The New York Times > Business > Drubbing of the Dollar: Dangerous or Therapeutic?
Not sure if the Chinese will ever switch from the dollar peg in the near future. The biggest problem is competition from Japan, Korea, etc. If they remove their peg, it woul dmake them less competative against other export driven nations that live in her neighborhood.
The other big reason is the banking problems in China. Since they have notoriously weak banking system, floating their currency after being pegged so long could be terrible for the global economy. Let's assume that their banking system is very weak and the banks a basically being proped up by the government.
Well, let's say that you have these bad debts out there that will never be repaid. That means that the banks have to recover somehow or go out of business. Those are not good options, savers don't like being defrauded and the borrowers don't like paying back debt they can't pay. The third way is to let tie the currency to a peg (like the dollar) and then to have lots of inflation. That way the debt is minimized as inflation runs up. This hurts those on fixed incomes, but they should be taken care of by their children anyways. So maybe that's why the Chinese choose to keep theior currency pegged to the dollar and let inflation rise.
Switching to a basket of currencies might be a good idea. Mainly because the US looks like a worse and worse investment every day. This way the Chinese could hedge against the decline of the dollar and keep a good peg. This is probably what will happen, but I would bet not for awhile yet.
Not sure if the Chinese will ever switch from the dollar peg in the near future. The biggest problem is competition from Japan, Korea, etc. If they remove their peg, it woul dmake them less competative against other export driven nations that live in her neighborhood.
The other big reason is the banking problems in China. Since they have notoriously weak banking system, floating their currency after being pegged so long could be terrible for the global economy. Let's assume that their banking system is very weak and the banks a basically being proped up by the government.
Well, let's say that you have these bad debts out there that will never be repaid. That means that the banks have to recover somehow or go out of business. Those are not good options, savers don't like being defrauded and the borrowers don't like paying back debt they can't pay. The third way is to let tie the currency to a peg (like the dollar) and then to have lots of inflation. That way the debt is minimized as inflation runs up. This hurts those on fixed incomes, but they should be taken care of by their children anyways. So maybe that's why the Chinese choose to keep theior currency pegged to the dollar and let inflation rise.
Switching to a basket of currencies might be a good idea. Mainly because the US looks like a worse and worse investment every day. This way the Chinese could hedge against the decline of the dollar and keep a good peg. This is probably what will happen, but I would bet not for awhile yet.
posted by Spud at 4:14 PM
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