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I took it to be what happened to the U.S. when China shifted away from using the U.S. dollar as a reserve currency and the subsequent (possibly positive) impact of the collapse of the dollar.

China has already switched away from 100% reliance on the dollar in its peg, but the presumption of most people is that the US$ still has a very large weight in the basket of currencies that China is presently pegging against.

In the mini-utopia, it was not just China that essentially dropped the US$ from its peg, but most of the other major neo-mercantalist nations as well. Presumably the various Caribbean dollars would still be pegged to the US$, but not the East Asian, Southeast Asian, and South Asian currencies that are presently pegged directly to the US$ or that we presume to be pegged primarily to the US$.

So its a loss of the counterweight from multiple neo-mercantalist nations that presently buffers declines in the US$.

On a sidenote, the Singapore basket peg should not be confused with the kind of basket peg adopted by the Koreans in the 80's in their transition from a US$ peg to a float ... they adopted a trade-weighted basket, so even if they did not announce the composition, it could be inferred to reasonable precision from public information. The Singapore peg does not publish the composition, which makes it far more difficult to infer whether a given move is just the natural consequence of the weights of different currencies in the basket, or is the result of a shift in the peg.

Note that since the (undated) rates given in the look back from Jan 1 2020 were mostly around 50% of current rates, in the story when it was called a currency collapse, there was a bit of hyperbole in that. In a full fledged currency collapse, it would not be surprising if the dollar lost 75% or 80%.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Oct 8th, 2009 at 06:20:47 PM EST
China is still almost entirely pegged to the US Dollar, as shown by the exchange rate of the Yuan and other currencies to the US dollar. If China had, in fact, changed its peg to other currencies, the relationship between the Yuan and the US dollar couldn't be a flat as it is. It wouldn't make much sense for an exporting nation like China to peg to any other major currency either, given those currencies' appreciation. As the Euro and other currencies appreciate in relation to the US dollar, China's exports become even more affordable to people in those areas, allowing exports to increase.  

This kind of dynamic helps to keep US dollars in use for international trade even as merchants complain about how US dollar devaluation affects their ability to buy high-quality, non-American things that they want.

 

by santiago on Fri Nov 6th, 2009 at 10:30:38 AM EST
[ Parent ]
That is a fantastically stupidly scaled chart.

On the left axis we have a range of 0 to 9 with two currencies priced at around 1 USD and one currency priced around 8 USD. Big waste of space and depressed ranges.

On the right axis we have a range of 85 to 130 for the Yen value of 1USD.

The range of variation of the Yuan exchange rate is about 20%, comparable to the range of variation of the Australian Dollar and the Euro exchange rates. The range of the Yen exchange rate is about 30%, also comparable.

The difference between the Yuan and the other is in the daily volatility. The Yuan's rate is managed whereas the others are not. But the peg is sliding, the exchange rate is definitely not flat as you claim. It just has lower day to day volatility.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Nov 6th, 2009 at 10:42:34 AM EST
[ Parent ]
The range of variation has almost nothing to do with this.  Scale it however you want, and you get the same story -- the relationship between the dollar and the Yuan is essentially flat , while the relationship between the Yuan and anything else is variable and trending in one direction or another.  This proves that Chinese central bankers are pegging to the dollar first and foremost.  Sorry for the inclusion.  It's a tradeoff when trying to put too many things on one chart.
by santiago on Fri Nov 6th, 2009 at 12:19:04 PM EST
[ Parent ]
sorry for the confusion, not "inclusion."
by santiago on Fri Nov 6th, 2009 at 12:19:45 PM EST
[ Parent ]
Now we're doing the proper comparisons, Yuan to USD compared with Yuan to EUR and yes China is actively managing its Dollar exchange rate and not its EUR exchange rate.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Fri Nov 6th, 2009 at 12:22:55 PM EST
[ Parent ]
That FED chart starts in 2005. Here's the longer view (from my diary on the savings glut):

