I was saying that pegging the RMB to the dollar doesn't resolve the weakness of the dollar. The dollar remains as weak as ever but now China owns a whole wad of them. Owning those dollars may, IN THE FIRST INSTANCE, prevent the RMB from being revalued upwards and thus deflating the Chinese economy. But once that ownership of dollars changes from a stopgap into an self-enforcing commitment, the inevitablity of either default or compulsory purchase of more worthless shit must be discounted. This will have the effect of actually DE-valuing the RMB because a large chunk of the "assets" owned by China, namely dollar assets, are themselves devalued. It's like the old saying, "owe the bank a billion and you've got a problem; owe it a trillion and the bank's got a problem."
That is to say that the peg itself has it's own dynamic. What starts out as an interventionary peg mutates first into an addictive peg and ultimately into a fait accompli at an all-around lower value for BOTH the dollar and the RMB vis-a-vis commodities. What began as an effort at a higher level ends effortlessly at a lower level. Instead of propping the dollar up, the peg succeeds in dragging the RMB down and the "simple" balance of payments problem proceeds to new stage of complexity as an inflationary spiral. Nor does the fact that all currencies are now faced with an inflationary crisis resolve the exchange rate problem because each country is faced with a _unique_ inflationary crisis. The fact that you now have two problems instead of one makes co-ordinating a response four times as difficult.
I'm not saying we're there yet. I'm just wondering if we're seeing the beginnings of an "unwinding" process that might turn out to be far from benign.
On 5/11/06, C Ruiz <[EMAIL PROTECTED]> wrote:
In a message dated 5/11/2006 8:54:20 P.M. Eastern Daylight Time,
[EMAIL PROTECTED] writes:
Yeah, I'm thinking of the peg but not imagining that unpegging would "fix"
it. Especially if part of the problem is that by pegging the RMB to the dollar
it doesn't so much rescue the dollar as it does weaken the RMB itself. The
US runs the printing presses and China underwrites the paper. It's still bad
money
To the contrary, the RMB won't be "weakened" but revalued upwards. The major
problem with this is that it would unleash deflationary pressures in the
Chinese economy because: 1-the revaluation or appreciation reduces the domestic
currency prices of imported goods whose world market prices are given in
dollars, 2- there is a negative wealth effect as external dollar assets lose
internal currency value. 3 As the RMB appreciates it might discourage foreign
investment as Chinese assets look more expensive now, In sum the scare is of a
deflationary slump.
Of course, it is not as simple as saying" China "underwrites the US dollar".
Nope, China benefits enormously from expanded industrial export goods
production and the employment and income it generates. Of course, it has a limit
and China has to look for more inward development soon.
C Senior
--
Sandwichman
