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Asian countries fight to keep their currencies undervalued vs the dollar

Page history last edited by Brian D Butler 13 years, 10 months ago

"An undervalued exchange rate acts as a subsidy for that country’s exports – and it also protects its domestic producers from competition from imports. Ask Dr. Bernanke. Dr. Subramanian of the Peterson Institute writes: “An undervalued exchange rate is in effect a combination of export subsidies and import tariffs.”

 

 

Result:

 

China's exports:  goods exports went from $250 billion in 2000 to $1430 billion in 2008

 

 

Asian countries fight to keep their currencies undervalued vs the dollar

 

This trend of countries in Asia fighting to keep their currencies undervalued has had major impact on the world economy.  China, is of course the major country that comes to mind, but others are doing the same thing.   In order to keep exports competitive, the Asian governments do their best to keep the currency undervalued.  But, with massive amounts of foreign capital coming into the country, these governments are forced to spend that money overseas.  See our discussion on the balance of payments and the Mundell trilemma to see why this is.  But the result of the situation is that countries like China are forced to invest most of that money overseas, and most of which pours into US T-bills.  As they buy up US debt, that helps keep the US borrowing costs to a minimum, so the Fed is able to keep interest rates extremely low.  This is partly to blame for the asset bubble in housing, and the subsequent credit crisis of 2007.  The bigger fear, however, is what would happen to the US economy if China were to suddenly stop buying up all that US debt.  If China were to stop supporting the weak currency by purchasing US debt, then the US would be forced to a balance of payments crisis, unless it would significantly cut back on imports, or expand exports.   For this reason, I suspect that many in Washington secretly are welcoming a weaker US dollar which should help to slowly correct the balance of payments issue (before confronting the Chinese to allow their currency to appreciate). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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