This is exactly what needs to be done and I wish Europe would do the same thing because the alternative is soul crushing austerity. Expanding the money supply needs to be combined with more regulation in their nascent market so that the money flows into people's pockets to spend rather than into another stock market bubble. A yearly ROI for the market should be around 10% anything higher is a sign of a bubble as irrational exuberance takes over from inexperienced investors. The US has rules like T+3 and $25,000 minimum account balances for short selling. During the 90s day traders cashed their retirement funds to speculate and many lost their shirts as they created too much volatility and panic. I'm not sure if China has market makers but they typically help keep prices stable by buying and selling with their large portfolios to prevent large market swings.
https://www.youtube.com/watch?v=d0nERTFo-Sk
https://www.youtube.com/watch?v=d0nERTFo-Sk
Isn't what the Fed did in 2009 (the whole QE thing) similar to what Japan, Europe and now China are all trying to do? The Fed's QE was intended to fight off deflation amid a contractionary economic environment it also caused a significant degree of dollar depreciation which is a major reason why US exports rebounded so quickly after the financial crisis. Was this whole QE thing here in the US bemoaned as a trade war by our trading partners abroad? Was it labeled as currency manipulation as well? Aren't the other central banks just now doing what Ben Bernanke started 5-6 years ago?
2
We should never have voted China into WTO, but Clinton did in the typical wide-American belief that membership would convert China to moderation. GOP politicians would have done no differently.
Faith in such measures is more fitting to groups of 'clappy-hands' children, adolescents, or collegians.
Now Russia wants to join WTO. If we okay that which would surely see Russia's admission, Russia and China could pass the ball back and forth as others stood helpless.
Faith in such measures is more fitting to groups of 'clappy-hands' children, adolescents, or collegians.
Now Russia wants to join WTO. If we okay that which would surely see Russia's admission, Russia and China could pass the ball back and forth as others stood helpless.
2
'wide-belief' should have been written 'wide-eyed belief'
The Communist Party of China is self-enriching; moves it makes to shore up the economy are entirely aimed at shoring up support among the peasants. They fear most a revolution, but can only cook the books for so long. We have reason to doubt past years of economic data; the only thing that's surprising is that it's taken naïve westerners this long to figure out that the Chinese economy is one giant ruse.
2
George Soros probably made another fortune betting on currency future.
"China’s devaluation stems in part from a desire to let markets influence the price of the renminbi, a shift global policy makers have advocated."
That is just so full of sh*t. If China really wants more market force to determine the value of RMB, it could easily widen the trading band of RMB to allow the market to direct whether RMB should go further up or down, as Beijing has done a number of times before.
By outright devaluation, China hopes to move exports faster to clean its inventory and to continue the support of its sagging manufacturing sector. While that's an understandably usual tactics for any country with China's current predicament, let's drop the laughable pretense that this has NOTHING to do with allowing market forces into the value of RMB.
And by doing so, China will prolong the non-inflationary trend in US, coupled with the low oil prices, allowing the Fed to further postpone the rate hike because, let's admit it, this "recovery" is just not very strong and there is still too much slack in the labor market, with low labor participation rate and too many households are still only trying to mend their balance sheet.
That is just so full of sh*t. If China really wants more market force to determine the value of RMB, it could easily widen the trading band of RMB to allow the market to direct whether RMB should go further up or down, as Beijing has done a number of times before.
By outright devaluation, China hopes to move exports faster to clean its inventory and to continue the support of its sagging manufacturing sector. While that's an understandably usual tactics for any country with China's current predicament, let's drop the laughable pretense that this has NOTHING to do with allowing market forces into the value of RMB.
And by doing so, China will prolong the non-inflationary trend in US, coupled with the low oil prices, allowing the Fed to further postpone the rate hike because, let's admit it, this "recovery" is just not very strong and there is still too much slack in the labor market, with low labor participation rate and too many households are still only trying to mend their balance sheet.
3
The fall in internacional economic rhythm Obliges the international economic financial system devalues international currecy exchange World wars there is no economic growth wealth is home of every developed nation The Wall Street this behaving with their own financial interests
"China’s Renminbi Devaluation May Initiate New Phase in Global Currency War"
Or, it might not. Perhaps the Chinese have more confidence in the USA than US citizens do. If we bring in 100 million of them, that would sure help the US get back to its normal economy.
Or, it might not. Perhaps the Chinese have more confidence in the USA than US citizens do. If we bring in 100 million of them, that would sure help the US get back to its normal economy.
Good for China to take decisive action. It may help the country maintain its much higher growth rate than the rest of the world's.
It appears that the USA - at least as long as it elects Democrats who prefer "social justice" to economic growth - is headed for #2 in the world by any measure of GDP.
It appears that the USA - at least as long as it elects Democrats who prefer "social justice" to economic growth - is headed for #2 in the world by any measure of GDP.
@James S
The way in which Republicans inadvertently reveal the extent of their intellectual capacity never fails to surprise. The Chinese have taken these steps because their economy, as is universally recognized, is in deep distress. And Chinese GDP per capita is a fraction of that of that of the US and likely to remain so for a long time.
The way in which Republicans inadvertently reveal the extent of their intellectual capacity never fails to surprise. The Chinese have taken these steps because their economy, as is universally recognized, is in deep distress. And Chinese GDP per capita is a fraction of that of that of the US and likely to remain so for a long time.
James, The US has been sliding down for a while and could slide lower than #2. While there is many ways to measure numerical order, we are perilously close to the point of no return. Once The Us loses one distinction of #1, the loss of another distinction becomes more likely. Spiraling downward is not good.
NYT " After that (fixed exchange rate system) fell apart in the early 1970s, major countries occasionally intervened to moderate currency movements through international agreements like the 1985 Plaza Accord, named for the Plaza Hotel in New York. At the time, the accord helped arrest a soaring rally in the dollar."
