The Chinese dollar reserves a “secret weapon”?
There were dramatic words, but the situation they were appropriate.
The world is in a currency war, “said the Brazilian Finance Minister – and used the same argument to fight back.
In the currency war, there are few alliances, each against all. Shot is not with tanks and guns, but with taxes, tariffs and exchange rates. The Brazilian Minister of Finance rises in future a higher tax on stock market operations to keep out foreign savers to his country. The Japanese central bank lowered its rate of “almost nothing” (0.1 percent) to “nothing” (0 to 0.1 percent) for not using the exchange rate of its currency is satisfied. India and Thailand have announced plans to stem the appreciation of its currency.Even the Chancellor expressed in exceptional circumstances to exchange rate issues and makes its spokesman criticize the weak dollar. These are the first skirmishes, and if it starts badly, could plunge the world economy into a new deep crisis.
Therefore, the experts are currently on offer with warning.
“Obviously, the idea spreads, currency as a political weapon,” said the head of the International Monetary Fund, Dominique Strauss-Kahn last week.
Strauss-Kahn had the weekend, finance ministers and central bankers of the world comes to Washington – and all the world hoped that the dispute will be settled there. But it was not (see IMF finds no solution to dispute currency)
The Chinese currency reserves are the largest in the world.
It all began with the rise of China by the communist developing country’s second largest economy in the world. When a country becomes richer and supplies more and more goods to other countries, then its currency is normally sought, and more. The products in this country are more expensive abroad and are no longer quite so extreme demand, the growth can be for something that can ensure the country where people buy more things from abroad.
The problem with this: Sometimes the currency too fast too expensive.
It was Japan before. In the eighties were all Western rivals fear the automakers and electronics companies from the Far East.Then in 1990 the country plunged into a crisis from which it has never really recovered.
Before that, the Chinese government afraid. The enormous economic growth helps to keep the Chinese people happy and stabilizing their own rule. Therefore, it controls the rate of its currency, the yuan, almost manic: The course may not develop as free as that of other currencies, but is tightly coupled since 2008 to other currencies – especially the dollar. And at a level that keeps China out, no one is appropriate. If we compare, for example, the prices of commodities in the two countries should the yuan be at least twice as strong, so that the ratio balances. From this course will benefit China because their goods are cheap on the world market.
Daily flow $ 700,000,000 to China, which puts the Chinese government on foreign reserves, rather than revalue the Yuan
In this way, the Chinese foreign reserves are already the largest in the world. 75 percent of which are invested in dollars, according to experts. While those dollars are missing Chinese citizens they can not spend now – the hedge fund manager George Soros says of this policy:
“This is like a tax, but it is much simpler.”
But this is growing the economy, and there are always new jobs.
In China’s factories are often run machine from Germany
Germany also benefited from China’s strength, because China’s factories often equips itself with machines from Germany. For the other countries in the exchange rate is however a problem. They find it hard to compete with the low prices of Chinese – that is especially true for American companies. American consumers can also benefit from the low prices they can buy Chinese goods very cheap, what good are especially poor Americans gladly, as studies have shown.
But unemployment in America is now high.
Now it is the United States and many countries so that they import more than to sell themselves. But compared to other countries has reduced this imbalance after the financial crisis.Not only to China.
But it’s not just the United States that have a problem with China’s exchange rate. Many European countries are not against the Chinese prices, many other emerging markets certainly are not.
“China’s currency policy is undermining the competitiveness of Africa and other poor regions,”
presented by the distinguished Harvard economist Dani Rodrik development set in September. And added:
“The developing world has little on it to follow the Chinese model.”
It is as if the others just waiting. Thailand and India have now announced to buy dollars from the market in order to keep their own currency artificially weak. Brazil has already done it last week – with loud complaints about the policies of developed countries, which printed in the financial crisis money to stimulate the economy, and as their currencies weaken.
The controversy is intense.
China is talking about upgrading – but it’s nothing of importance!
But for the finance ministers of the world, it is difficult to find a new solution. Although China announced on for months to let its own currency to upgrade soon – but still nothing is done. The latest news from China talk about a possible revaluation in the context of 5% for the year 2011. And all alternatives to a Chinese revaluation have their own hook.
The U.S. Congress has passed a new law that specific duties levied on all imports from China with the idea that if China
its products artificially cheaper, making it America again artificially more expensive.
However, it is highly questionable whether this corresponds to the rules of the World Trade Organization. America should impose such duties actually provoked the opposition. Then in the currency would skirmishes a tangible trade war, which the international exchange of goods would increasingly expensive.That would hurt both consumers and export companies in all countries.
Other experts discuss, in principle, re-establish fixed exchange rates. This happened earlier, for example after the Second World War, when the world is in the American town of Bretton Woods to a system of fixed exchange rates with the dollar as reserve currency agreed. But whether the states could be tied to real exchange rates is questionable. In addition, fixed exchange rates are often not stable. Although they are not subject to extreme swings in the free exchange rate can have. But in many systems, fixed rates soon appeared:
If you are not flexible enough to countries with different growth rates at the same meet.
Why is that you see on the example of China and the United States, whose exchange rate is currently fixed, yes.
And this situation can not remain as it is. It drives America even deeper into crisis. Experts Although it states that the high demand for Chinese goods and the rapid growth of jobs and eventually drives the Chinese wages and the local inflation, so adjust the prices, even without exchange rate movements together. But the way is long and painful – especially because the return will fall in wages and prices in America, as the economists Willem Thorbecke from the Asian Development Bank says. Of that pressure is a real wave of price and wage reductions,
‘Deflation’, and would be disastrous for America.
In such a situation, many jobs lost and the economic policies can hardly do anything about it.
China’s reserves are supposedly out of U.S. government bonds
That would be more dangerous than America is already in debt.
Every dollar that keep the Chinese currency as a reserve, less a credit that America must pay back one day. Most assets are supposedly out of U.S. government bonds.
Thus, China can push America into crisis when it is sold to America and finds no new creditor for this huge amount of papers.
But even if China remains stable, the risk is enormous. Former IMF chief economist Kenneth Rogoff has a great historical analysis of financial crises in 700 years just shows that debt is the main cause of financial crises. Eventually, the debtor will specifically at the point where can not repay them – and if America would go bust, would plunge the world economy into a new, deep crisis.
In fact, seems to remain only a hope that China does revalue its currency soon. Country code as the teaching in China Professor Horst Loechel hope the management do that now by itself, it would be the simplest solution.
The International Monetary peace now depends on the Chinese government.
The U.S. central bank is divided over further monetary policy stance. The International Bankers Association warns, however, before a crash of the U.S. dollar if the Fed loosens its monetary policy.
(See Washington Post publication with additions and updates)
I refer here to my blog:
“A couple of recommendations and advice for people of faith”