[lit-ideas] Re: lit-ideas Digest V1 #129
- From: Teemu Pyyluoma <teme17@xxxxxxxxx>
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Tue, 16 Nov 2004 00:54:02 -0800 (PST)
As far as I understand, the basic problem is that
China has pegged its currency to USD. Now given that
half of the trade deficit is with China, lower dollar
will do nothing to fix that. It's Asia in general that
has the biggest problem with this, for Europeans it's
a mixed blessing as The Economist writes:
"America?s net overseas liabilities amounted to 23% of
GDP at the end of last year, close to the record debts
it amassed in 1894[...]the bulk of these debts are
denominated in dollars. Thus America may be sorely
tempted to dishonour its dollar debts, not by
defaulting on them, but by devaluing them.
"The immediate casualties of such a policy would be
America?s East Asian creditors. By the end of last
year, Asian central banks held $1.89 trillion of
foreign reserves, the vast bulk of them in dollars. If
these reserves lost value, Asian economies would
suffer an almighty capital loss in domestic-currency
terms. [...] If the Chinese yuan were to appreciate by
10% against the dollar (and other reserve currencies),
China would suffer a capital loss worth almost 3% of
GDP, the study found. If the won rose by 10%, South
Korea would suffer similarly. The toll would be even
greater in Singapore (10% of GDP) and Taiwan (8%).
"To avert such an appreciation, Asian central banks
would have to amass ever greater holdings of dollars.
But this would only expose them to greater capital
losses down the road. Alternatively, they might seek
to avoid the consequences of a dollar fall, by
diversifying into other reserve currencies, such as
the euro. But that would only bring the dollar
crashing down all the more quickly. In other words,
Asian central banks are caught in an awkward dilemma:
either they try to break the dollar?s fall, or they
try to escape from underneath its collapse.
"Despite this dilemma, Asia?s central bankers created
less of a fuss on Monday than Europe?s did. [...] But
why all the worry? In some ways, the stronger euro
will [..] contain euro-area inflation, which has
remained stubbornly above the ECB?s ceiling of 2%. It
will offset the higher dollar price of oil?last
month?s worry du jour. And if the euros in their
pockets gain in value, European households might be
more willing to spend them, overcoming the caution
that has held the European recovery back for much of
this year."
http://www.economist.com/agenda/displayStory.cfm?story_id=3372405
Cheers,
Teemu
Helsinki, Finland
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