The case for ending China's US Dollar peg

Peter Schiff talking sense again in a short article that’s worth a read.  This time he weighs in on the global imbalances and exchange rate pegs.  Peter correctly points out that a strong currency is a blessing to a nation, not a curse as most mainstream analysts think.

“Contrary to the conventional wisdom, when China drops the peg, the immediate benefits will flow to the Chinese, not to Americans. Yes, prices for Chinese goods will rise in the United States – but so will prices for domestic goods. As a corollary, the Chinese will see falling prices across the board. As anyone who has ever been shopping can explain, low prices are a good thing.

In addition, credit will expand in China while it contracts here. When China abandons the peg, it will no longer need to swell its currency reserves by buying Treasuries or other dollar-denominated debt instruments. Other nations will no longer feel the pressure to keep their currencies from rising, so they too could throttle down on their onerous dollar purchases.

China will do itself and the world a favour by letting its currency strengthen.  Whether the Chinese realise this remains to be seen, but it may not be long before its only choice is to let its currency appreciate or follow the dollar into major weakness and possibly collapse.  The Chinese are savvy enough to adopt the former eventually, hopefully sooner than later.

This is a major issue right now and Human Action will be keeping an eye on policy developments in this regard.  We have already written about this here and here.  Hopefully South Africa’s policy makers will get on top of this issue and stop thinking they can devalue the economy’s currency into industrial competitiveness and prosperity.

The rand should become strong in the months ahead, and government and the central bank shouldn’t try to stop it.

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