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Saturday, February 19, 2011


Two Good Links To Look At

 The first is a good analysis of Ben Bernanke's views of the major imbalances in national rates of savings around the world, and how they cause current account surpluses in those countries where the savings-rate of GDP are very high --- which means national rates of household consumption are very low --- and exceed net national investment rates and hence entail current account surpluses.   With, of course, the opposite rates entailing as in the USA current account deficits . . . those deficits financed by corresponding inflows of foreign capital in the capital-account part of the balance of payments each year.  Click here for the lucid analysis.


The second link is to a commentary by an outstanding macroeconomic, David Altig, who works for the Federal Reserve Bank of Atlanta, Georgia.  It explains with some easy-to-follow comments and illuminating diagrams four influences:

 1)  The difference between China's real and nominal exchange rates.  The latter refers to the exchange rate between the Yuan (Renimbi or RMB) and the $US that exists on a day-to-day basis in currency markets.  The real  exchange rate of the Rmb/$US takes into account over the years of the actual differences in the costs of producing goods and services within China for exports markets abroad.  The difference shows up in the steady, fairly rapid rise of the real value of the Chinese currency compared to the nominal exchange rate in dollar terms.   Meanwhile, please note, imports of commodities and manufactured and service products are priced in the existing day-to-day nominal exchange rate of the undervalued Yuan (or Renimbi) in dollar terms.

2) To hold back the rise in the nominal  exchange rate, the Chinese Central Bank manipulates its value in dollar terms.  In effect, it prints money (Yuan) to buy $US and in this way keeps the dollar from falling as hundreds of billions of dollars flow into China's banking system each year from the current account surplus with the USA . . . $273 billion dollars excess into China last year.

By contrast, the Chinese Central Bank has, until recently, ignored the inflationary pressures that an overheated economy has caused --- not least fueled in large part by export-led growth thanks, in no small measure, to the undervalued nominal exchange rate, not least for ever higher priced imported goodsw and services.   It has also ignored those inflationary pressures, understand, by financial repression: such repression keeps Chinese interest rates and deposit rates at banks for household savings artificially low, and that allows Chinese export-firms to expand their output at lower costs in order  to keep feeding the export market.  (The same artificially low interest rates also feed the  unusually high investment-rates of both the government and business firms of any sort, whether in the export-business or not.

3) The result in China?  There has been a steady build-up of inflationary pressures that threaten to destabilize the Chinese economy, all the while obliging booming manufacturing firms to raise the wages of their work-forces, not least to attract new workers . . . all this even as the undervalued Yuan (Rmb) has obliged those same firms, not to mention end-household consumers, to pay ever higher amounts of Yuan for imported goods of all sorts.  

4) An effective tool to offset the inflationary build-up in China --- one among others --- is to revalue the Yuan by a noticeable margin.  Import prices would fall;  business costs and the prices of numerous consumption-goods would both decline.  And the Chinese Central Bank would stop printing Yuan to buy dollars from Chinese banks and export-oriented firms that result from the huge excess inflow each year of $US from abroad.  So far, though, the Central Bank (and the Communist Party top-dog leadership) has refused to do this, relying instead on a mild uptick in interest rates and a big rise in bank reserve-requirements as the only anti-inflationary policy.  
Click here for the Altig commentary.