Is China keeping its currency undervalued a double edged sword for China?

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Is China keeping its currency undervalued a double edged sword for China?

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One complicating factor here is that the US$ is defacto the world currency. Irrespective of any issues of trade imbalances, it’s necessary for the central bank of a nation to increase the money supply as the economy of that nation grows. If they don’t, you can get a problem with liquidity which chokes the economy. Back in the middle ages, when precious metal was “money”, they had that problem and their economies couldn’t expand fast enough until after a huge silver strike at Joachimsthal in Bohemia. Then, later, the massive influx of precious metals from Central America resulted in the opposite problem: too much money resulting in inflation. Because the US$ is effectively the world currency, if the US “solved” its trade imbalance problem and balanced its trade, it would mean that the world’s dollar supply would stop growing, and the world economy could conceivably stall as a result of liquidity problems. Oddly enough, that means that international trade actually requires the US to keep

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I don’t think that’s true, Stephen. Countries have their own currencies for local growth. Whatever the supply of US$ actually is, the world will adapt. Even if there were only ten US dollars in existence, they could make it work with fractions of a cent or somesuch. Likewise, it’s pretty easy to work around the lack of physical gold; temporary notes were once very common. Gold would be checked in ‘at the door’ to merchant halls, and scrip issued. Trading would happen via the scrip, and then everyone would cash out at the end and go home. Blaming slow growth on insufficient gold is most likely too simplistic. Money is just the most marketable commodity. There’s nothing really _that_ special about it. If a given commodity (say, gold) is too scarce to serve as money, something else will take its place. Governments meddle in money primarily because it gives them power. They’ll point to the evil days of pre-fiat money, where we had booms and crashed… without bothering to mention that imma

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What would happen if China and Japan dumped their US$ reserves? As I mentioned above, it would be a disaster for both China and the US. Right now the US is running huge budget deficits that are funded by bonds purchased by China and Japan. Since there is a trade imbalance, they have lots of dollars to loan to us. Fortunately for the US, this demand for bonds keeps interest rates low, meaning that the US is getting pretty much a free ride on its debt. This works only as long as they have confidence in the US dollar. Now what happens if someone, Japan, China, etc starts to get nervous and decides to sell off some of their US bonds. An oversupply of bonds means that the US has to raise interest rates on bonds to get someone to buy them. As interest rates go up, the value of current bonds goes down. After all, who would want to hold old bonds at 4% interest when new bonds are paying 10%. At this point there could be a panic rush for the exits as everyone tries to dump their bonds before th

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Absolutely. Their economy is in a bubble, much like the US in the late 1990s, but worse. To keeping their currency low, they have to print lots of it to buy ours. Since we’re printing money like crazy, they have to print like crazy too. In essence that just exports our inflation. With all the money available in China, it’s easy to get loans. The state-run banks are free and easy with money, and more than happy to prop up failing enterprises. So too much stuff gets built. And there is always massive fraud and corruption in bubbles. When the Chinese bank stops printing as much money, a contraction within China will start. The overbuilt capital assets will have trouble paying for themselves. Insolvent businesses will fail, but many businesses that would have been fine in normal economic times will also fail. The net damage will be terrible. There are no good solutions to economic bubbles. The only solution is not to have one. Their bubble is a Siamese twin to our debt-driven one, which is

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Money is supply and demand, just like other commodities. (which is why it’s kind of amusing to see people demonize gold as ‘just a commodity’, because that’s all money IS… the most marketable commodity. Paper money is a commodity too.) (note: that is Mises’ definition of money. Not everyone uses that definition.) If I buy something Chinese, removing the middlemen for clarity, I trade dollars to a Chinese manufacturer for a product. He will probably immediately convert dollars into renminbi, to pay his workers and buy new materials. This makes more dollars available, and fewer renminbi. If this transaction happens often enough, it will gradually strengthen their currency and weaken ours, because it increases the supply of dollars and decreases that of renminbi. We’re currently running a deficit with China to the tune of something like 200 billion dollars a year. In a free market system, this would dramatically affect the value of the dollar; the world would be swimming with them. But

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