Compared to the 10-year poriod to 2005, China is letting its dollar peg slide.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Nov 6th, 2009 at 12:29:23 PM EST
[ Parent ]
Yes, it is, as it has to because it becomes too expensive for the Chinese treasury to subsidize its exporting interest groups indefinitely, and that is who is really complaining when "China" says it wants a different reserve currency.  But the long flat segments that show up in this chart show dollar pegging interrupted by periods of float or devaluation (or vice versa), not pegging against other currencies.  If it were trying to switch it's peg to another currency we would have to see longish flat segments in exchange rates with other currencies, and I don't think that's the case. (I haven't checked well enough to say for sure, though.)
by santiago on Fri Nov 6th, 2009 at 02:44:17 PM EST
[ Parent ]
It doesn't cost the Chinese treasury anything except RMB¥ to discount its exchange rate - and that's not something that it runs out of the ability to produce, after all.

And its peg is to a basket of currencies, and they do not reveal the composition of the basket or the pegged rate, so they could definitely reduce the weight of the dollar in the basket but manipulate the peg to mask the move - where you would notice it is not in the exchange rate data but in the foreign exchange reserve data.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Nov 6th, 2009 at 06:12:23 PM EST
[ Parent ]
I disagree.  A peg is observed in the exchange rate -- if flat it's being pegged.  Nothing else can produce a flat exchange rate given that their rates observed in other currencies are anything but flat. And the data show that China is currently not using a basket of any kind -- just the US dollar. It appears to have given up on any semblance of either a basket or a float in mid 2008, so they're certainly not walking their talk if they still claim to be pegging to a currency basket.

It costs the Chinese either Yuan (buying power in China) or other currencies (buying power in other places) to prop up the value of the US dollar.  This is a policy subsidy that benefits a narrow exporting class in China, and it hurts those in China who would rather purchase more stuff made in Europe or save their purchasing power in Yuan for later years. (China suffers from high inflation, partly due to buying dollars with Yuan.)  Either the Chinese authorities are ignorant of this, or they must be shifting blame for their policy decisions regarding export-oriented growth onto the US.

by santiago on Fri Nov 6th, 2009 at 09:43:30 PM EST
[ Parent ]
... I disagree that a traffic circle should be called a traffic circle, because of all the openings in the circumference ... I think it should be called a traffic celtic cross ...

... but a peg is an immediate target in trading in some other currency. You can obviously walk the peg in order to target some other objective - including in order to maintain a stable exchange rate in another currency - so a currency peg can easily show up as a moving exchange rate.

What doesn't happen with a peg, if it is performed competently, is a lot of volatility in the exchange rate. A relatively stable exchange rate with a lot of "noise" along the way would be an indication that something other than direct pegging to maintain that exchange rate is taking place.

Mainstream economists, of course, get sloppy about it, since they can ignore the differences that make a difference with absurd assumptions about expectations and information - witness the neutrality of money assumption for an especially obviously absurd assumption completely unanchored in reality which is nevertheless the "normal" assumption to make.

However, when considering open money in the real world, you have to distinguish between the currency whose exchange rate you are targeting by buying and selling that currency, and the exchange rate management targets that you have.

We all assume that there is a substantial weighting of dollars in the composite currency peg that the Chinese in fact use, but the volatility in the exchange rate that you have shown suggests that there may not be as heavy a weighting as we have been assuming.

That is, what would you see if country A was pegging with currency B while trying to keep A:C exchange rates steady? In a period that B:C was moving rapidly, the peg would be reset frequently ... possibly daily, certainly once a week or more ... between each reset, the A:C exchange rate would move like the B:C exchange rate, and with each reset the A:C exchange rate would jump back toward the target A:C rate.

To infer which currency or currencies dominates the composite peg, you'd look for a currency or mix of currencies that show a rapid change in B:C exchange rates when there is a lot of volatility in the A:C rate, and slow change in B:C exchange rates when there is less volatility in the A:C rate.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Nov 7th, 2009 at 05:23:45 PM EST
[ Parent ]
Bear in mind, though, that since China abandoned the single currency peg, it can manage its US dollar exchange rates in distinct ways - it can, for example, discount the RMB¥ against the € when the € rises against the US$, rather than directly pegging against the dollar. That is, rather than pegging to the US$, it has the option of pegging to something else and shifting the peg to mask the fact that it is no longer pegging to the US$.

