seems to be overiding factor , besides central banks don't have so much rope to play with these days anyway, what do you think?

Henry,

That’s an interesting take on right/left, poor/rich. And largely true. Many of the working class are Tory, based on the simplistic premise that the right support free enterprise, and thus a possible route to economic improvement.

My political damascene conversion – from old Labour to new Labour -if you like was the realisation or belief that politics – right and left – could not be driven on purely ideological grounds (why old Labour spent years in opposition, and the demise of Thatcherism). Unfortunately, that is precisely where Gordon Brown (old Labour) stands, and God help us if he became PM.

While the economy has flourished under new labour (but as you point, is this because, or in spite of?) this doesn’t seem to be reflected in fiscal success (over-spending, increasing budget deficit, deteriorating pension provisions, increasing Whitehall bureaucracy spending, etc). There is still the insistence on change, but it seems change for the sake of it, not through necessity. Further, despite throwing more and money at problems, everything gets worse, especially the health service, education, transport infrastructure. So people are dying prematurely because the NHS won't fund cancer medication and school kids are largely illiterate. Rejoice. We have the forthcoming Olympics. The tax-payer will gladly cover any shortfall. The glories of athletic prowess (are lack of, for the UK) can be broadcast throughout the cancer wards in the UK. That’s the medicine.

I think the left/right designations are now largely redundant. Who is more right-wing than Jack Straw or David Blunkett when he had position? Although I did admire Straw’s position re the veil. I like Tony Blair, I hate new Labour (and I voted for them). But the Tories are not a coherent or credible alternative. While the French may profess to be socialist, are they not the most corrupt politicians? Apartments on the Champs-Elysees for children, million pound wine cellars for personal use, back-handers right, left and centre.

I think I’d better take a breather.

Grant

Grant, i believe you slightly missed my point , no matter , i feel that people turn to the right in voting through fear of starvation ,I'm thinking now of the winter of discontent as an example . The relative prosperity of labour verses conservatives isn't because of how they managed the economy , it's because of how the previouse government managed the economy .Though your right in that these days both parties fight over centre ground , i would suggest both parties will shift to right if the economy goes tits up.The observation that voters shift to the left in times of relative prosperity and visa v isn't restricted to just the uk , and i suspect the cycle we seemed to have followed of each government being populer becuase of the economic policies of the previouse ones is also mirrored elswhere , just think it's interesting that this cycle in the uk has been very longrobably because governments have understood this effect , it certainly would have been foolish for labour to spend heavily early when they didn't need the popularity , but now that they do there is ( in my mind ) a feeling of looser purse strings.However coming back to the strength of a currency , I'm not sure that this is always based on the underlying strength of an economy ( i said before i was guessing , sometimes ( like japan i think was mentioned)a strong currency and very low inflation and stagnant economy seeems to appear ??? Perhaps percieved stability , reliability of a country is important , like japan , even if this reputation is detrimental, the strong currency hurting exports and keeping inflation low, didn't they have almost negative nterest rates for a while?

henry766 said:

Grant, i believe you slightly missed my point ...

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Very interesting discussion which got me reading on why the Dollar is pegged to the Yuan only to end up reading about Labour v Conservatives in the UK...

Lets face it is economic warfare in kind out there. I have read many stories on how the Americans blame the Chineese about their BoPayments and value of their currency for their ballooning BoP defecit. This is a lot of nonsense from the Americans.

Countries in general prefer strong currencies. Means they have stronger purchasing power. China is essentially a manufacturing power house with low Labour costs. They have to import raw materials and commodities. Hence, the advantage of buying and selling negate themselves. They have Labour advantage.

USA is essentially a high capital service economy including patents, technology and so forth. Kapital is their advantage.

However, the USA for sometime now has been living beyond it's means. In fact since the Reagan era if I remember correctly when they went for heavy expenditure to knock Russia of it's perch.

This point about getting the Yuan to revalue is daft. Leave China alone and let the US depreciate the Dollar. What's the big deal. Ultimately that is what will happen to rectify the BoP and GDP defecit. (The £ prior to the two World wars was at about £1=$8). As the UK lost the empire to the US so came the £terling tumbling down. Same fate awaits the $ to the developement of the BRIC. Once India and China (market 2bn+ population), there will be competitiors to eBay, Google and all the patents and technology that Cisco & Intel & AMD have now. New technologies that will literally revolutionalise the market place.

However, there is a big impending problem. China has already indicated it wants to move out of the $. Likewise many other countries. I'd bet Middle Eastern US allied countries will follow.
This would need to be done carefully as it would be like shooting your self in the foot. As you would halve your own reserves. But the trend has already started. GOLD HAS RISEN AND WILL CONTINUE TO RISE. DOLLAR WILL HAVE TO ULTIMATELY FALL if interest rates and taxes do not rise. Fact of life - pure economics. Watch the long term trend.

Also, once Europe loses confidence on the Feds ability to curb the defecit and if they pull their money out of the US & the $ make sure you have some toilet paper next to your fan.

