Re: We didn't start the fire? was Re: Alignment and 4E

On 6 Jun 2008 22:10:08 +1200, tussock <scrub@xxxxxxxxxxxx> wrote:

Kyle Wilson wrote:
tussock wrote:
Kyle Wilson wrote:
Del Rio wrote:

Assuming that we borrowed in dollar amounts and not in yuan...? Do
you know that for sure or are you speculating?

I expect that most of the government debt was sold as T bills and thus
is denominated in dollars. Private debts may differ.

China holds $US, but the Yuan is fixed to the $US and they aren't
keen to float it while a large portion of their exports go to the US,
regardless of what it would do to their debt holdings.

Yes, I know that the Chinese currency is currently pegged to the falling
dollar. One of the real questions will be whether they can keep it
pegged there without damaging their own situation in the world economy
until all of the current US debt that they hold matures.

They're happy enough to be a low-wage economy with a large positive
trade balance for the next generation, or two, and the post-Tiananmen
education system is turning out a hugely pro-grovernment population, so
there's no great odds of it suddenly changing.

It increases the cost of large internal infrastructure projects
(resulting in cheap-ass schools that fall down in earthquakes, ODHSNM),
but they're more than covering that with the positive trade balance; and
that trade balance is kept normalised to the US and grows overall to
Europe with the artifically low Yuan.

Ok, maybe I misunderstand the way that pegging a currency works then.
I would have expected that when China went to anyone other than the US
to purchase goods or services, they'd need to convert between Yuan
(pegged to dollars) to the local currency at the 'Dollar' rate. As
the dollar sags, this should essentially cost them value as a floating
currency of an exporting nation should be rising rather than falling
with the Dollar. The peg should leave them losing trade value in the
Yuan as the Dollar falls.

I would also expect (again, maybe unrealistically) that any currency
that is used heavily for international commerce would need to be
pretty freely convertible. This should leave them in a position where
anyone who get ahold of Yuan can get the Chinese government to convert
those Yuan to Dollars on demand. I would think that this would
effectively have a cost to the issues of the currency.

They also are presumably expending significant resources maintaining
the peg in this world of highly convert able currencies.

It's _not_ a floating currency. Fixed currencies are all about
opportunity costs, the big money can't play them like they can with a
managed float.

The government here (NZ, hi) has occaisionally discussed fixing ours
again, but it's very hard on a small country with a negative trade
balance. The float kills us on seasonal export variations, though the
government has recently taken to putting a few billion here and there
into damping that effect.
Swings and roundabouts, or so says the finance minister.
--

Kyle Wilson
email: kylewilson@xxxxxxxxxxxxx
.

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