But as the dollar is not allowed (because of the mercantilist policies of Asian and oil exporters) to weaken against most other currencies, it can only go down against freely tradeable currencies...
It used to be true that a government could artificially set the exchange rate of its currency (think of the ruble in the USSR), but this led to a black market and also inhibited international trade. Real deals needed to be made in a reliable currency such as the dollar.
Now China is trying to do the impossible. It wants the dollar to remain strong so that its vast holdings don't become devalued while, at the same time, it wants to control its own currency to promote exports, and, unlike the USSR, it depends upon extensive international trade.
This can't work. China is already experiencing higher inflation. Some estimates are 12%, but they fudge these numbers too.
If I were smart enough I would know what to do and then people would be reading my books (if I had any) instead of George Soros.
Based upon historical patterns, the US will have to weaken the dollar to "pay off" the rising deficit. This will cause inflation in the US and a simultaneous recession. In China there will be a knock-on effect as exports (at least to the US) decline and as internal inflation also causes an economic slowdown. There is a lot of discussion about what the Fed should or could do, but I don't think that it has the tools to counter international pressures.
The parallel is right in front of us, the aftermath of the Vietnam War, 15 years of economic stagnation and runaway inflation. Not only is the government following the same policies as then it is actually many of the same people. Apparently nothing succeeds like failure. Policies not Politics ---- Daily Landscape
"It used to be true that a government could artificially set the exchange rate of its currency (think of the ruble in the USSR), but this led to a black market and also inhibited international trade. Real deals needed to be made in a reliable currency such as the dollar."
I'm sure you are correct in what you say, but it was not just the ruble, not just even the Eastern Bloc, and the effects were not so strong in other places, I think. I remember when I was growing up that the AUD bought about USD1.20 (!), until the dollar was 'floated' by the Hawke government in the early 1980s. Was there a 'black market' in AUD? Did it really matter that the currency was not freely convertible?
Farmers hated the old rate, but nobody else cared, so to this day I can't understand why the dollar was floated in the first place (like the Labor Party needed their mortal enemies the farmers to vote for them ...)
Anyway, on conversion the rate went from USD1.20 to about 68 US cents, if I remember (and I probably don't :) )
I freely admit I understand none of this stuff. But I do remember when a dyed-in-the-wool total-USUK-suckhole country called the Commonwealth of Australia had currency that was not fully convertible (apologies if I mangle the technical language here ... I'm sure most of you can work out what I mean, it wasn't 'floated' on the currency markets ...)
Soaring food prices propelled the Chinese inflation rate to its highest point in nearly 11 years, cementing expectations that the central bank would defy a global trend and keep raising interest rates. Consumer prices rose 6.5 percent in August from a year earlier after gaining 5.6 percent in July, the Chinese statistics bureau said Tuesday. [...] The statistics office said inflation had been driven by an 18.2 percent leap in the cost of food, which accounts for a third of the consumer price basket. Meat prices rose 49 percent in August from a year earlier, reflecting a shortage of pork, the staple meat in China. That results from a 10 percent drop in the Chinese pig population because of blue-ear disease and fast-rising feed grain costs, even as prices for pigs fell last year. Cooking oil cost 34.6 percent more in August than a year earlier, eggs were up 23.6 percent and vegetables 22.5 percent.
Consumer prices rose 6.5 percent in August from a year earlier after gaining 5.6 percent in July, the Chinese statistics bureau said Tuesday.
[...]
The statistics office said inflation had been driven by an 18.2 percent leap in the cost of food, which accounts for a third of the consumer price basket.
Meat prices rose 49 percent in August from a year earlier, reflecting a shortage of pork, the staple meat in China. That results from a 10 percent drop in the Chinese pig population because of blue-ear disease and fast-rising feed grain costs, even as prices for pigs fell last year. Cooking oil cost 34.6 percent more in August than a year earlier, eggs were up 23.6 percent and vegetables 22.5 percent.
What cannot be sustained indefinitely is a central bank raising the value of its currency against external market pressure, unless it has the full co-operation of the central bank of the other currency in the exchange.
Because the direct market action to raise the value of a currency is to buy the domestic currency with foreign exchange, and the central bank can only use whatever foreign exchange it has on hand.
However, a central bank operating under a reserve banking system can depress the value of its currency indefinitely, since that only requires buying foreign exchange with domestic currency, and the central bank has unlimited power to generate new domestic currency. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
