China’s Currency Peg: What Does It Mean?

There are several nation states now pegging their currency to the reserve currency that is the U.S. dollar, several nations have sought to drop indigenous currencies and simply adopt the dollar like Ecuador.  Inefficiencies remain but longterm you arrive at a equilibrium.  Can the same be said for China?

While the U.S. begins to talk of free trade agreements, we must remember that at the heart of any free trade agreement is a currency transaction.  A true free trade agreement would seek to normalize how a nation set valuation rates.  China determines its peg by fiat, it has in the past permitted the U.S. Federal Reserve by proxy determine the value of the yuan.  In truth, the Federal Reserve sets the interest rate NOT the market, ditto for the yuan.  In sum, we don’t really have efficient markets operating.

With manufacturing moving abroad at the end of the Cold War, government expenditures have been financed by borrowing abroad and taxing consumption NOT PRODUCTION.

The 2008 meltdown was an opportunity to redress structural constraints on U.S. wealth production.  Instead, what we got were cash transfers financing entitlements.

2016 can’t arrive quick enough!

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About William Holland

Systematic Theologian/International Relations
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