The NYT paragraph lacks a crucial background information about the main consequence of the Plaza Accord. It forced the Japanese to re evaluate by fiat the yen vis a vis the dollar.
The super yen led, ultimately, to a humongous real state bubble. At one time, the area around the Imperial Palace in Tokyo was more valuable than all properties in NYC. The Japanese banking system went under when the bubble burst in late 80s. Japan never recovered from such crash.
The Japanese lesson is very much in the minds of China's central bank authorities. In sum, a new global financial global has just begun with a strong dollar and a weak renminbi.
Of course, this new currency scenario has important implications that will become clear as time goes by. One thing for sure. Chinese high value manufactured goods and services will continue to dominate global markets while creating well paid jobs for a growing middle class back home.
The NYT paragraph lacks a crucial background information about the main consequence of the Plaza Accord. It forced the Japanese to re evaluate by fiat the yen vis a vis the dollar.
The super yen led, ultimately, to a humongous real state bubble. At one time, the area around the Imperial Palace in Tokyo was more valuable than all properties in NYC. The Japanese banking system went under when the bubble burst in late 80s. Japan never recovered from such crash.
The Japanese lesson is very much in the minds of China's central bank authorities. In sum, a new global financial global has just begun with a strong dollar and a weak renminbi.
Of course, this new currency scenario has important implications that will become clear as time goes by. One thing for sure. Chinese high value manufactured goods and services will continue to dominate global markets while creating well paid jobs for a growing middle class back home.
2
To me, this war started in the 1980s, with Japan. Japan Inc. was able to deindustrialize the US, by pumping up the US dollar's value by buying Treasuries thanks to Reagan's huge deficit. This led to the theory of the "twin deficits." After the 1986 Plaza Accord, and series of tax hikes by Bush Sr. and Bill Clinton, America sold less Treasuries to weaken the dollar and allow America to sell goods instead. This led to a crisis in Japan, which led to pressure on other Asian countries, resulting in the Asian financial crisis in 1997. With Bush Jr.'s unfunded wars, huge tax cuts and Medicare prescription expansion, the US ran huge deficits again - allowing China to manipulate the dollar/renminbi exchange rate. They took advantage of the US conservatives' laissez faire attitude while China played with financial markets. This crushed US manufacturing further while flooding the US with Chinese money (the byproduct of currency manipulation), inflating a credit bubble in the US. When crisis struck in the US, the dollar should have weakened against the Renmenbi to allow the US to export goods to China and pay down its debts. Instead, as the dollar fell with QE, China held onto its peg harder so that the renminbi fell with the dollar against the euro, pound, Brazilian real, etc. Brazil's finance minister than coined the term currency war because China was pigging backing on the dollar's fall. To me the currency wars started in Tokyo in the 1980s, but is championed by Beijing.
@ Paul
You must have skipped the class on comparative advantage assuming you ever received any economic education.
The shift in manufacturing jobs was inevitable in a reasonably open global economic system. As countries developed, the location of jobs has shifted based on comparative advantage. And many of those manufacturing jobs in the US weren’t lost to other countries but to technological change and growing efficiency. It had nothing to do with Reagan's deficits (although I don't applaud those). No policies could reverse economic forces of this magnitude. You live in some sort of conspiratorial fantasy land alas.
You must have skipped the class on comparative advantage assuming you ever received any economic education.
The shift in manufacturing jobs was inevitable in a reasonably open global economic system. As countries developed, the location of jobs has shifted based on comparative advantage. And many of those manufacturing jobs in the US weren’t lost to other countries but to technological change and growing efficiency. It had nothing to do with Reagan's deficits (although I don't applaud those). No policies could reverse economic forces of this magnitude. You live in some sort of conspiratorial fantasy land alas.
@ Paul
Comparative Advantage
Concept in economics that a country should specialize in producing and exporting only those goods and services which it can produce more efficiently (at lower opportunity cost) than other goods and services (which it should import). Comparative advantage results from different endowments of the factors of production (capital, land, labor) entrepreneurial skill, power resources, technology, etc. It therefore follows that free trade is beneficial to all countries, because each can gain if it specializes according to its comparative advantage. Basic concept of international trade theory, it is founded on the work of the UK economist David Ricardo (1772-1823) on comparative cost.
Comparative Advantage
Concept in economics that a country should specialize in producing and exporting only those goods and services which it can produce more efficiently (at lower opportunity cost) than other goods and services (which it should import). Comparative advantage results from different endowments of the factors of production (capital, land, labor) entrepreneurial skill, power resources, technology, etc. It therefore follows that free trade is beneficial to all countries, because each can gain if it specializes according to its comparative advantage. Basic concept of international trade theory, it is founded on the work of the UK economist David Ricardo (1772-1823) on comparative cost.
You don't seem like here you're to inform others, but to debate and degrade. Comparative advantage works when both trading partners are playing fair, with market forces guiding production (manufacturing and resources) to countries that are most productive for the price. To Adam Smith, price is the "invisible hand" that allocates resources and production. When a country manipulates the price of its exchange rate, it misallocates prices domestically and internationally. In that case, resources are not being allocated properly, and China is not here to interact in a global economy based on comparative advantages...it is seeking absolute advantage in production. If you're only going to discuss David Ricardo, then you're ignoring all the work done by economist since the late 1800s...which sounds about where your education of economics stopped developing. As for "no policies" could reverse economic forces of this magnitude" comment - you need to take a step back and realize this is what China is grappling with. Manipulation has side effects (just ask Japan).
The reason for having a flexible exchange rate is that it can depreciate or appreciate as a consequence of changes in other economic variables. China's moves have been done under IMF guidance and with a view to making the currency more used in international capital market transactions. If we are going to call a currency war whenever any major currency fluctuates relative to others, we have completely failed to understand what role exchange rates play.