I've read articles about how the long run trend of the dollar is strengthenning. You can prove anything with charts. But that to me is a lot of BS. The economics don't support the facts.

If the US don't increase taxes, raise interest rates and reign in the surplus and start competing in the market place on economic terms ( not miltary ones by twisting countries to their point of view by war and deceit and corruption ) they will be relegated to chapters of history as the 100 year empire in the next thirty years not fifty.

Finally, it comes down to politics again. The Republicans cut taxes and max the economy out and everybody says wow how well they ruled. The Democrats ( like the Clinton era ) reign in the excesses and get accused of screwing up the economy.

Either way lifes a circus and we are the clowns. Le chic 1987 I'd guess.

Point taken Atilla , guilty of waffling about other stuff , I'm not certain about countries preferring a stronger currency ,they definitely prefer a strong economy , as you alluded too the u.s. doesn't like being strong against the yaun , what you say about the dollar weakening seems to make sense , doesn't balance of payments , say with china come into play also ? On the other hand if the u..s economy takes off interest rates could rise in short term,i do agree with you accept for the last part ,the u.s. economy has been a monster for hundreds of years , the dips small compared with the gains . I read (in encyclopedia of tech analysis i believe) that the indians who sold manhatton island could buy it back and all the buildings at todays market value if they had invested the price received in u.s. stockmarket( or equivalent). You could be right , it's just a brave call ,the end of their economic power , though maybe in 30 years they have to share it with china.

henry766 said:

Point taken Atilla , guilty of waffling about other stuff , I'm not certain about countries preferring a stronger currency ,they definitely prefer a strong economy , as you alluded too the u.s. doesn't like being strong against the yaun , what you say about the dollar weakening seems to make sense , doesn't balance of payments , say with china come into play also ? On the other hand if the u..s economy takes off interest rates could rise in short term,i do agree with you accept for the last part ,the u.s. economy has been a monster for hundreds of years , the dips small compared with the gains . I read (in encyclopedia of tech analysis i believe) that the indians who sold manhatton island could buy it back and all the buildings at todays market value if they had invested the price received in u.s. stockmarket( or equivalent). You could be right , it's just a brave call ,the end of their economic power , though maybe in 30 years they have to share it with china.

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The rise of the US empire and the fall of the British empire was one and the same thing. Not sure what you mean about the US being an empire for hundreds of years. It was the railways that opened up the great plains. Financed by the British who could get better returns for their money in their efforts to colonise America and built by the Chineese immigrants. However, until late 19th, beginning of the 20th century the US was hardly an empire.

Also, we now have economic empires. I believe it is a fact that any country which fights a war; whether it wins or loses, ulitmately loses. War is destructive to resources or thoeretically economic factors of production - Labour and Capital. If territories gained like Land can't be maintained then it was a big mistake. As for the technology gain or improvements, they are out weighed by the losses. Hence, the war in Iraq and Afganistan - $500 bn will come home to roost and further hurt the American economy.

That's a little bit of history and my point of view from an Englishman's perspective. Correct me if I'm wrong. Coming back to currencies, I just heard on Bloomberg China is allowing the Yuan to appreciate before Paulson's visit to China. Now is that just politics or because they are finally worried about their economy over heating? Either way though, the state of the US economy remains vulnerable. The £1=$1.94.

If I wait another couple of years for the kids to reach 9 I'll be making my way to a well earnt - very cost effective - Disney tour.

yes empire isn't really the right word for U.S. economy , and what you say makes sense , it's just that i'll believe it when i see it when it comes to the demise of u.s. economy , it's been through tough times before. I don't think anyone was saying the yuan wouldn't strengthen in years to come,that seems more certain .

henry766 said:

yes empire isn't really the right word for U.S. economy , and what you say makes sense , it's just that i'll believe it when i see it when it comes to the demise of u.s. economy , it's been through tough times before. I don't think anyone was saying the yuan wouldn't strengthen in years to come,that seems more certain .

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Perhaps you are right. Super Power might fit the bill better. How would one consider its bases all over the world though; Germany, UK, Turkey, Saudi Arabia, Phillipenes, Iraq, Latin America... Tentacles to reach out and kick ass any administrtation that doesn't tow the line.

You are also probably right on an economic crises that needs to be overcome. However, when countries start using military might it's a sign of their demise. They now have economic, political and military issues...

The challenges to the US are in my opinion are;

1. Cut back reliance on Oil - not likely
2. Raise taxes - deflationary
3. Raise interest rates - deflationary
4. Reduce Balance of Payments defecit - saturated demand
5. Reduce Budget Defecit - 6%+ deflationary
6. Coupled with $500 bn cost of Iraq war with no end in sight...
7. Falling $ & lack of credibility of the Fed and Us administration to resolve problems

Do all these issues warrant the bull markets and further expected rises? I don't think so IMHO.

Time will tell...

Good luck Atilla , let's hope the markets agree with you.