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Home Publications Blogs Beat the Press The U.S. Government Can Do Something About the Exchange Rate with the Yuan

The U.S. Government Can Do Something About the Exchange Rate with the Yuan

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Friday, 30 April 2010 05:03

New York Times columnist Floyd Norris told readers that: "China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that." Actually, the U.S. government is free to set its own higher exchange rate of the yuan against the dollar.

The Chinese government sets an exchange rate puts the value of the yuan at approximately 14 cents. There is nothing that prevents the Treasury of offerring to buy yuan at a higher price, for example 20 cents. If the Treasury made this commitment and was prepared to stand behind it, it would like raise the value of the yuan to 20 cents. This competing exchange rate would be highly unusual, but there is nothing that literally prevents the U.S. government from doing it.

Comments (6)Add Comment
...
written by izzatzo, April 30, 2010 7:00
To beggar thy nation which has beggared you,
Violates free markets of floating exchange,
A cardinal sin of the highest order,
Worse than regulation of derivative fodder,
Bretton Woods socialism of fixing prices,
So multinational imports can survive on vices.
...
written by Ron Alley, April 30, 2010 8:23
Dean,

Your comment really is bizarre. Just ask, what would Goldman do? The answer is sell yuan to the US and buy yuan from China.

How big would the Goldman bonus pool then be?

Those critical of buying oil from noxious foreigners would really be pleased with pumping dollars to noxious bankers.
...
written by nassim, April 30, 2010 9:10
Don't shoot the messenger, unless the message is not really rational, AND it is in really, really bad poetry. Get a life.
Why I appreciate this blog...
written by Nick B from DC, April 30, 2010 10:20
For a non-economist like myself who reads the news regularly, if I were to take the news economics reporting at face value I would probably have some very incorrect assumptions. That's why for me it's really helpful (and entertaining) to read Dean take apart the days stories from the economic headlines. This story in particular shed light for me where I otherwise would have no alternative ideas. Thanks again Dean!
Actually no
written by Mark, April 30, 2010 7:46
The People Bank of China achieves it's peg by issuing liabilities in renmenbi, and lending in dollars (buying treasuries). It's only able to do this because the United States has open capital markets in which foreigners or foreign central banks can buy US treasuries. China does not allow the same, having very resricted capital markets, so there is no mechanism by which the US could enforce the peg.
Who is the counterparty?
written by Kevin Donoghue, May 02, 2010 8:16
"There is nothing that prevents the Treasury of offerring to buy yuan at a higher price, for example 20 cents."

But residents of China are not free to sell yuan to the Treasury, are they? I suppose there is a black market somewhere, in which the yuan trades at a premium to the official rate, but I can't see how this proposal is supposed to work unless the black market is very substantial.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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