1
Despite the speculation on the motivation, it would be unwise to think that China's leaders are doing other than what they believe is best for China's interests and objectives. China's leaders have a plan and a policy for achieving that plan whether or not we know what it is or agree with it. One thing is clear, however, and that is that world domination is at the base of the plan.
1
Unlike American leaders, who do what is best for their sponsors, never mind the American people. World domination is always at the base of our leaders plans, also, and for now, it is working.
It is interesting that currently, the US Dollar is the only true reserve currency--with both its strength and the size of the economy. And yet, some of the Republicans, in Congress, wish to eliminate the Fed, which has been the protector of our economy.
What do they think has kept the Dollar, and U. S. Treasuries, so strong? It's because the Fed did not follow standard advice on Austerity--like Europe and Japan did.
http://thetruthoncommonsense.com
What do they think has kept the Dollar, and U. S. Treasuries, so strong? It's because the Fed did not follow standard advice on Austerity--like Europe and Japan did.
http://thetruthoncommonsense.com
I don't have the figures in front of me, but my impression is that when the Chinese allowed their currency to rise. after pressure from the US, especially Congress, it rose at a painstakingly slow pace. Now, "in response to market forces" it falls more than 4 percent in three days. And many see no competitive devaluation, even though Chinese exporters at the lower end have been smarting because of rising labor costs? If it walks with a waddle and quacks-what is it?????
The capitalist / liberal trade system has many strengths but ultimately it depends on the 'growth' of its own metrics. And while this is internally good for itself. it simultaneously maintains tensions and destructive forces that can lead to enormously serious consequences. Currency wars are a systemic step toward those unhappy circumstances.
When the Pope, and others, criticize this self-interested system it is a rational call for world leaders to find a new way; one that maintains the positives while ignoring the negatives. It's a profound challenge to find and implement this better way, but if we can pull it off it will represent a truly evolutionary step in the growth of our species.
That step is sorely needed.
When the Pope, and others, criticize this self-interested system it is a rational call for world leaders to find a new way; one that maintains the positives while ignoring the negatives. It's a profound challenge to find and implement this better way, but if we can pull it off it will represent a truly evolutionary step in the growth of our species.
That step is sorely needed.
1
My ignorance on display here, "deflationary, secular stagnation". Which is it deflationary or stagnation? How does secular modify stagnation? Is stagnation nominally a religious experience?
There is considerably more smoke than fire here. The renminbi has clearly become overvalued, particularly in view of the dollar peg while China's other main trading partners, particularly the EU, have seen their currency(ies) depreciate against the dollar. Clearly the foreign exchange market was pressuring the renminbi to drop some, and the Chinese have bowed to reality and started to let some air out of the tires. This is fundamentally no different from what would be happening if there were a free market in renminbi, just with less volatility. It certainly does not represent a "currency crisis" or some sort of "trade war."
1
Amazing how Europe's markets don't seem to succumb to the same jitters that the US markets do. They've been solid, and going up for days.
Excellent explanation on China's devaluation. China is going through a correction, one that is more severe than expressed by the Chinese GDP figures that are probably whitewashed, lest they scare their internal citizens. And that is exactly why the devaluation - 3 straight day now @ 4% decrease and possibly double that within the month. China fears their manufacturing machine has slowed too much or is no longer as competitive. The danger for China is that it's smaller neighboring neighbors will also devalue their currencies to remain less expensive and competitive. China devaluation has three goals, jump start production for exports, keep workers working instead of protesting or even civil unrest and wipe out their competition at all costs.
On the long run China will need to adapt its currency so that its trade balance becomes more balanced.
But that is the long term view. Sudden moves in this area can turn out bad: Japan never really recovered from its currency revaluation after the Plaza Accords. So China needs to move carefully. The present devaluation was needed as the overall valuation of its currency towards the rest of the world had risen too much. There may be a lobby of US bond holders in China against devaluation who resisted the move as it devalues their holdings.
But that is the long term view. Sudden moves in this area can turn out bad: Japan never really recovered from its currency revaluation after the Plaza Accords. So China needs to move carefully. The present devaluation was needed as the overall valuation of its currency towards the rest of the world had risen too much. There may be a lobby of US bond holders in China against devaluation who resisted the move as it devalues their holdings.
1
I do not know much in the area of economics, however from what I read there seems to be two possibilities.
The first is our own economy suffers just as China's did. China plays in important role in the global economy, so it is reasonable to say their decrease will affect the U.S. and other countries.
The second is that it actually helps the U.S. If China's currency is devaluated compared to the U.S. dollar, that means that the U.S. can then purchase more from China for the same price. This in turn would help our economy.
While i do not have enough knowledge to take a stance on this, according to the reading and what little I do know, both possiblities are likely.
The first is our own economy suffers just as China's did. China plays in important role in the global economy, so it is reasonable to say their decrease will affect the U.S. and other countries.
The second is that it actually helps the U.S. If China's currency is devaluated compared to the U.S. dollar, that means that the U.S. can then purchase more from China for the same price. This in turn would help our economy.
While i do not have enough knowledge to take a stance on this, according to the reading and what little I do know, both possiblities are likely.
Im kind of glad the Chinese are running out of gas on their economy
if your read your history when a rapidly industrialized economy slows things get ugly. That is when Fascism rears. Now in the case of China we already have Fascism! I think China is existentially dangerous.
Personally I would be happy to pay double for stuff made in the US, if only our politicians would put on tariffs. (by the way that would also create much needed inflation!)
Personally I would be happy to pay double for stuff made in the US, if only our politicians would put on tariffs. (by the way that would also create much needed inflation!)
1
China is devauling there currency because they think it will start economic progress. China's economy has been bad lately so they are trying to remedy it. They hope it will be easier to ship stuff overseas. That is why China is devauling there currency.
