12.12.07
Great Article on Exchange Rates, China and Inflation
I recommend you read Steven Pearlstein’s article in today’s Washington Post. It reiterates a point in one of my earlier blogs that we are exporting the inflationary pressures of the excess demand from the large US deficit. That is sustainable only as long as China is willing to keep an fixed exchange rate and maintain sterilization operations to limit domestic Chinese inflationary pressures. As I noted last week, many analysts are expecting contractionary policies after the Olympics. Pearlstein put is very well in the on-line discussion this morning in the Post:
“Q: how long can nations such as China tie their currencies to the dollar? It seems to me that at some point, that strategy will backfire.
Steven Pearlstein: Well, there is a limit on how long they can do it, as we now see. Without getting into the details, let’s just say that all the market turmoil you are seeing is an indirect effect of their currency manipulation all these years with the currency of a large trading partner. It causes all sorts of other distortions in market economies and financial markets, and those distortions eventually cause problems that come home to roost. These may look like our problems at the moment, not China’s. But if you look more closely, you see that China’s economy is overheating, inflation is very high and rising, there are bubbles in its real estate market and its stock market, and things are looking a bit dicey for them as well. Because they are still a controlled economy, they think they can handle this and let the steam out gradually — they raised bank capital reserve requirements to 14.5 percent the other day, which is very very high in an attempt to slow growth in credit and money. But markets have a funny way of correcting indirectly what they are not allowed to correct directly. All of which is a longwinded way of saying that the peg can’t last much longer.”
What do you think? What would be the impacts on your business strategy?
Sphere: Related Content
