You wrote:
a rising yuan (relative to the US$) would eventually cut China's trade surplus with the US. By lowering >the US trade deficit, it would reduce the US demand for funds (supply of US bonds) at the same time >it lowered China's supply of funds (demand for US bonds). It's hard to say which would win and which >way US interest rates would have to go. However, it would definitely stimulate US net exports and >hurt China's net exports.
I now write:
Perhaps it's just a trademark case of squeezing the evidence to fit an _a priori_ theory, but I don't think a yuan-dollar readjustment would bring about such equilibrating results. Why not? If the yuan is revalued, China and perhaps even Japan will progressively bail on their dollar-denominated asset holdings. There will probably be some kind of cascading effect: forex speculators will prompt central banks the world over to gnaw away at the US' seignorage privileges. US exporters, especially in sunset industries, cannot compete in the world market simply on the basis of the cheap dollar. They need capital deepening and capital widening investment. It will be tough for US manufacturers to add newer, better plant and equipment if the U.S. seignorage privileges are attacked, because the cost of borrowing will be so much higher. Just one possible concatenation of cause-and-effect, I suppose.
Also, a decline in Chinese exports to the US may alleviate the US' merchanside trade deficit to some degree, but it is revenues from those very Chinese exports that are propping up the dollar !!! If, say, European exports to the US partially displace Chinese exports to the US, the revenues from these European exports will not go toward supporting the dollar, but rather the euro. With attendant results outlined above.
OK, I must curb my obsession with this thread.
John Gulick Assistant Professor Department of Sociology University of Tennessee 916 McClung Tower Knoxville, TN 37996 email: [EMAIL PROTECTED] work phone: 865 974 7029 fax: 865 974 7013
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