U.S. Weighs Currency Pact With China as Part of Partial Deal

[vi-va]

In an ideal efficient free market without any government intervention, all countries should have a balanced current account.

If you have a surplus, it means that the demand for your currency outstrips the supply, and therefore your currency should appreciate until your current account is balanced.

Vice versa, if you have a deficit your currency should depreciate until you reach a balanced current account.

However in the real world, the market isn't free nor efficient. Economies like Singapore or Taiwan wants to accumulate foreign reserves to have a buffer against external shocks, so they put their money in USD which is the world's reserve currency. This creates artificial demand for the USD and artificial supply of their home currency. The market isn't efficient because it can take years for market forces to reflect the current account situation.

Right now China's current account is almost close to zero as a percentage of GDP, so it's fair to say that the RMB is fairly valued. OTOH, the US runs current account deficit with almost every country because of the artificial demand of the USD which pushes up its price.

You forgot two important factor - saving rate and natural resource.

East Asia countries has higher saving rate, U.S. before 2008 has less than 10% saving. Some natural source rich countries, like KSA, Russia has surplus. There is no way they would like to balance their current account, they will reinvest their surplus in the international market and accumulate more and more reserve.

 

[Mista]

You forgot two important factor - saving rate and natural resource.

East Asia countries has higher saving rate, U.S. before 2008 has less than 10% saving. Some natural source rich countries, like KSA, Russia has surplus. There is no way they would like to balance their current account, they will reinvest their surplus in the international market and accumulate more and more reserve.

Nope, I've already factored these in knowing that some posters will definitely ask this.

In a totally free market without government intervention, you will eventually reach a balanced current account. You can save a lot (lower imports) or sell huge amount of resources(higher exports), either way it means that in the forex market your currency's demand will outstrip supply, raising its price until you consume (import) as much as you produce (export). You can add in investment income and it's the same.

The problem is that in the real world a totally free market doesn't exist.

 

[vi-va]

Nope, I've already factored these in knowing that some posters will definitely ask this.

In a totally free market without government intervention, you will eventually reach current account balance. You can save a lot or sell huge amount of resources, either way it means that in the forex market your currency's demand will outstrip supply, raising its price until you consume (import) as much as you produce (export). You can add in investment and it's the same.

The problem is that in the real world a totally free market doesn't exist.

Not true. Chinese saving rate is higher than US. Chinese saving goes to investment, while US consumers spent every penny they have.

The whole free market theory is bull$hit.

 

[Mista]

Not true. Chinese saving rate is higher than US. Chinese saving goes to investment, while US consumers spent every penny they have.

How does that contradict what I've said?

The more you save/invest > the higher your current account surplus > demand outstrips supply > currency appreciates > consume more/sell less > reaches equilibrium eventually

The whole free market theory is bull$hit.

Like I said, a totally free market doesn't exist in the real world. It's just a hypothetical scenario in which there's no government intervention to gauge a country's currency fundamentals based on market forces. That's what the IMF do to analyse a country's currency fundamentals as well, unless you're telling me the IMF is BS too and you know better.

https://www.scmp.com/business/banki...lar-overvalued-while-chinas-yuan-and-japanese

 

[vi-va]

How does that contradict what I've said?

The more you save/invest > the higher your current account surplus > demand outstrips supply > currency appreciates > consume more/sell less > reaches equilibrium eventually



Like I said, a totally free market doesn't exist in the real world. It's just a hypothetical scenario in which there's no government intervention to gauge a country's currency fundamentals based on market forces. That's what the IMF do to analyse a country's currency fundamentals as well, unless you're telling me the IMF is BS too and you know better.

https://www.scmp.com/business/banki...lar-overvalued-while-chinas-yuan-and-japanese

The ideal free market theory founded on completely wrong assumption. The whole free market theory is a theory to hoax those developing countries, especially in cold war ear. It's bull$shit, no value at all.

Free market theory base on Homo economicus or economic man. While man has nationality, man can't move freely like merchandise, man is not rational, not always, man is unequal. With such a ridiculous theoretical basis, any analysis has no value.

 

[Mista]

The ideal free market theory founded on completely wrong assumption. The whole free market theory is a theory to hoax those developing countries, especially in cold war ear. It's bull$shit, no value at all.

Free market theory base on Homo economicus or economic man. While man has nationality, man can't move freely like merchandise, man is not rational, not always, man is unequal. With such a ridiculous theoretical basis, any analysis has no value.

Yea yea, IMF is a hoax and economic theories are conspiracies to bring down developing countries.

 

[vi-va]

Yea yea, IMF is a hoax and economic theories are conspiracies to bring down developing countries.

Washington consensus is a hoax, Chicago Boys is a criminal group.