I would like to see an article which explains clearly how it is that currency devaluation effects prices. Why is it that if China changes the "value" of the renminbi by 4% it affects the price an American importer pays in dollars? If I am going to import something for a dollar a piece, and that is the price the exporter is willing to sell it for, why is the "official" value of the renminbi relevant, as the exporter can use those dollars to import stuff? In addition, when a country pegs an unrealistic exchange rate, there is usually a black market that developes to exchange money. Why do we hear nothing about such in China?
This and cosmic background radiation are two things I have never been able to get my head around. Any help from Commenters will be much appreciated.
This and cosmic background radiation are two things I have never been able to get my head around. Any help from Commenters will be much appreciated.
1
Can someone please explain to me why the US Dollar is so high?
The US economy is not exactly a stalwart and beacon of success right now., The mint is printing money faster than the paper manufacturers are producing toilet paper, Big Oil is down, Banks are constantly being found guilt of crime (without jail, but hefty fines), and so on.
There has been some innuendo and suggestion that some people and countries would like to see an alternative to the "standard" of the US Dollar as a universal reference for money. Is this the start?
The US economy is not exactly a stalwart and beacon of success right now., The mint is printing money faster than the paper manufacturers are producing toilet paper, Big Oil is down, Banks are constantly being found guilt of crime (without jail, but hefty fines), and so on.
There has been some innuendo and suggestion that some people and countries would like to see an alternative to the "standard" of the US Dollar as a universal reference for money. Is this the start?
2
Majortrout
"The US economy is not exactly a stalwart and beacon of success right now., "
Actually by virtually every metric the US economy is a beacon of success right now. You need to distinguish the difference between emotion and empirical reality.
"The US economy is not exactly a stalwart and beacon of success right now., "
Actually by virtually every metric the US economy is a beacon of success right now. You need to distinguish the difference between emotion and empirical reality.
6
US dollar is strong because the alternate currencies
like Euro and Yen are weak. Japan has weakened
its currency significantly and the saga of Euro is well
known. That leaves dollar as the only currency with
reasonable economy albeit with many problems. Gold
is the other alternative and it was high for sometime
when US economy was in the dumps. British economy
is doing as well or slightly better than US but it is small
so pound is no longer the king. Dollar is the reserve
currency and is strong by default. It will be stronger
when fed starts raising the interest rate.
like Euro and Yen are weak. Japan has weakened
its currency significantly and the saga of Euro is well
known. That leaves dollar as the only currency with
reasonable economy albeit with many problems. Gold
is the other alternative and it was high for sometime
when US economy was in the dumps. British economy
is doing as well or slightly better than US but it is small
so pound is no longer the king. Dollar is the reserve
currency and is strong by default. It will be stronger
when fed starts raising the interest rate.
Sorry, John. Tune in to the financial news. Its growth is anemic, and there are many not participating in the laborforce. The dollar is strong because the US is currently the best house in a blighted neighborhood.
In 18 months in 2004/5 the dollar declined about 30% against a basket of currencies. I don't seem to remember hysterical articles in the NYT about trade wars back then. Probably because the US was focused on the unfolding debacle in Iraq. The shiny object du jour. In the past two years the Japanese Yen has fallen over 20% against the dollar and the Euro about 35%. Likewise media bloviating has concentrated on the pipsqueak problems of Greece and the alleged imminent doom of the Euro. A 4% devaluation in a currency that by common consent remains considerably over valued is hardly earth shattering. Were the Yuan to float it would probably fall 20% plus overnight.
8
Currencies move over time, depending on economic characteristics - for example, the euro has been around since 1999. At that time, all the prior exchange rates (lira, mark, francs) were considered in alignment. But since 1999, Germany has seen unit labor costs gradually decline from a combination of wage restraint and capital utilization that it is now deemed "undervalued", where it exports far more than it imports. The old currency, the mark, would have risen to give Germans an international pay raise, allowing them to buy more Italian wines, French cheese and Spanish vacations. This would lift their economies. With the euro, there is no adjustment that Germany's undervaluation is confused with competitiveness.
Likewise, China has been transformed since 1994. Overtime, as a country develops, its exchange rate should rise (it's called the "Balassa-Samuelson" theory in economics). Chinese leaders knew that if it kept the exchange rate locked, overtime China's "real exchange rate" will be undervalued. To this day, given that 80% of the US's record trade deficit is with China, it means the renminbi is massively undervalued against the US dollar. Up to 2008, the Eurozone exported more to Switzerland than to China. The problem now is that China's system is built around a weak real exchange rate (like Japan) that any appreciation, though needed for its trading partners, is destabilizing. It's like a drug...withdrawal is difficult. Ask Japan in the 1990s.
Likewise, China has been transformed since 1994. Overtime, as a country develops, its exchange rate should rise (it's called the "Balassa-Samuelson" theory in economics). Chinese leaders knew that if it kept the exchange rate locked, overtime China's "real exchange rate" will be undervalued. To this day, given that 80% of the US's record trade deficit is with China, it means the renminbi is massively undervalued against the US dollar. Up to 2008, the Eurozone exported more to Switzerland than to China. The problem now is that China's system is built around a weak real exchange rate (like Japan) that any appreciation, though needed for its trading partners, is destabilizing. It's like a drug...withdrawal is difficult. Ask Japan in the 1990s.
@Paul
Albany
Of course currencies shift over time so there's really no need to state the obvious as if it were some oracular wisdom. That's the point. There's nothing particularly significant about this small move except perhaps as reflection of internal circumstances in China. As for the suggestion that the Yuan is undervalued against the Dollar, and thus against most other major currencies, it's completely idiotic. Were a free float allowed the Yuan would fall substantially as everybody in the world apart from you apparently recognizes.
