Is China a Rogue Nation? Thoughts on a fixed currency system.

Ok, I'll admit, rogue nation isn't precisely accurate. But by staying outside the international community and maintaining a fixed currency China risks being labelled a currency manipulator something which we (the world) all want to avoid.

Currency Since the Second World War.

Currency is a complicated topic, and many nations see the strength of their currency (not in value but in prestige sense) as directly tied with their sovereignty. It is not accident that the preeminent power since the Second World War, the United states, has enjoyed the dollar being the de-facto trading currency of choice. The US was able to use the strength of the dollar to push multilateral free trade agreements and in an age of the Cold War push capitalism successfully across the globe.

Since 1973 with the end of the gold tied Bretton Woods system, most western nations have allowed their currencies to float, that is allowed their currencies to be traded on the foreign exchange markets. This is crucial as freely floating currencies promote market efficiency, money flowing in and out of the economy doesn't need to be accounted for by the central government. Furthermore a freely floating currency reduces the need for government intervention in the financial markets (the price of currency doesn't need to be set) which is always a positive.

Having a freely floating currency also reduces the need to physically back your currency, so long as your currency remains stable there is no need for the central bank to provide surety in the form of gold or other valuables.
Admittedly the system isn't perfect, a floating rate can be highly volatile, causing headaches for financial markets as the going rate for a particular currency fluctuates widely, especially in times of crisis.

This is What has Happened in China

The Renminbi (the official term for China's currency which is still split into Yuan) whilst being tradeable on the foreign exchange markets, and having some level of flexibility attached to it-the value is allow within a few percentage points of a the value of a basket of foreign currencies- the value of the Yuan is carefully controlled by the Chinese government. The Yuan is hence essentially a fixed currency. This is important as it has aided China's growth by encouraging its export sector to flourish. It is no accident that China is the largest exporter in the world.  

Ok? But this doesn't really sound like an issue. 

Many countries rightly see a fixed exchange rate as an attack on free trade, disadvantaging their own manufacturing sectors and causing markets to move to China. Until recently the US was the granddaddy of pushing free trade. Trump in his contract with the American Voter promised to instruct his "Secretary of the Treasury to label China a currency manipulator." This means that America could be pushing for a potential trade war with China. Or diplomatic stoush as the Americans seek to prop up their fading manufacturing sector, and the Chinese seeking to maintain their growth. Furthermore this goes back to what I mentioned about countries seeing their currency being tied to their sovereignty. 

The Future

China is unlikely to give up one of its major engines for economic growth, and whilst it has striven to allow a greater level of flexibilty in the going rate for the Yuan, backdown on this issue may be politically impossible due to the growing strain in Sino-US relations. The United States and China becoming economic enemies could be calamitous not just for the economy, but for the world. 

Tomorrow

Just a quickie,
Tomorrow I'll write either about the TPP, or China's currency manipulation.

Why Trump's Tariff Push is Dumb

WHY TRUMP'S TARIFF PUSH IS DUMB

Although I said i'd write on happier things, I'm drawn to another tale of economics currently developing.

Credit: hafteh7

The Wall. 

Its ominous sounding term, one that brings up thoughts of a stark divide. Whether it should or shouldn't be built isn't the point of this entry. Rather it is how it is intended to be paid for which is going to be examined.

Trumps promise to "make Mexico pay for it" hasn't seemed fruitful thus far, and it appears unlikely that the United States will get a lump sum payment to cover the cost of the wall. Trump knew this, the American voters knew this, Mexico knew this.

Why then does Trump continue to make Mexico pay for the Wall? To put it simply what has been proposed by Trump is a tariff on certain Mexican made goods. The basic economics of this is sound enough, Trump is engaging in protectionism to deny Mexico their largest market, force American citizens to look elsewhere for imports and hence push Mexico into paying for some if not all of the wall through a concerted economic effort.

The Problem.

The problem with protectionism is that it is by far from efficient, everyone loses out in the long term, not just Mexico, but also the United States who lose a source of cheap imported goods. Furthermore introduction of tariffs can lead to retaliatory measures taken by Mexico. A similar situation occurred before the great depression with the introduction of the Smoot-Hawley tariff in 1930- ostensibly to protect American industry and labor from cheaper overseas markets was followed by similar tariffs around the world, choking trade and whilst not being the causal factor for the great depression, it definitely made it worse.

Why It's Dumb.

Trumps combative stance on the economy was clear during his election campaign, promising to keep jobs in America, as well as helping the faltering motor industry, something which no doubt helped him in the rust belt states and played no small role in his election to presidency.

With American recovery from the GFC still slow, it is important for all countries around the globe to work together, trade together and grow prosperous together. This combined with Trumps withdrawal from the TPP, it has me hoping that he will not set off a huge trade conflict that hurts the still sick world economy.

One more thing I want to add, another new years resolution.

I'm about to go into my last year of an economics degree. So I want to hone and sharpen both my economic writing and my economic thinking process, as well as prove to myself I'm capable of putting together a long term project and delivering on it (hopefully). Plus writing down my intentions of doing something tends to incentivise me to follow through.
To that end I'm going to write a series of essays/articles called something like The Economics of... I'll write about the Economic state and policies of each country alphabetically, starting with Afghanistan.

I'll try to write one every week (I'll put them up on Sundays?). I'm going to aim for about a thousand words or so. Not enough to go all the way into a countries policies, but enough to cover them in reasonable depth. Plus keeping it to a thousand words means I won't give up, as that is a manageable target (I hope).
This is in addition the the more regular daily musings on whatever topic I feel like.
Writing this is a small step, but an important one.

New Beginnings

The Thought of Us:

Hello and welcome!
A new years resolution a month late.
This blog is going to be run as a pseudo diary, as such you (me) will be reading my personal insights into whatever I happen to be thinking of on a particular day. I'm going to try to write on here every day. Note that the quality will be low and there is no expectation of this lasting overly long.

However if I do stick around, and I am still here in a few months awesome :).