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Investing and Economics Blog

The Truth Behind China’s Currency Peg

Peter Schiff does a good job of explaining The Truth Behind China’s Currency Peg

The peg, they argue, offers China a competitive advantage by making its products cheaper in U.S. markets, thus allowing Chinese firms to gobble up market share and steal jobs from U.S. manufacturers. The thought is that were China to allow its currency to rise, American manufactures would regain their lost edge, and both manufacturing firms and the jobs formerly associated with them would return.
…
In fact, for the U.S., de-pegging would cause the economic equivalent of cardiac arrest. Our economy is currently on life support provided by an endless flow of debt financing from China. These purchases are the means by which China maintains the relative value of its currency against the dollar. As the dollar comes under even more downward pressure, China’s purchases must increase to keep the renminbi from rising. By maintaining the peg, China enables our politicians and citizens to continue spending more than they have and avoiding the hard choices necessary to restore our long-term economic health.
…
As demand falls for both dollars and Treasuries, prices and interest rates in the United States will rise. Rising rates will restrict the flow of credit that is currently financing government and consumer spending. This change will finally force a long overdue decline in borrowing.
…
De-pegging will force the hand of U.S. politicians toward pursuing realistic policies. The Chinese will come to their senses eventually because it is in their interest to do so. Meanwhile, the longer the peg is maintained, the more indebted we become, the more out of balance our economy grows, and the more our industrial base shrivels. In short, the longer they wait, the steeper our fall.

I agree the largest impact of the currency peg on the USA is supporting our economy in the short run. If we didn’t go into huge debt it would actually be good for the USA for the long run too. Essentially China subsidies our purchases and borrowing. The problem is that we have taken a good thing too far and become used to living beyond our means. That is not sustainable – even with a subsidy from China.

I disagree that the USA manufacturing base is hollowed out. It is strong in comparison to the rest of the world, except China. China’s manufacturing growth has been phenomenal, compared to that everyone looks weak. Manufacturing jobs are disappearing everywhere, not just in the USA.

Related: Top 10 Manufacturing Countries in 2008 – China and the Sugar Industry Tax Consumers – Why the Dollar is Falling – Who Will Buy All the USA’s Debt? – Peter Schiff Answers Redditers Questions

November 21st, 2009 John Hunter | 1 Comment | Tags: Economics, Financial Literacy, quote

Comments

1 Comment so far

  1. CrisisMaven on January 27, 2010 2:58 pm

    The peg can’t do as much damage as the “attacked” country’s own economomic policies:
    Economic Fallacy I: Harmful Currency Undervaluation?

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