If they were doing that, the chart would look like a relatively flat RMB¥/US$ rate, but with more volatility than if the RMB¥/US$ rate was directly pegged.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Nov 6th, 2009 at 06:19:49 PM EST
[ Parent ]
That's the same thing as pegging to the US dollar. It has exactly the same effects on welfare distributions and provides no protection against decreases in buying power of US dollars, which is the only reason the Chinese are complaining about the fall in the dollar's value -- it makes Chinese exports to the US less competitive relative to others and it makes American exports more competitive in China and elsewhere. This  is especially problematic for Chinese agriculture where avoiding dependency on American corn, soybeans, and meat is a high-level development policy concern.
by santiago on Fri Nov 6th, 2009 at 09:55:22 PM EST
[ Parent ]
That was poorly worded. I meant to say that a decline in the dollar's value relative to the Yuan would make American exports, particularly agricultural, more competitive, threatening China's policy of agricultural independence (which it has long enjoyed).  A decline in the value of the Yuan, due to pegging to a declining US dollar, reduces Chinese purchasing power abroad which has negative welfare effects for anyone in China who wants to buy anything made somewhere other than America or China.
by santiago on Fri Nov 6th, 2009 at 10:14:14 PM EST
[ Parent ]
... have to decide is whether the value of resources available from the US or the value of a discounted RMB¥ in selling in the US market.

Clearly if the Chinese stop propping up the dollar, the dollar drops dramatically against the Yen and the Euro, so the risk in other export markets is not substantial. That is, one cannot equate a decline of the US$ against the RMB¥ as a decline of all currencies against the RMB¥ when that same decline would remove the functional support of the US$ exchange rate.

reduces Chinese purchasing power abroad which has negative welfare effects for anyone in China who wants to buy anything made somewhere other than America or China

... is clearly a complete red herring - the question for retention of political power is providing employment until the pace of labor force expansion starts slowing. For a wide range of imports, the government does not risk losing political power as a result of "welfare effects for anyone who wants to buy anything made somewhere other than America or China" - those positional good imports that are not important for maintaining production are worth whatever their price is in RMB¥ - if the exchange rate was higher, more expensive imports in foreign currency would be required to maintain the same positional status.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Nov 6th, 2009 at 11:04:33 PM EST
[ Parent ]
Clearly if the Chinese stop propping up the dollar, the dollar drops dramatically against the Yen and the Euro, so the risk in other export markets is not substantial. That is, one cannot equate a decline of the US$ against the RMB¥ as a decline of all currencies against the RMB¥ when that same decline would remove the functional support of the US$ exchange rate.

No one is saying this.  If the China stops propping up the US dollar, the dollar will fall relative to the Yuan, and American agricultural imports will rise, while exports of finished goods to America will fall. This has problematic implications for China's export-oriented development policy and agricultural independence policy.

On the other hand, if China continues pegging to the US dollar, but the dollar declines in value anyway because of the continuing US current account deficit, this causes the Yuan to also decline in value relative to other currencies.  That's a good thing for exporters, which is why they do this, but it's not a good thing when trying to buy things, including investment in assets, in those other countries.  That's the self-induced paradox of China's unsustainable, export-led growth strategy.  It's a Chinese-caused economic problem, not an American one.

by santiago on Sat Nov 7th, 2009 at 08:14:54 AM EST
[ Parent ]
If the China stops propping up the US dollar, the dollar will fall relative to the Yuan, and American agricultural imports will rise,

And the oil required to make those agricultural products will be procured with which stash of hard currency?

Recall that the definition of American agriculture is "the process whereby farmland is used to turn fossil fuels into food." So the price of oil in US$ establishes a floor for viable prices for agricultural products (most oil substitutes are pegged to oil, price-wise). And the price of oil in US$ will go up when the US$ drops, because the US is a net importer of oil.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 7th, 2009 at 09:22:45 AM EST
[ Parent ]
The relationship between oil and agricultural prices is actually somewhat more complex and ambiguous. The direction of causality is actually greater from agricultural commodities TO oil rather than the other way around, driven by fertilizer prices more than anything else. (I.e., natural gas -> fertilizer -> ag prices AND fertilizer -> oil)  Oil prices are almost always shown, empirically, to RESULT from changes in other commodity prices, contrary to the way most narratives assume happens.

