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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: The Wharf who wrote (21778)	10/28/2004 6:24:29 PM
From: sea_urchin	Respond to of 81092

Darleen > I am certain that China will end the peg she has too. Whenever I hear a Chinese commentator discuss the peg on TV I hear how China benefits from it and has no intention, certainly in the short-term, to change it. It is the US commentators, like Secretary of Finance Snow, who are insistent that China removes the peg. > a run for gold that makes the tech bubble look like a wee tiny pimple on the face of this earth I think you know my opinion about that.

To: The Wharf who wrote (21778)	10/28/2004 7:22:42 PM
From: sea_urchin	Read Replies (1) \| Respond to of 81092

Darleen > I am certain that China will end the peg she has too. (2) .. atimes.com >>.. the dollar's fate will probably flow one way or another from China. Now that you understand how deeply the United States is entrenched in deficit, you can understand why the US is pressuring China to "revalue" its currency. The US does not have the political will to do what it takes on the spending side of the equation to improve its financial position. "For the first time in the post-World War II era, the United States faces a future in which every major category of federal spending is projected to grow at least as fast as, or faster than, the economy for many years to come. That means not just pension and health-care benefits for retiring 'baby boomers', or increasing interest payments as deficits and interest rates rise, but also appropriated or 'discretionary' spending for national defense, for foreign aid, and for domestic homeland-security programs," writes Peterson. In a country where voters know they can vote themselves the goodies and have accepted the term "war on terror", it's highly unlikely the US can get its fiscal side under control for many years to come. Thus the howls for China to do something with its currency grow louder. There is one major problem with the Chinese "revaluation" scenario: There are no guarantees that once China allows the dollar-yuan rate to move within a "more flexible band" that its currency will appreciate against the dollar or that it will significantly benefit US manufacturers. Here are four reasons: First of all, the chances of some type of big-bang revaluation in the dollar-yuan rate are slim to none. Chinese policymakers do not believe the yuan is overvalued. And I believe the most they will do is slightly widen the trading band around the 8.28-yuan-per-dollar rate that now exists. Second, if China utilizes a trade-weighted approach to calculating its trading band, which is likely, because the US is the largest trading partner, and because said band will move on a trade-weighted value, not China's fundamentals, the index will not fluctuate a great deal against the dollar. Third, it's not necessarily a differential in exchange rates that will solve the competitive differences between China's exports and the rest of the world. With China's abundant supply of very cheap labor, state-of-the-art manufacturing capabilities and world-class infrastructure, it will take much more than a shift in exchange rates before the goods flow comes into balance. And finally, if financial liberalization includes reducing capital controls, the private sector has significant scope to raise its foreign-currency holdings (of US dollars). US policymakers are depending heavily on a Chinese revaluation and a corresponding improvement in the balance of trade with China. But that dog might not hunt. The dollar's Achilles' heel "Causa remota of the crisis is speculation and extended credit; causa proxima is some incident which snaps the confidence of the system, makes people think of the dangers of failure, and leads them to move from commodities, stocks, real estate, bills of exchange - whatever it may be - back into cash." - Charles Kindleberger, Manias, Panics, and Crashes Causa remota: An explosion of credit from bank lending and fixed investment pouring into China. Causa proxima: A hard landing in China. "When the Asian financial crisis hit in 1997-98, the US Federal Reserve tolerated a liquidity boom that spawned the Internet bubble. When the Internet bubble burst, the Fed tolerated another wave of liquidity, which has led to the global property bubble," says Andy Xie of Morgan Stanley. I would say, "Bingo!" The Economist magazine recently summed it up this way: "China's boom is itself partly the product of the Fed's super-lax monetary policy. With its currency pegged to the dollar, China has been forced to import America's easy monetary conditions. Its [China's] higher interest rates have attracted large inflows of capital that have inflated domestic liquidity, encouraging excessive investment and bank lending in some sectors which could lead to a bust." With the Fed now in a tightening mode, the music in China could soon end. And the scramble "back into cash" from "commodities, stocks, and real estate", as Kindleberger describes, could soon begin. When it does, it's very bad news for the buck. <<