Friday, January 21, 2011

China Goes to Nixon - More on China Currency Denial

China Goes to Nixon

A few weeks back, i started to write on the need for China to let it's currency float with the market and rise in value. The Chinese currency is estimated to be 50% under value which greatly effects trade with other nations making Chinese exports artificially cheap and leads to inflation in China. All this is a mess the chinese are dealing with by tightening credit instead of solving the currency problem. This obviously is related to special interests in China probably US multi-nationals included.
History teaches us that this is all a very bad thing:
Could all of this really turn into a full-fledged crisis? If I didn’t know my economic history, I’d find the idea implausible. After all, the solution to China’s monetary muddle is both simple and obvious: just let the currency rise, already.
But I do know my economic history, which means that I know how often governments refuse, sometimes for many years, to do the obviously right thing — and especially when currency values are concerned. Usually they try to keep their currencies artificially strong rather than artificially weak; but it can be a big mess either way.

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