Freedom Fries, Hum Bao, and Pegged Currencies.

[thedr9wningman]

Al Jazeera English - News - Sarkozy Pledges Support To Us: So much for the 'Freedom Fries'.

Now that there's a right-winger in office in France, the war drums have started.  And apparently, let's see if the imports for cheese and wine get a bump.  The flip-flopperedness!

In other news, on my continued wariness of staying in this country because of her spending habits (would you stay with someone who maxes out all their credit cards, just to get more, and then refuses to get a job?  That's what America's done.) China's considering unpegging.  OK, refresher for those who haven't been listening to my whining about this for the last 2 years (basically, ever since I learned how international economics work).  China currently 'pegs' its currency to the dollar.  This has a lot of effects.

1. We are not exposed to international currency movements with respect to China.
2. Our Yuan-denominated debts are essentially denominated in dollars.  But over the last two years or so, China's moved more toward a floating currency, which in effect raises the cost of Chinese imports for us.
3. It keeps the demand for the dollar high, because they're buying dollars to keep the peg going. (more info? Look here.  This is why you hear about 'foreign reserves')

Now, let's deconstruct this.  If the unpegging happens, you get a spiraling effect: the US will be exposed to international currency prices, and the dollar has devalued about 40% in the last 2-4 years.  That means that prices go up for us because we have to buy other currencies at a higher rate.  Our foreign-denominated debts then grow in cost.  In trillions, 1% is still tens of billions.  So, think about the massive loss of cash the US would experience if our debts suddenly became more expensive!  Additionally, without (artificial?) demand for the dollar, that ends up increasing the supply of dollars (market dumping).  If you had the choice of any currency to hold on to, would you hold on to the Argentinian Peso in 2000 when it was losing value by the hour?  No, you'd sell it. Markets are unstable, and once someone starts doing some major selling, it depresses the price, so everyone sells (can anyone recall the 'run on the bank?), which further depresses the price of the currency.  Same thing with widgets or cars or anything else.  If gas is 6$/gal, I swear to you that the 12MPG cars will be dumped on the market--you won't be able to give them away.  So, markets respond in this situation in a way that makes the average citizen uncomfortable: It's called raising interest rates.

Raising interest rates has two major effects: it encourages people to sock away money (theoretically... I don't know if Americans can afford to which is why they spend the way they do) and it encourages foreign investment in our currency.  But the dollar is an abstraction of the US's industrial might, resource availability, and all other things that contribute to an economy.  But we're a 'service economy', and our major export, ironically, is the dollar itself--we've been exporting the dollar as a peg and as a measure of stability for the last 60 years. This is why people had a problem with losing the gold standard, and all that.  It essentially makes all of our money abstracted 'play money' currencies.  And now, unless something changes, I have a bad feeling about where we're headed.  A raise in interest rates means that more mortgage companies are going under, that more foreclosures happen, etc.  And when the rich take a bath, we all pay the price.  They like to make that abundantly clear.

Pretty soon, we're going to be smuggling ourselves into Mexico.