The Currency Peg

China comes to town this week, or, more specifically, a Chinese representative comes-a-callin’. The question on everyone’s mind: Will the Chinese wilt under the pressure of the Obama smooth talk, the letter signed by a hundred Congressmen and Senators, and Geithner’s middle-of-the-night clandestine meetings? It seems everyone wants the Chinese to allow their currency to float versus our dollar.

A little review is in order. We no longer, since 1971 (thanks, President Nixon), are on the gold standard. Thus, currencies float against each other. For example, if the U.S. dollar is rising, the euro is falling, and vice-versa. The tactic of printing money (Bernanke style) has de-valued our currency. However, it has made our goods cheaper in the world, and this benefits American corporations engaged in international trade. In addition, it also makes overseas goods more expensive. Thus, you see a German manufacturer urging their country to play the same game as the United States.

China is the only country not to go along with this. They have pegged their currency to the U.S. dollar. Thus, if our dollar goes up, so does theirs. If our dollar goes down, theirs does likewise. So essentially, there is no currency benefit for either country. Why do it? Because China knows that if currency is taken out of the equation, manufacturing will simply be judged by cost and quality. China knows that they can always win on cost, not always on quality. (You’d never know by looking at the way Wal-Mart markets Chinese goods.)

Will China float their currency? Probably not. However, they might provide some type of provision so Obama can say he’s working things out, and the Congressmen and Senators can go back to their districts, or states, and show how tough they were with the Chinese.

The reality is that China has us over a barrel, and they know it. And de-pegging from our currency? No way.

Till next time,

Bill


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