Albany
Of course currencies shift over time so there's really no need to state the obvious as if it were some oracular wisdom. That's the point. There's nothing particularly significant about this small move except perhaps as reflection of internal circumstances in China. As for the suggestion that the Yuan is undervalued against the Dollar, and thus against most other major currencies, it's completely idiotic. Were a free float allowed the Yuan would fall substantially as everybody in the world apart from you apparently recognizes.
You must be a Chinese blogger trying to cast misinformation far and wide. You calling people idiots and such must mean that you're getting frustrated that you're fallacy isn't bought by everyone. The Yuan is undervalued against the dollar, especially when China has $3.6 trillion in reserves and 80% of America's $700 billion trade deficit is with China. But, you are right about one thing - China's exchange rate may not be undervalued against other trading partners (Japan, Korea, Taiwan, euro, etc.) But, that only means the dollar is overvalued against all of them, also. The Chinese exchange rate on a trade basis therefore may be overvalued because it is piggy backing on the dollar's overvaluation with all its trading partners. China is a manipulator, but in this case, its neighbors have been better (and smaller to be ignored). America is the beggar of last resort because the establishment here likes an overvalued dollar to gut labor's power in America. When this is unsustainable, as in 1987 with the Plaza Accord, Japan felt the burn. China now resembles Japan in 1980, including property bubble and all...which as a Chinese blogger, you have to realize then that your government's policies is harming your own people, and no amounts of nationalism that blames others will change that.
Difficult though to achieve yet the frequency of trade and currency wars among nations does really warrant a serious global consensus and effort now at so restructuring and redefining the international monetary and economic system as to make it more inclusive and participatory than what's to be seen today when the US and its dollar do effectively shape the dynamics of international exchange system and the markets.
1
What I don't understand is how, despite the Fed quadrupling its balance sheet through many rounds of QE and printing billions of unbacked dollars, we're still at risk of deflation and the dollar is still strong. Can someone explain please?
3
@The Procrastinator
Actually it's very simple to understand.
a) We're not at risk of deflation although falling commodity and energy prices will happily help to keep inflation subdued.
b) The dollar is strong because the US has experienced an economic performance over the last six years (to which QE has contributed substantially) that is notably stronger than that of the rest of the developed world.
Actually it's very simple to understand.
a) We're not at risk of deflation although falling commodity and energy prices will happily help to keep inflation subdued.
b) The dollar is strong because the US has experienced an economic performance over the last six years (to which QE has contributed substantially) that is notably stronger than that of the rest of the developed world.
3
Injecting more money into the economy only affects price levels if people spend that money.
But the Fed has, effectively, injected the money into the banks, which use it to bid up prices of financial assets. It's not being used to buy goods or services, which is why there are still a lot of unemployed people who will take any job, no matter how low the pay - so there's no upward pressure on wages, rather the opposite.
Then, since demand in the US remains low and the purchasing power of the dollar remains steady, it's a safe currency for foreign investors to use as a store of value, so demand for the dollar remains strong.
But the Fed has, effectively, injected the money into the banks, which use it to bid up prices of financial assets. It's not being used to buy goods or services, which is why there are still a lot of unemployed people who will take any job, no matter how low the pay - so there's no upward pressure on wages, rather the opposite.
Then, since demand in the US remains low and the purchasing power of the dollar remains steady, it's a safe currency for foreign investors to use as a store of value, so demand for the dollar remains strong.
Great question. Could it possibly be that those dollars are going into the accounts of countries, corporations and wealthy individuals who are only interested in accumulating dollars, simply for the sake of accumulating dollars.
As I have said before... in the end, I have an iPhone and the Chinese have dollars. I think I got the better of the deal. The funny thing is that about the only useful thing the Chinese seem to be able to do with their dollars is to loan them back to us so we can get even more iPhones.
I, like you, await a cogent explanation.
As I have said before... in the end, I have an iPhone and the Chinese have dollars. I think I got the better of the deal. The funny thing is that about the only useful thing the Chinese seem to be able to do with their dollars is to loan them back to us so we can get even more iPhones.
I, like you, await a cogent explanation.
Well not being very knowledgeable on this topic it seems kind of confusing. However I do see the potential problems of this event. From what I understand China’s main currency the renminbi rapidly decreased in its value therefore causing concerns for the global economy. If what I mentioned above is correct than I could see how this could be a huge problem. When China’s economy, being in of the largest in the world, goes into turmoil it disrupts many other economies. Overall I see this devaluation process as not working in China’s favor or other countries favors.
1
Why are Americans concerned about China devaluing their currency? If the US dollar is worth more relative to the Yuan then Americans can buy more Chinese goods with fewer dollars. That helps American consumers. Who loses? The Chinese people do. If the Chinese government prints more Yuan to devalue it relative to the US dollar then price levels in China will adjust upwards due to the increased supply of Yuan. This means the Chinese people won't be able to purchase as many Chinese goods with their savings. That's too bad for them but not a problem for Americans.
3
Yes, a devalued Yuan helps American consumers and boosts Chinese exports, but at the same time, it hurts American exports to China. In other words, a devaluation - on purpose - of a country's currency is a form of exports subsidy.
Since China has elected to allow the value of their currency to slide, the United States should proportionately raise all duty rates for Chinese imports by a percentage equal to the amount of the currency devaluation.
This would not constitute a form of trade protectionism, but would help limit the fallout of lost jobs that will be the result of cheaper imports caused by China's willful currency manipulation.
For those of you not familiar with duty rates, the Harmonized Tarriff Schedule has a range of special duty rates for selected countries that trade with the USA, the implementation of this policy would be very straightforward if we had the political will to do so.
This would not constitute a form of trade protectionism, but would help limit the fallout of lost jobs that will be the result of cheaper imports caused by China's willful currency manipulation.
