Monday, April 6, 2009

A Few Thoughts on Currency

by Edythe Huang

Lately, I’ve been a bit obsessed over a comment that Geitner made about China’s currency manipulation. Yes, I know it’s old news, and yes, I know that I’ve already blogged about it. But, I can’t seem to get past the accusation.

During a recent trip to China I got in the habit of asking people I met there what they thought of Chinese currency. I was starting to get a better picture of the big picture. Essentially I came to the conclusion that everyone manipulates their currency by indirectly buying and selling in the market, China is just an easy target because they do it a bit more than everyone else. I was just beginning to understand a small part of the very large and complex market that is Chinese currency. . . and then, China called for alternative currency. When I first watched the announcement on CCTV, I was a bit shocked.

Why in the world would China call for an alternative currency? After all, they are the largest holder of United States hard currency. Their incredible power created through holding so much hard currency reserve would essentially vanish . . . unless they used their hard currency reserve to buy the alternative currency. Their current account balance is much higher than any other country (by $100 trillion) and they aren’t burdened with the level of debt which saddle most western countries. It completely makes sense why China would want an alternative currency: they would have more of it than anyone else.

As for me, I was even more shocked in the hour when Geitner was agreeing with China. Thank goodness he changed his mind fast. Why would the United States want the rest of the world to lose confidence in the dollar? I do not know much about the intricacies of currency exchange and rates, but I do know that the only thing the dollar rests on is the confidence that the world places in the currency. Why would our finance guy say that we want a competitor? I have the upmost respect for Geitner’s intelligence and ability, but that short-term agreement with China did make me step back and wonder about his judgment for a moment.

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