Also, fuel is a significant but still not a very large part of the cost of agricultural production (less than 10% of total variable costs, if I recall).  So variation in oil price is going to be less important than the variation in the value the dollar and won't be a limiting factor regarding terms of trade.

by santiago on Sat Nov 7th, 2009 at 11:34:37 AM EST
[ Parent ]
Natural gas prices are locked to oil prices (with a delay) under most contemporary contract regimes.

And the empirical relationships of the century of abundant oil may or may not apply to the century of scarce oil.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 7th, 2009 at 08:40:47 PM EST
[ Parent ]
Contemporary contract regimes don't have a lot to with any of this. But yes, it is true that the relationships of a scarce future can't be so easily implied from those of an abundant past.
by santiago on Sun Nov 8th, 2009 at 12:44:34 AM EST
[ Parent ]
FT.com / Commodities - Oil-gas price link to weaken

While oil has been transformed during the past 30 years into a vibrantly traded global commodity, natural gas trading remains fragmented, with prices in all regions but the US mirroring the oil price.

But that is all about to change, says the International Energy Agency. The looming surplus in gas supply is set to put pressure on the current market structure, helping gas to break from crude oil and trade independently.

The cost of West Texas Intermediate, the US oil benchmark, has risen 70 per cent since January, while Henry Hub natural gas, the country's benchmark, has fallen 22 per cent since the beginning of the year, bringing the divergence between oil and gas prices close to record levels.

Gas exporters are, nonetheless, reluctant to break the oil-gas link. Russia's state-owned Gazprom and Algeria's national company Sonatrach fear, the draft says, "a move away from oil-price indexation on the grounds that gas-to-gas competition would be more likely to result in lower gas prices".

Analysts say that gas exporters will fight to maintain the oil link and keep long-term contracts, on the assumption that revenues will be higher.

While the changes in pricing systems are likely to happen over time, the integration of the regional markets seems more distant. "The North American market may remain largely disconnected from the rest of the world," the draft says, pointing out that rising domestic supplies are displacing imports of liquefied natural gas.

"A truly global gas market - characterised by strong price linkages between all the main regional markets - is still some way off," the draft adds.

I believe that a global market in natural gas "Units" - issued by producers in exchange for fiat money or 'money's worth' and redeemable in payment for natural gas - may form the basis of an 'Energy Clearing Union'.

Supply arrangements, and 'spot' transaction prices, will be agreed bilaterally, but there will be a choice of settlement in fiat currencies, 'Units' or any other 'money's worth' acceptable to the seller.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Nov 8th, 2009 at 04:45:18 AM EST
[ Parent ]
You said a true thing and then moved on to act as if the Chinese propping up the dollar has no impact on the US$:€ exchange rate. But of course, if the Chinese peg directly to the dollar, the dollar exchange rate with all currencies it floats against is higher as a result.

That's the way a mixed floating/pegged system working through exchanges works - the floating currency that is the subject of the pegging operations rises in value relative to other floating currencies.

Except when taking sloppy mainstream economic shortcuts involving assumptions un-anchored in reality that in effect assume money neutrality when discussing demand and supply of one currency for another, there are not two pure cases to consider, but four, and in practice countries can adopt mixes of the pure cases:

  • Pegging to the dollar, targetting the US$ FXR
  • Pegging to the dollar, targetting some other FXR
  • Pegging to something else, targetting the US$ FXR
  • Pegging to something else, targetting some other FXR

It might seem that the second case is just for logical completeness, since we are moving from a period of the West Pacific Rim pegging to the US$ - though it was of course relevant, for example, to the transition from the £sterling to the US$ in the former British Empire in the late 40's and 50's.

China is presently doing a mix of the first and the second, since they adopted a Singapore Peg early in this decade. However, they have the option at any time to switch to mixing all four - for example, shifting the currency basket they peg against to a trade-weighted basket and targetting a stable synthetic FXR against that basket would be a mix of pegging with the US$ and other currencies and targetting US$ and other floating currency exchange rates.

If they switched to that, the floating currencies would be far closer to the situation you imagine, where the pegging operation against one currency does not affect its FXR with the currencies it floats against.

