Re: Raising interest rates when currency is pegged
- From: Les Cargill <lcargill@xxxxxxxxxx>
- Date: Sat, 24 Nov 2007 01:12:12 -0500
Brablo wrote:
I was just reading an Economist Magazine article, and they mentioned
the dilemma about China and its peg to the USD. The economy in China
is red hot and in USA is slowing down.
Because of China's peg to the USD, this hinders their ability to raise
interest rates. Here are my questions:
1. I realize why nations raise/lower interest rates. Why do the
Chinese peg their currency on the USD anyways - Does this imply that
they expected us to be their biggest trading partner?
Yes. They've since diversified to European markets. Leaving the yuan
pegged to the USD allows the currency differentials to make Chinese
goods sold in European markets cheap.
2. Why can't the Chinese raise their interest rates easily? I don't
see any harm in this to slow down their growth.
Within the structure of the Chinese economy, who will pay
more interest? The new Mandarin class doesn't need financing.
Those under them wouldn't be able to afford it.
3. Why can't the USA now peg the value of our USD to the Euro?
The US doesn't have to. Market forces will tend to equalize the
values of all international currencies over time.
--
Les Cargill
.
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