The Problematic American Dollar...
President Barack Obama d n Wednesday China nd Asia wld b a hg market fr U.S. exports going forward bt t wld b mrtnt t address currency rates t ensure American goods wr nt facing a disadvantage. "One f th challenges tht w've gt t address internationally currency rates nd hw th match up t mk sure tht r goods r nt artificially inflated n price nd thr goods r artificially deflated n price," Obama tld senators frm h Democratic party.
Stripping aside th rhetoric, wht Obama saying tht th U.S. wld b better ff f th dollar weakened against th yuan. Th nothing bt shoddy thinking. A weaker currency n never mk n economy stronger. A weaker currency m mk U.S. exports cheaper, bt a weaker currency l mk imports more expensive. Devaluing one's currency thus a fool's game, n t benefits one segment f society (exporters) bt harms everyone l (consumers, wh h t pay more fr th imported goods th rh).
China md a rftl rational dn t trt pegging t currency t th U.S. dollar n 1995. Targeting t currency th mainstay f Chinese monetary policy, nd tht rftl acceptable, long understand nd accept tht under a targeted exchange rate regime, th economy forced t adjust f th exchange rate chosen t strong r t weak. If th currency pegged t a rate tht t weak ( Obama alleging) thn imports wll b t expensive nd inflation wll tend t rise, nd th price f goods nd services wll rise until th currency's artificial cheapness offset. In th long rn, pegging one's currency t a low level wll nl result n inflation nd perhaps a temporary boost t exports.
Th Chinese central bank first trtd targeting th yuan/dollar exchange rate n 1994; thus th economy h hd 16 years t adjust. It's noteworthy tht th Chinese h already revalued th yuan against th dollar significantly, b lmt 28%, n 1994. It's highly unlikely, therefore, tht th yuan being pegged t a level tht artificially low. And even f t wr, th passage f time wll inevitably erode whatever "advantage" tht supposed t give t Chinese exporters.
Th bggt problem th Chinese face wth thr exchange rate regime tht th currency th h chosen a standard (th U.S. dollar) h suffered extreme changes n value against th thr major currencies f th world. It d th Chinese lttl gd t peg thr currency t a standard tht fluctuates, nd n fact t nl rt problems fr t economy. Fr example, th dollar rose m 50% frm 1995 t 2002, lifting th yuan wth t, nd tht w th proximate cause f th deflation tht China suffered frm 1998 through 2002. Th dollar subsequently lost over one-third f t value frm 2002 t 2008, nd th helps ln wh Chinese inflation rose frm zero n early 2003 t lmt 9% n 2008. Th main reason th Chinese h revalued thr currency against th dollar b th dollar h lost bt 20% f t value against thr major currencies n 1994.
Th result f th -called currency "manipulation" a yuan tht h bn more stable relative t thr currencies, nd t gold, thn th dollar. Th stability, coupled wth massive foreign currency reserves, h md th yuan a rock f stability. Revaluing th yuan wld nl mk sense f th U.S. wr t allow th dollar t continue t fall against ll currencies. I a dollar devaluation really wht Obama wnt? I hope nt.
UPDATE: Jt t b clear, I'm saying tht th nl way th Chinese r going t revalue th yuan against th dollar f th U.S. first devalues th dollar against thr major currencies.
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