Will inflation always bring about a lower dollar?

Discussion in 'Economics' started by The Kin, Jul 12, 2005.

  1. Question for you economists...

    If the US were to experience inflation, would there also be a somewhat proportional drop in the greenback relative to other currencies?

    A weak dollar would definetly help exports which is what this country needs right now and it will also force China to revalue the yuan.
  2. Joe


    I think the consequences of a week dollar are worse than the benefits received from exporting more.
  3. Can you offer a little more insight? Given the situation... excessive borrowing by the US govt with China buying the debt along with a huge trade deficit and job outsourcing problem, do the consequences still outway the benefits?
  4. The answer is... it depends.

    If inflation remains under control (i.e. CPI at 3.0% p.a. or less), and the economy remains moving ahead at 3% or more GDP growth, and the fed makes only 1 or 2 more rate hikes, then, as investors around the world join the quest for yield, the dollar would probably appreciate mildly rather than weaken. Stability+mildly higher yield than what I can get in Eurozone or Asia = stable to slightly lower USD.

    If the long yields start rising without bad economic news - then that's the end of the USD downward trend, at least for a while.

    HOWEVER, if interest rates skyrocket because of some sort of world event that causes massive price inflation ( read: China pulls a fast one), then you can kiss the USD goodbye, at least for the first round of the bloodbath. After that what happens is anyone's guess.

    P.S. It is my opinion that we cannot force the Chinese to do ANYTHING.
  5. toc


    "US cannot force China to do anything"

    Chinese should also understand that if US economic house gets downgraded even by one step down the ladder, then demand for goods will taper off very quickly leaving China on the brinks of recession. Some say like housing, credit markets....China itself is a bubble waiting to pop.

    While I do not know if the majority of Chinese growth is attributed to exporting to US or internal demand for goods but if their exports to US are cut by even 20% (due to US slowdown) then their internal demand will also hurt. That would be killing the golden goose.

    US is the importer of the last resort. The world needs the US more than it needs the world and that includes Europe.
  6. I agree that we cannot force China to do anything, but we can screw them and should screw them because we are Americans. Right now we're helping them develop their economy by purchasing their products. This might be benefital to both countries as China might finally see the light and become a Democracy and America's best friend. But if that does not work I think we should at least screw them in the ass. Maybe let them manufacturer dangerous chemicals which will kill their environment.. Buy up all their natural resources such as trees etc (given the discount due to the undervaluation of the yuan) then rape their environment. And a bunch of other shady economy activities.

    Hell if that does not work, bring in the CIA to cause a civil war or something. Widespread counterfeiting. Sell them American cigarettes and American fast-food so the Chinese willl later have a massive health problem down the road. Waste their economic resources on preventable health related care. Introduce the youth to crack cocaine etc...

    j/k :p
  7. Trajan


    Yes, inflation is primarily a monetary phenomenon, and the more I look at it so too are currency exchange rate changes. For that reason, I think the days of the dollar's decline are done. It's not that it won't go back to 1.30, but that a break down to 1.40 or 1.50 vs the Euro isn't going to happen. Also, the risk in China is for higher inflation not lower. I really don't subscribe to the theory of buying the Rmb.

    Also, from what I understand from people who deal with the Chinese government, they are are by far the most arrogant people on the planet. It will eventually blow up.
  8. As with all communist bastards. Thanks for the insight Trajan.
  9. It's time Bush kocked those sons of a bitches down.

    China ‘ready to use N-weapons against US’
    By Alexandra Harney in Beijing
    Published: July 14 2005 21:59 | Last updated: July 14 2005 21:59

    China is prepared to use nuclear weapons against the US if it is attacked by Washington during a confrontation over Taiwan, according to a senior Chinese military official.

    “If the Americans draw their missiles and position-guided ammunition on to the target zone on China's territory, I think we will have to respond with nuclear weapons,” Zhu Chenghu, a major general in the People's Liberation Army, said at an official briefing.

    Mr Zhu, who is also a professor at China's National Defence University, was speaking at a function for foreign journalists organised, in part, by the Chinese government. He added that China's definition of its territory includes warships and aircraft.

    “If the Americans are determined to interfere [then] we will be determined to respond,” Mr Zhu said. “We Chinese will prepare ourselves for the destruction of all of the cities east of Xian. Of course the Americans will have to be prepared that hundreds. . . of cities will be destroyed by the Chinese.” Mr Zhu is a self-acknowledged “hawk” who has warned previously that China could strike the US with long-range missiles. But his threat to use nuclear weapons in a conflict over Taiwan is the most specific by a senior Chinese official in nearly a decade.

    Rick Fisher, a former senior US congressional official and an authority on the Chinese military, said the specific nature of the threat “is a new addition to China's public discourse”.

    China's official doctrine has called for no first use of nuclear weapons since its first atomic test in 1964. But Mr Zhu is not the first Chinese official to refer to the possibility of using such weapons first in a conflict over Taiwan.

    Chas Freeman, a former US assistant secretary of defence, said in 1999 that a PLA official had told him China could respond in kind to a nuclear strike by the US in the event of a conflict with Taiwan.

    “In the end you care more about Los Angeles than you do about Taipei,” Mr Freeman quoted this official as saying. The official is believed to have been Xiong Guangkai, now the PLA's deputy chief of general staff.

    The rationale for the new threats is unclear. China's Ministry of Foreign Affairs could not be reached for comment.

    Mr Zhu, who has risen from the rank of colonel over the past five years, insisted he was expressing his personal views, and that they did not represent the policy of the Chinese government. Nor was he anticipating war between China and the US.

    But he said that, because China did not have the capability to fight a conventional war against the US, the threat to escalate might be the only way to stop a war.

    His comments could provide insight into the thinking among some in the PLA amid growing anxiety in Washington about its capabilities. Last month, Donald Rumsfeld, defence secretary, voiced concern about China's military build-up.

    Additional reporting by Edward Alden in Washington
  10. Trajan


    Speaking of blowing up!

    About what I posted, it was too early in the morning. It's tough going out for a couple of beers during the week and waking up at 6 am.

    Generally, a country with higher inflation will have a weaker currency. With China, you have a couple of different factors. One is the huge capital inflow have to sterilized. That is the money supply held constant. Otherwise, as I was trying to say earlier, you could get higher inflation as the money supply increases. The other is that China doesn't have a good track in monetary policy about a decade ago they had some real problems with inflation. Then there is the whole arrogance/communist thing which makes me think they will somehow fuck it up and goose the money supply when things slow down.

    You were more interested in the U.S. however. I had intended to say that with the monetary policy tightening it is unlikely we'll see inflation going forward. The inflation we have seen was from the late nineties and post-bubble easing. The fed is removing that excess liquidity from the system. Money Supply growth is quite low right now.

    A note about the Chinese, in addition to trading fulltime I'm also working on my Phd in econ(though generally I try and avoid this forum). My comment comes what consultants and academics have said with their dealings with the government there. Generally though, I would have to say that the Chinese students I go to school with are very nice and happy to be here. I can only think of one of them who would relish in pushing the button to nuke L.A.

    edit: I just wanted to add that I'm leaving a ton out here, such as the dynamic of the fixed exchange rate.
    #10     Jul 14, 2005