For those of you not familiar with duty rates, the Harmonized Tarriff Schedule has a range of special duty rates for selected countries that trade with the USA, the implementation of this policy would be very straightforward if we had the political will to do so.
4
Are you sure about that? As both China and the US are WTO members, they have to apply Most Favoured Nation (MFN) duties to each other's exports, they cannot unilaterally increase duties towards one particular Member of the WTO.
China`s trading partners should peg import duties on goods cleared and customs clearance time to changes in the exchange rate initiated by the Chinese govt. What initially appeared to be a move to mollify the investor class, which has seen a net average loss of 30% in the last 3 months has now been repeated twice again. China has always played by its own rules - it`s time for countermeasures.
4
The devaluation is a big deal but the hoopla surrounding it really is much ado about nothing. Why were the horns not blown when the yuan rose steadily against the dollar a few years back? With such large reserves, the Chinese can set the yuan to practically whatever level they wish it to be. They may have simply decided to devalue now to catch currency speculators off guard. Anyone who adopted the typically highly leveraged positions betting that the yuan will rise in value will have to take large losses if they cannot hold their positions. No tears from me for these people.
2
the Chinese leadership is in a panic - and rightly so: the 'deal' they've made with their people is strong economic growth in return for a monopoly on power - if they fail to deliver on the former, people might start to question the latter. the fact that the devaluation will make goods more expensive reflects the leadership's cavalier attitude towards its people. if the US government devalued the dollar people would be screaming bloody murder - and promptly vote the offenders out of office - an option the Chinese people don't have.
6
The Fed does what it thinks is in the best interest of the US (well, at least of the Wall Street). When others behave similarly and put their own interests ahead of others', we complain.
9
China's largest trading partner, the EU, devalued the Euro by almost 20% .
China finally adjusted by an exceedingly moderate 4% .
And yet , the New York Times writes of "currency wars". That is not a fair and balanced view .
Historically, the term was first used by Guido Mantega, finance minister of Brazil, in 2010, when the Federal Reserve, ignoring that the dollar is the international reserve currency, rode roughshod over the emergent economies.
I.e. if there should be indeed such a thing as currency wars it was the US that fired the first shot.
China finally adjusted by an exceedingly moderate 4% .
And yet , the New York Times writes of "currency wars". That is not a fair and balanced view .
Historically, the term was first used by Guido Mantega, finance minister of Brazil, in 2010, when the Federal Reserve, ignoring that the dollar is the international reserve currency, rode roughshod over the emergent economies.
I.e. if there should be indeed such a thing as currency wars it was the US that fired the first shot.
10
This story is lack of economic knowledge on this issue or it is bringing biased views particularly on China. Non-Financial media likes to blow up conflicts without comprehensive and in-depth analysis on economy.
6
Talk about a transparent move.....The Fed, set to increase the US interest rate in Sept now has to rethink its strategy. Everyone who benefits from a near 0 interest rate are popping the corks! Raising the rate would just compound the devaluation of China's currency............Really!
3
Indonesia is certainly taking the biggest hit from the yuan devaluation. The immediate impact of the yuan devaluation is the further strengthening of the dollar against other Asian currencies IDR, INR, MYR, VND, SGD, PHP, THB. It might be a blip brought on by the CNY but the impending Fed rate increase will crystalize this trend and these rates will be the new normal levels.
I hope the region will not see a repeat of the Asian currency crisis. Local companies have been issuing USD-denominated bonds in recent years. Consumer and commercial lending in these regions have also gone up however local banks are better capitalized now with ok NPL ratios (except for Vietnam!).
I hope the region will not see a repeat of the Asian currency crisis. Local companies have been issuing USD-denominated bonds in recent years. Consumer and commercial lending in these regions have also gone up however local banks are better capitalized now with ok NPL ratios (except for Vietnam!).
2
It seems like weekly we read snippets about the Communist Chinese government and the things they are willing to do. From land reclamation 100 miles from their shore to freezing their stock market. What happens next should concern all free citizens....nothing. Our corporate based news organizations simply stop following the story, in a out of sight out of mind methodology designed to allow the nonsense to continue, unabated, while our citizens continue to suffer in some way. 30 years ago this never occurred with the Soviets. Why are the new communist given a free pass on their misdeeds? Why is their not a more concentrated narrative concerning these transgressions? Why is their not more being written about the impact of allowing the Communists to run rampant, squashing freedoms, stealing intellectual capital, destroying the environment, manipulating their currency, all the while we are subjected to the propaganda, which is coming from within our country, by major American corporations? Anyone?
10
Maybe because they are holding $1.27 Trillion of US T-Bills?
Who doesn't love a good race to the economic bottom ?
The 0.1% fell for cheap labor...the rest of us fell for cheap stuff from China...and China fell for 'Communist' Crony Capitalism currency.
Let's all fall down together into this economic quicksand.
The 0.1% fell for cheap labor...the rest of us fell for cheap stuff from China...and China fell for 'Communist' Crony Capitalism currency.
Let's all fall down together into this economic quicksand.
31
You lost me with the opening line about China looking "like the principled noncombatant." Between hacking, piracy, counterfeiting, bribery, and general corruption up and down the economy and government, China's government and big businessmen are about as far from "principled" as you'll find. Unfortunately for the West, doing business with them has made many westerners adopt China's ways, not the other way around, and we're all worse off for it. Capitalism is great, but not the way it's been heading the past 30 years.
36
@ Coaster: "You lost me with the opening line about China looking like the principled noncombatant."
Why are you lost? In the past few years, China was the only major economy that sided with the US on currency stability. Euro dropped about 20-30% against US dollar, and Yen dropped about 30-40%. More or less the same for many other nations.
If there were a currency war, it were between the US & China and the rest of the world. Now China cannot hold any more because her own economy is slowing down. That's pretty simple, I think.
