Libertarian Jackass

"Life is short, but truth works far and lives long; let us speak truth." -- Schopenhauer

Sunday, October 19, 2003

Bush Heads to Asia to Promote The "War on the Yuan"

President Bush spoke in Asia friday on the latest stop in a world tour promoting the War on Terrorism as well as the newest crusade against financial evildoers, the War on the Yuan (and the Yen, etc.). Bush insists that "we expect the markets to reflect the true value of the currency." Does this statement make any sense? Does a currency have some intrinsic, true value? In terms of the Chinese paper currency, I'll agree with Mr. Bush and our friend Voltaire: "Paper money eventually returns to its intrinsic value--zero."

But, the most amusing aspect is that Bush's comments--implying that the yuan is undervalued--reduce to a more simple statement: "We expect Americans to be able to purchase fewer Chinese yuan with dollars they own and therefore fewer, cheap Chinese goods!"

On second thought, it does seem odd to me that that as the U.S. enjoys unprecedented foreign central bank purchases of U.S. government and agency debt, which keeps inflation low, interest rates low and funding for war more manageable, the president is pressuring foreign governments/central banks to cease intervening in the market. I wonder if he is willing to carry this argument as far as China intervening in the markets to acquire dollars, hold U.S. debt as reserves and print yuan?

In response to the War on the Yuan, Chinese president Hu Jintao Sunday stated decisively, "We will maintain the basic stability of the RMB exchange rate at a reasonable and balanced level while further improving the rate-forming mechanism amid deeper financial reform." Chinese central bank governor Zhou Xiaochuan, however, seems to support a "widening of the band" of the exchange rate of the yuan to the U.S. dollar from a tight 8.2-8.3 to 1 range to a looser 8.3-8.7 to 1. In other words, a move by the Chinese may come in the long term, but as the U.S. dollar continues to fall against world currencies, China is content with a nice peg for the benefit of its export industries. And, as the paper currencies of the world continue the fall in value toward zero, who can blame them?

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