David:
I am sorry to get this late to your message.
Setting an exchange rate by a pure CB fiat (as in China) or by the market (as in most developed countries) or by a mixture of fiat/market (as in India) or by a currency board (Argentina/HK) exploit the same underlying principle: the true economic value of one currency relative to another. The market can and does screw up the prices (as in Europe, Latin America and now in Asia) as badly as a government fiat.
I feel the currency board, which links the exchange rate to price of a basket of goods and services in two countries, is an ideal mechanism as long as the basket of goods and services is representative -- but there are a lot of controversies about a basket of goods and services as you may have heard concerning the US CPI being overstated.
But, no matter how a country sets her exchange rates, the final rate will be dictated by pure supply and demand which are unfortunately not purely related to economics; there are socio-political factors. For example, the minorities in Indonesia are selling all their rupiah because of a fear of social unrest, while the rich and famous have huddled their wealth in US$. I feel the current currency run in SE Asia is related to fear and greed, not to the underlying economic fundamentals.
I see a great risk to the US$ in terms of a loss in value because of over-optimism about the safety attributed to this currency, completely out of line with the fundamentals. US is the largest debtor nation and has the largest current account deficits with ballooning trade deficit -- these fundamentals are worse than that in SE Asia. The budget deficit will rise once the corporate profits dwindle. Yet, US$ had been gaining steadily becase of the safe-haven status it enjoys. [In fact a few weeks ago I had predicted that the rising US$ should/would/must fall to restore an equilibrium. Not many then believed that this would happen. It has happened sooner than I had thought, although I am not sure if a trend has formed yet.] Earlier US$ was losing in value when Asia was considered to be developing fast. Assuming that the loss of confidence in SE Asia has reached the nadir, capital is likely to flow back to Asia and other countries from where it flew out in line with economic fundamentals.
My greatest fear is political upheaval in the US over the trade deficit and Asian dumping once the Congress resumes its session in the last week of January.
Sankar
<<Argentina and Hong Kong both have currency boards whose goal is to peg the value of the local currency to the US$. I have heard voices lately advocating this approach for other countries.
My question is, if this practice became wide spread, are there any risks Americans should be aware of for our economy and/or currency? From a strictly selfish American point of view is this a good, bad or indifferent thing.>> |