Why are you lost? In the past few years, China was the only major economy that sided with the US on currency stability. Euro dropped about 20-30% against US dollar, and Yen dropped about 30-40%. More or less the same for many other nations.
If there were a currency war, it were between the US & China and the rest of the world. Now China cannot hold any more because her own economy is slowing down. That's pretty simple, I think.
8
Good comment and correct analysis Mike. But as you can see a significant percentage of commentators are incapable of rational analysis -- or even basic math --when it comes to China.
2
In addition, Elephant tusks* mostly go to China so beyond "normal" corruption they have unregulated consumption and sad business ethics. ( *BBC broadcast this week)
The Chinese, Russians, Iranians and many others have seen President Obama's weakness, incompetence, inexperience and lack of leadership.
The Chinese are simply taking advantage of the situation before Obama leaves office. They have no fear of any ramifications.
The Chinese are simply taking advantage of the situation before Obama leaves office. They have no fear of any ramifications.
7
There is a drought in California-- absolutely must be Obama's fault.
7
Yes, Don....it's all Barack Obama's fault...of course !
How insightful....how trenchant...how one-dimensional !
Keep up the Fox News-inspired cutting edge analysis !
How insightful....how trenchant...how one-dimensional !
Keep up the Fox News-inspired cutting edge analysis !
25
Uh huh, Don, if we had a republican president we would already have invaded and conquered China...and Iran...and Russia...that would show them all just who's boss around here.
8
China is playing “dirty pool” in global FX markets !!!
Western Economies should launch actions against China through the World Trade Organization because of China’s manipulation of its currency and other related policies that violate the WTO’s rules of world trade that China is a member of.
China’s devaluation of the renminbi by about 4.4 percent this week, the biggest drop in decades, has roiled world foreign currency, bond and equity markets.
This comes after many diplomatic efforts by the Treasury attempting to convince China to REVALUE its managed low currency value over the last decade. China’s managed low currency value coupled with the relocation of transplants from Western countries to China and the consequential rise in Chinese balance of payments surpluses resulted in China’s accumulation in huge foreign currency reserves since the 1980s.
China’s foreign currency reserves, the largest in the world, are currently estimated to amount to $3.8 TRILLION US dollars. Only three countries have a GDP larger than that amount: the US, China and Japan.
China also manages two foreign exchange rates: one for onshore trading and one for offshore trading.
In economics, devaluing a currency in a low growth global environment too often results in currency wars which are a variation of the “beggar thy neighbour” strategy. Currency wars are a race to the bottom. In currency wars there are no winners, and too often they end up only with losers !!!
This can get very ugly.
Western Economies should launch actions against China through the World Trade Organization because of China’s manipulation of its currency and other related policies that violate the WTO’s rules of world trade that China is a member of.
China’s devaluation of the renminbi by about 4.4 percent this week, the biggest drop in decades, has roiled world foreign currency, bond and equity markets.
This comes after many diplomatic efforts by the Treasury attempting to convince China to REVALUE its managed low currency value over the last decade. China’s managed low currency value coupled with the relocation of transplants from Western countries to China and the consequential rise in Chinese balance of payments surpluses resulted in China’s accumulation in huge foreign currency reserves since the 1980s.
China’s foreign currency reserves, the largest in the world, are currently estimated to amount to $3.8 TRILLION US dollars. Only three countries have a GDP larger than that amount: the US, China and Japan.
China also manages two foreign exchange rates: one for onshore trading and one for offshore trading.
In economics, devaluing a currency in a low growth global environment too often results in currency wars which are a variation of the “beggar thy neighbour” strategy. Currency wars are a race to the bottom. In currency wars there are no winners, and too often they end up only with losers !!!
This can get very ugly.
7
The US is doing it too but with different tools, the Fed benchmark rate. Japanese is doing it too with the same set of tools as the US.
3
This is a very serious set of developments. Politicians must understand the gravity of the situation and not politicize these events.
The economies of the world are very weak. Consumption is declining. Poverty is increasing. Oil prices have cratered. Many nations are at the edge of a deflationary spiral, particularly in Europe.
Since 2008, the major economic powers have embarked upon and kamikaze like quest of budget cutting and austerity. Spending is the problem, we have been told. Inflation will roar out of control and debase the dollar.
Just the opposite has happened. Deflation is at the door. The dollar has become so strong, that our exports are threatened. Nations suffering economic malaise are retaliating by manipulating currency values. In doing so, they are attempting to export their problems to the US.
The article uses the phrase "negative sum game." Aptly stated. What is needed is global stimulation. What is needed is mild inflation. What is needed is spending.
Washington is bereft of sane leadership. The Congress is hogtied with false ideology. Germany is on a debt crushing rampage. Japan is deflating.
Currency wars occur when the "everyman for himself" idea goes into full mode. All economies are interlinked now and benefiting one at the expense of another just pushes the real problem away, for a little while.
Enough with the ideology. It's time for reality to take hold. Please, no currency wars.
The economies of the world are very weak. Consumption is declining. Poverty is increasing. Oil prices have cratered. Many nations are at the edge of a deflationary spiral, particularly in Europe.
Since 2008, the major economic powers have embarked upon and kamikaze like quest of budget cutting and austerity. Spending is the problem, we have been told. Inflation will roar out of control and debase the dollar.
Just the opposite has happened. Deflation is at the door. The dollar has become so strong, that our exports are threatened. Nations suffering economic malaise are retaliating by manipulating currency values. In doing so, they are attempting to export their problems to the US.
The article uses the phrase "negative sum game." Aptly stated. What is needed is global stimulation. What is needed is mild inflation. What is needed is spending.
Washington is bereft of sane leadership. The Congress is hogtied with false ideology. Germany is on a debt crushing rampage. Japan is deflating.