And the Chinese could also switch their target to one that does not include the US$ - they could drop the US$ from their pegging currency basket entirely, or in a less extreme scenario simply shift the focus of their exchange rate management from the RMB¥:US$ to some other FXR, like RMB¥:€

Given that a pegged exchange in a mixed pegged/currency world must be held at a discount in order to be effective - a peg at a premium is subject to speculative attack, draining foreign exchange reserves, while a peg at a discount is of course immune to speculative attack, since capacity to generate domestic currency cannot be drained - pegging countries are net demanders of floating currencies.

Assuming that the currency that they are pegging can be ignored and all that has to be considered is the exchange rate that they are managing via the peg ignores the fact that the same target rate achieved with different currency pegs implies different relative demand for the floating currencies and hence a different exchange rate between the floating currencies.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Nov 7th, 2009 at 10:20:41 AM EST
[ Parent ]
I certainly agree that China's propping up the dollar, and how they go about doing that, has an affect on the dollar-euro and dollar-other exchange rates. (I think the affect is unlikely to be very large, however, but I haven't really looked at enough to say for sure, so I admit I could be wrong on that.) I did not mean to imply otherwise. However, that's a US Treasury  problem, not China's problem.  For China what matters is how its own currency and international buying power are changed by its exchange rate policies -- the gross and distributional welfare/development effects of favoring exports over imports or vice-versa.

The fact that China has the option to switch how it manages it's exchange rate policies -- and always has -- leads to the question of why they are choosing to track the US dollar so tightly right now. I think the most reasonable place to start is the political-economy equilibrium view: the current policy of pegging to the dollar best balances the current internal and external demands on government policy for the welfare of various interest groups.  This means that moving away from that peg -- as US exporters and domestic industry wants -- needs to be understood as a set of conditions requiring a shift in the demands of Chinese interests (only one of which is its relationship with the US and others) on China's government.  

China is pegging the dollar because it is in its best interests to do so, and it will change as soon as it is in its best interests to do otherwise.

by santiago on Sat Nov 7th, 2009 at 12:19:00 PM EST
[ Parent ]
The fact that China has the option to switch how it manages it's exchange rate policies -- and always has -- leads to the question of why they are choosing to track the US dollar so tightly right now.

The evidence you have presented suggests that they are not targeting the US exchange rate with US currency transactions as heavily as previously and are targeting it more heavily with other currency transaction than previously suggests that they are are not taking for granted that they will continue to be targeting the US$ as heavily as they are now doing.

The peg is of course the actual piece of wood being placed in the actual hole that is actually being used to hold onto - anyone who has climbed a peg board in gym know that there's no implication of a peg holding its position for a long period of time if there is a different objective in mind.

I think the most reasonable place to start is the political-economy equilibrium view: the current policy of pegging to the dollar best balances the current internal and external demands on government policy for the welfare of various interest groups.

How about starting with the Iron Law of Oligarchy - an Oligarchy's first priority is staying in power. The number one threat to the oligarchy's hold on power is if there is no job creation to put large numbers of the new entrants into the labor force into employment. The oligarchy has for over a decade now used aggressive neo-mercantalist exchange rate policy as an essential element of its strategy to use export markets as a safety valve generator of employment.

"Political-economy equilibrium" sounds very much like an effort to export a theory that is radically incomplete in explaining economic behavior so that it can be radically incomplete in explaining a broader range of sociopolitical behavior. I suppose there is a sillier application of equilibrium theory than Chinese growth over the past 20 years, but none spring immediately to mind.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Nov 7th, 2009 at 06:25:33 PM EST
[ Parent ]
I'm not sure why you think employment policy explains so much about a non-democratic regime's methods of keeping power, and I'm not sure that "keeping power" is even a very good explanation of Chinese governance objectives in general. As far as silliness is concerned, I think I'd better just let you rethink your last outburst of "iron laws" and the like. It seems you're lapsing into some simplistic paradigms of Chinese politics here, and political science in general, don't you think, especially coming from someone so well versed in the institionalist critique social science?
by santiago on Sun Nov 8th, 2009 at 01:02:07 AM EST
[ Parent ]

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