Currency wars occur when the "everyman for himself" idea goes into full mode. All economies are interlinked now and benefiting one at the expense of another just pushes the real problem away, for a little while.
Enough with the ideology. It's time for reality to take hold. Please, no currency wars.
24
Analysts I have heard downplay the risks of a currency war or this affecting the Fed's decision on when to raise interest rates for banks. They also do not see this as hugely affecting the price of Chinese goods which are already cheaper than most others. Some say this is intended to stimulate domestic consumption. At any rate, this article and other Times stories on this devaluation seem to big on hyperventilation, rather than thoughtful analysis.
1
I am surprised to read comments by Lawrence H. Summers in this article. For me this is one of the most incompetent professionals in the field of Finance who led America and the world to the crisis in 2008.
45
Lawrence Summers, hmmmm, isn't he the guy that fumbled on the start of the U.S. economy when President Obama was elected? Yes he was, Summers sat back and gave the child President the wrong advice and started the mass downward fall of the American economy, arrogant was the word used for Mr. Summers at that point. Nobody knows what to do.
According to today's Financial Times China has moved to prop up their currency to avoid further devaluation. So what are we to believe?
1
The real war is between the ultra wealthy throughout the world, (and both China and the U.S. have their share), versus the laborers of the world, who get pitted against one another to produce goods that now get shipped anywhere via container ships. China could have grown its domestic economy by preventing it's ultra wealthy from hording their profits -- because it is an inevitable natural consequence of the human condition -- through innate differences in intelligence, greed and aggression -- that a small group will always end up with nearly all the wealth. This is why governments, an unnatural invention, and otherwise called civilization, are formed. Now the ultra wealthy in China, having failed to create a sustainable domestic economy using wealth redistribution (progressive income tax), simply want to pit China laborers against US laborers. And the U.S. ultra wealthy, e.g., Walmart and Apple, are OK with that.
44
Sorry, but this article misperceives currency wars near totally. They are not, when countries, "let the value of their currencies slide on international markets." They are when governments actively intervene to devalue. In that way, what China has done is the opposite of a currency war, because it was intervening to prop the currency up and now it is doing so less, hence the drop.
Besides, this is a whopping 3% devaluation. That is miniscule, folks. And there is ample news suggesting the PBoC is intervening at the end of the day to mitigate the rate of decline.
Ultimately, I am thoroughly unconvinced we've had currency wars in the last six years, but if we have, that's pretty bullish because the economy's growing throughout.
Besides, this is a whopping 3% devaluation. That is miniscule, folks. And there is ample news suggesting the PBoC is intervening at the end of the day to mitigate the rate of decline.
Ultimately, I am thoroughly unconvinced we've had currency wars in the last six years, but if we have, that's pretty bullish because the economy's growing throughout.
4
A simple solution is the have China join the EU. Then it will be under the thumb of Germany's Merkel who will have China begging for bailouts because it can't devalue its currency.
7
"Growth for the sake of growth is the ideology of a cancer cell." Edward Abbey
In Europe.
In America.
In Asia.
In Europe.
In America.
In Asia.
39
Pithy quote, but all the largest economies and corporate debtors aren't seeking growth for growth's sake. They need it desperately to pay, or at least roll over, their debts. How we got here is another issue, but stopping growth now isn't an option.
5
“The risks of a deflationary, secular stagnation in the U.S. would be increased by a large devaluation of the renminbi,” said Lawrence H. Summers, the former Treasury secretary."
Always good to hear commentary from this egomaniac who was directly responsible for the Great Recession of 2008. Anybody listening besides the gang at Goldman Sachs?
Always good to hear commentary from this egomaniac who was directly responsible for the Great Recession of 2008. Anybody listening besides the gang at Goldman Sachs?
49
A clueless wage slave asks the following question: Is this a gambit to crowbar the Renminbi into the Dollar/Euro/Yen reserve currency basket? Allow us into your "Reserve Currency Club" or we might put our thumb on the scale again.
4
I had the same thought when I read this article. There was a recent article in China Daily - IMF to Study Yuan Inclusion. And NYT had an article last week (?) about CHINESE textile factories opening up factories in the US south, because US labor costs are becoming "more competitive" (ie cheaper). The article specifically mentioned that pesky strong dollar that's putting a glitch in their plans.
If yuan becomes a global reserve currency, well hey that solves their problems! USD is NOT the only global reserve currency, it is just the most widely used.
Connect the dots.
If yuan becomes a global reserve currency, well hey that solves their problems! USD is NOT the only global reserve currency, it is just the most widely used.
Connect the dots.
China has largest holdings of US Treasuries...$1270.3 billion as of May 2015. Remember they bought during 2008 to prop up US economy.
1
The Us has the largest holdings of US Treasuries :
The US has the largest holdings of US Treasuries:
-Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.783 trillion
- Office of Personnel Management Retirement - $924 billion
-Military Retirement Fund - $483 billion
-Medicare (Federal Hospital Insurance Trust Fund, Federal Supplementary
Medical Insurance Trust Fund) - $270 billion
The Japan has $1.21 Trillion, China $1.27 Trillion.
Overall US government agencies hold over 65% of US Treasuries.
The US has the largest holdings of US Treasuries:
-Social Security (Social Security Trust Fund and Federal Disability Insurance Trust Fund) - $2.783 trillion
- Office of Personnel Management Retirement - $924 billion
-Military Retirement Fund - $483 billion
-Medicare (Federal Hospital Insurance Trust Fund, Federal Supplementary
Medical Insurance Trust Fund) - $270 billion
The Japan has $1.21 Trillion, China $1.27 Trillion.
Overall US government agencies hold over 65% of US Treasuries.
16
I'm confused. Please elaborate your point.
US govt. = taxpayers
http://www.economist.com/economics-a-to-z/c